J.B. HUNT TRANSPORT

JBHT
Temps Différé Nasdaq - 22:00:00 03/02/2023
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Transcript : J.B. Hunt Transport Services, Inc. Presents at Baird 52nd Annual Global Industrial Conference 2022, Nov-08-2022 10:15 AM

08/11/2022 | 17:15

Presenter Speech
Garrett Holland (Analysts)

Robert W. Baird & Co. Incorporated, Research Division

All right. Good morning, everyone. Thanks for joining us. My name is Garrett Holland, Senior Analyst Cover Transportation and Logistics here at Baird. We're very excited to have the J.B. Hunt team presenting at the Industrial Conference this year. With us from the company, we have Shelley Simpson, President; Darren Field, Executive Vice President and President of Intermodal; John Kuhlow, Executive Vice President and Chief Financial Officer; as well as Brad Delco, Vice President of Finance and Investor Relations.

The company has a few opening remarks. But after that, we will head into Q&A, and feel free to submit those questions through the portal, and we will relay them to management. So with that, we'll turn it over to the team. Thank you very much.

Presenter Speech
Shelley Simpson (Executives)

Yes. Thank you. So thanks for having us today. I thought we would walk through a few core pieces of our strategy and also our performance in the organization that will give us time to ask questions as well. For us, our mission as an organization is to create the most efficient transportation network in North America. As we've scaled as an organization over the last decade, we've really seen a great opportunity to help our customers in creating more efficiency, but also helping create that efficiency inside networks overall, creating a more connected ecosystem in total.

If you think about J.B. Hunt as -- at a glance, in total, we're just under $15 billion over the trailing 12 months as an organization. We have grown substantially on behalf of our customers, particularly through the pandemic as the supply chains have been completely disrupted and customers have looked for solutions around capacity. We have really leaned in with our customers being able to do that. We're doing that with just over 37,000 of our people located all across North America with about 25,000 of those our professional driving force, 7 maintenance and the remainder in our warehouse and office teams located throughout the country.

We do that also not only with our own equipment, but also aggregating other equipment through our technology called J.B. Hunt 360, giving us access to not only our 23,000 tractors, but also about 1 million trucks in total. That gives us about 30% of the total market to be able to access equipment and create solutions for our customers. Located at 400 unique locations here in North America. We celebrated our 60th anniversary last year. So very proud of what's happened inside the company. We focused a lot on making sure that we have solutions across the supply chain.

So if you think of -- from more than a small letter but think of a palette all the way to managing your entire transportation spend. That's the way we approach and think about our customers. We were founded by Mr. And Mrs. Hunt. Mrs. Hunt is still alive and we get the opportunity to interact with her on a more regular basis. But some of the things that we've done like starting dedicated contract services, which is really private fleet services for and on behalf of our customers. Bringing in ICS, so allowing the aggregated capacity to occur. And then certainly, our Intermodal business segment, which has been really a huge win for our organization and also for our customers in total.

Probably one of the slides that we think is most impactful, and this doesn't just represent our senior management team, our executive leadership team, you really could cascade this through the organization in total. If you looked at our 14 executive officers here, we have a combined experience at J.B. Hunt of 336 years, making that, on average, 24 years at J.B. Hunt. We think that makes us unique and special because we have been through several cycles, but also we saw a lot about innovation and how we can approach our customers differently, really carrying on that spirit that Mr. Hunt started the company with making sure that we thought of big ideas and being disruptive in the industry that would create something better for our customers.

We're founded on our 6 foundational pillars and what sets us apart. Safety is always going to be at the forefront and very foundational for us as an organization, in total. But we will be and are continuing to be focus on creating more value for our customers that will drive industry-leading growth and returns that allows us to invest in our people and shareholders. And so it's a very simple strategy, it works for us in both upturns and downturns. It allows our people to think about what we should be focused on most with how we create more value for our customers.

We are constantly thinking about innovation. As a result of that, technology has been key for us. And then everything starts and ends with our people. We think that's what differentiates our organization because really without our people, our capacity and technology really, it's fairly irrelevant. From an investment perspective, we do have leading positions in all of our addressable markets. And so if you think about the market we serve, which is about a $1 trillion market, our addressable market is over $500 billion.

So each 1 of our 5 independent business units has great opportunity for us to think about how we can grow on behalf of our customers and maintain a margin discipline as a result. If you look at what we've done really over the last decade, we've grown with our customers substantially from about $4.5 billion really with 4 segments and then adding our fifth segment over that decade in a breakout over the last couple of years, which is our Final Mile Services segment in total. You can see Intermodal is our leading position for our customers.

It is the most efficient way for land transportation in North America. And so that wins for our customers. It also wins for us because if you look at these pie charts, they don't change considerably when you think about what happened from an operating income perspective from 2011 to 2021. We're proud that we just reached $1 billion in 2021 in operating income in total. And you can see Intermodal driving more than 50% of that. But each one of those having unique model targets or margin targets really competing with best-in-class inside their own market.

When we think about J.B. Hunt 360, it really brings together what our customers want and what we can provide. So from a provider perspective, it really comes down to giving our customers access to the right level of capacity, transparency to information and visibility of leadership in fact and customers clearly are asking us for capacity cost and service and where that meets in the middle is through our technology called J.B. Hunt 360. And for us, that revenue trend has really been fairly steady throughout the last decade, but you see a couple of big marks.

We tend to shine when the supply chains become disruptive and customers are looking for someone that can really provide great solutions. You see that happening in 2018 and in 2021 and that continuing here into 2022. And then finally, our 2022 priorities, and this has been consistent through the pandemic, our focus is on our people, honoring the commitments we make to our customers and investing heavily on behalf of our customers and the needs how we can create value in total.

Presenter Speech
Darren Field (Executives)

So I thought I'd take a minute and just talk about Intermodal and what tremendous opportunity in front of us. When you look back at this 6-year period, a lot there. And railroads were going through PSR, pandemic. We had a little disagreement with one of our railroads in arbitration. So there's a lot of noise in the background there. But as we look to the future, we're very, very excited about our opportunities. Highlighted last March, we announced a joint initiative with BNSF to grow our container fleet to 150,000 in the next 3 to 5 years.

That's just a reflection of our significant confidence in our ability to grow. And we've come to that conclusion just through that dialogue with our customers, focused on growing our business and looking for the most efficient way for them to solve their transportation needs. And then later this year, you've seen additional announcements as we've grown transload capacity in both Southern California, Tacoma as well as the border in Laredo. And we also opened a transload facility in New Jersey about a year ago.

So we're really focused on growth in a couple of ways. First and foremost will be highway conversion and as we're coming out of this pandemic period and really difficult supply chain time window, we have tremendous demand from our customers for highway conversion and cost savings. And that's why we're so focused on it as we present Intermodal solutions, there's a cost benefit to our customers, and we are certainly looking forward to next year as we find our way towards that growth.

And then beyond that, it's just -- our customers are looking for us for advice in terms of rail transit and the service quality, and I'm very confident in the way that our customers trust how we talk about it. And we shared at the end of the third quarter that really BNSF was making significant progress in their service product. And I can tell you today, that continues. We continue to be happy with their progress. I would say that there's more work to be done. We're not at the end of the challenge, but at the same time, we're certainly excited about the progress they've made.

Certainly, in the East, we're beginning to see some green shoots there. We have work to do there and continue to see that the whole network has an opportunity to get more healthy as we move into 2023 and our opportunity to continue to really grow. But for the next -- I'm going to call it a next decade, there's no reason why our Intermodal product can't continue to grow at double digits, and we're excited about the future.

I'm going to hand it off to John for more businesses.

Presenter Speech
John Kuhlow (Executives)

All right. Thank you, Darren. So just continuing on with our segment discussion, Dedicated Contract or Dedicated Capacity Solutions, our DCS segment. Obviously, we're very pleased with the performance in that business unit over the years, tremendous revenue growth coming off of 2 record-setting years of adding trucks and capacity. The one thing I think that's important for the group to understand is how we're different than some of our competitors and this business unit is primarily a private outsourced fleet solution.

We go in. We have long-term contracts. We take over the transportation needs of our customers, and these are longer-term contracts. You'll note that we have a 98% customer retention rate. It's just been a very sticky business for us. We go in. We take over their transportation needs, provide great service. And that's really highlighted in -- during the pandemic when we were able to flex with different customers that were needing additional support, but then also helping our customers needed to slow operations or even shut down. And so we are able to provide that flexibility, and it's really been demonstrated of late, just given our size and density in this segment.

Integrated Capacity Solutions is a core component of what we're referring to as our Highway Services. This is our brokerage segment. Again, tremendous revenue growth over the last 5 years. The dip in operating income, that was intentional investments in technology as we are building out the platform that Shelley talked about. And now we're at a point where we're continuing to invest in technology, but also people to scale that operation.

And then the second piece of the Highway Services is Truckload JBT. And that is really our kind of legacy company. It was the legacy segment that we have but over the last couple of years, you noted on the performance, we've transitioned that segment into our 360, what we refer to as our 360box program, and that's providing trailing fleet that we own to serve our customers. And then we use the power that we source through the ICS and marketplace to serve a growing customer need.

Finally, our last segment is Final Mile Solutions, FMS. It's probably our youngest segment. That is where we are providing big and bulky delivery services for a variety of products started with appliances, but it's more into a furniture and exercise equipment. And a lot of the growth of the last few years has been through acquisitions. This is primarily where you've seen some of our M&A activity. And we're now at the point where we feel like we have what we need from a base, and now we're working on revenue quality with our customers to make sure that we're going to paid appropriately.

Capital allocation over the last 10 years, over $10 billion in operating cash flows, 70% of that has been reinvested in the company in terms of our revenue equipment. So our trucks, our container fleet and our trailing capacity. $1 billion paid out in dividends and then $2 billion in share repurchases. And you'll see that our CapEx plan is, again, large going into next year. We're investing heavily in the equipment to provide capacity for our customers.

Finally, on the balance sheet, just very proud of maintaining discipline and this is an accumulation of that work over the years, continue to maintain a low debt-to-equity ratio and then also our leverage. And so we feel like we're in the best position available to take advantage of market and customer needs going forward.

Presenter Speech
Garrett Holland (Analysts)

That's perfect. We appreciate that perspective. Very helpful. With that, we'll dive right into Q&A.

Question
Garrett Holland (Analysts)

Feel free to submit questions as they come up. Maybe just to start, anxiety is high about deteriorating demand. What would you point to, and you've been working at it for years now, to bolster performance in a potential downturn, what would you point to as the 1 or 2 factors that should result in more resilient or stronger performance whenever the downturn does come? But also, how should investors think about the growth profile for J.B. Hunt over the next 5 years? I know that's what you're building towards. Some of those drivers and opportunities would be great.

Answer
Shelley Simpson (Executives)

So I think we could talk about a downturn, we could talk about as dramatic as a recession that happened in 2009. In any of these scenarios, if you remember, our revenue chart, with our customers, we continued to grow and continued to take a long-term approach with our customers. I think for us, we're better positioned this downturn than we ever have been, primarily because of the way our segments are set up. So if you think about Intermodal today, Darren talked about this a little bit, there is so much freight, the largest part of our market is actually on the highway side.

And that's where our Intermodal opportunity lies. And so our opportunity to talk to customers about shipments that are moving on the highway, they should be moving into Intermodal, can automatically not only save our customers' money, but also winds up being very good for our business as well. In addition to that, on our Highway Services area, we've transformed that entire business, both on the asset and non-asset side. Think of that more coherently through our J.B. Hunt 360 platform, that model is now a variable cost structure.

And so because we use the power of nearly 1 million trucks, our ability to really move with the market is very different in this downturn than it ever has been. And our Dedicated Contract Services segment, that is our second largest segment, and that business model is in long-term agreements with our customers. And so we have contractual agreements that also have ECI, CPI mechanisms built-in on an annual basis, typically to have those conversations with customers.

And then you heard John Kuhlow talk about in Final Mile, we're very focused there on our revenue quality and making sure that we have good conversations with our customers, making sure we get paid properly for the value that we think that we can create. So we're in a more variable model with our customers. We have the ability to save the money through any kind of downturn. So our objective from a growth perspective over the next 3 to 5 years, all 5 segments are growing today and are in fairly healthy shape from a profitability and a return on invested capital perspective.

We'll continue our growth plan across all 5 business segments. So probably the biggest differentiator for us is being completely mode neutral with our customers. So we don't really care how they conduct business with us. We're going to solve for the most efficient way to move goods. It just so happens that we're leading -- industry-leading in all 5 of our segments. So no matter which segment they slot into, if we can create the most efficient way to move goods, we think we win in the long term with our customers.

Question
Garrett Holland (Analysts)

That's very helpful. And we appreciate the transparency and thought what you're seeing in the marketplace as it relates to demand, one of the first to call a muted peak or not event. How has that demand continued to evolve here in Q4? And what do you see in the marketplace?

Answer
Shelley Simpson (Executives)

Well, maybe I'll just talk over and then Darren, maybe you can talk a little bit about Intermodal. I think what we talked about on our earnings call has really played out for us here as we come into the fourth quarter. I think our customers, there is an inventory correction happening across the board with our customers. We hear that consistently with them. I think that they are fairly optimistic that, that is a correction that needs to occur, and then they can think about what replenishment and what goods should be moving, but we're certainly seeing some of that and continues from what we talked about in our third quarter.

The other thing I would say is our customers wanted to make sure they didn't get stung here in this, what could be considered, peak or in 2022, like they did in 2021. So they made decisions very early in the year. Some of that was sourcing changes, some of that was bringing on their inventory much earlier in the year. And then certainly with all the economic discussions that are going on, I think just customers are a little more at pause, letting inventories bleed down so they can determine what's happening in 2023.

And Darren, I don't know if you want to mention Intermodal?

Answer
Darren Field (Executives)

Certainly, peak season for Intermodal is always a significant event. There's an awful lot of retail that imports through the West Coast, and we participate in the transload model there. And 2022 so far is, I would call it, the most muted version of peak season that I can recall in my career. We just don't have a significant surge in demand. I think it's a little tricky for us to fully understand is we do still see some business moving on a highway where Intermodal would likely be the right solution.

So there's a lot of sort of unknowns out there. We feel in dialogue with our customers, it's a challenge for them to really know. I think that Shelley highlighted a significant inventory correction. We have equipment at customers that's not unloading, and it's maybe not as much any longer about labor to perform the work, it's more about don't have anywhere to put it. And so that's a new and unique event. Typically, when that's happened in the past, I don't want to call it short term in nature, but I think that over the next, call it, 2 quarters, I mean, there'll certainly be a correction that our customers are trying to go through. And frankly, they don't know, but we're trying to help them through it.

Question
Garrett Holland (Analysts)

When you think about unique and more medium-term opportunity with the strength in partnership out West and some of the changes in your competitive landscape, talk about how you're looking to capitalize on the opportunity? To what extent you've been successful in keeping that business as you think about trends for '23? And we had a question from the audience just to describe in greater detail how your contract with the rail partners give you a unique advantage, especially out West?

Answer
Darren Field (Executives)

Sure. Okay. Well, for anybody in the room that doesn't know we are an exclusive provider on BNSF. We don't utilize the Union Pacific at all. And Schneider, one of our largest competitors who was also a BNSF channel, is moving from BN to UP on January 1. Swift -- Knight-Swift did the same move a year ago. And so at this point, really, we're the last full truckload channel moving on BNSF in the dry space. There's certainly temp control providers out there, but we're significantly the largest channel to gain access to BNSF.

We've been in an agreement with BNSF since 1989. It's very unique in that it's revenue share, and that certainly gives us a ton of advantages. Shelley had highlighted that the decade-long significant growth and even a look back as far as 2009, the last really significant recession at that time, we had a brand-new Norfolk Southern contract. And we were very effective at growing and converting off the highway during that window of time. I liken that situation to the one we're headed into in '23 in that we have massive capacity becoming available to us on our primary rail partner.

We have a contract that allows us to compete and effectively go out and solve for our customers. We're aligned like we've never been in September. We had an executive off-site session where the BNSF brought their entire executive team. We had ours. We spent a day talking about what our -- what have been our limits in the past? And how are those changed now that we're really -- we're married, we're locked together, and we're just solving. There are no channel conflicts. So as we move forward, we're very energized about the long-term future and feel like 2023 can be a set up a lot like 2009 with this new available capacity to us at a time when getting your cargo onto the UP might be difficult because there's going to be a lot of challenges with that transition for Schneider. And so we feel like we need to be ready to take advantage.

Answer
Shelley Simpson (Executives)

I think one more thing to add for our customers. Remember, supply chain has made the headlines of the majority of our customers' earnings calls. And so it's been very frustrating not only from a cost perspective, but lack of being able to source straight to the shelf. So our customers and our contacts, they've been under pressure from their C-suite in what's happening in the supply chain and particularly what's happening in cost. This is the greatest opportunity for us to help our customers save money.

They are moving goods inefficiently. They're moving goods on the highway primarily because they couldn't get access in over the last, I would call it, 4 or 5 years. It's been very difficult for them to think about how they can move goods in Intermodal or even getting a private fleet started has been difficult. What's happening on the Truckload side. So I think we have a unique opportunity to talk to our customers about getting their data file and really optimizing what we think is best for them.

And our mode-agnostic approach with them will help being fairly indifferent with our customers and helping them solve for that. So I do think this is very unique and the opportunity for them to be a hero at the C-suite level is the greatest it's ever been in the last probably 5 years.

Question
Garrett Holland (Analysts)

Very helpful. A couple of questions on pricing and margins from the audience. One of the questions is about how do you make sure you're achieving the appropriate targeted returns on this capacity investment? Interested in your thoughts there as well as we're still seeing a lingering inflationary dynamic. There's a lot of concern about contract pricing in the marketplace. But what are you seeing on the inflationary front that may -- will enable you to hold the line when you think about pricing conversations next year?

Answer
Darren Field (Executives)

Yes. So on the Intermodal side, the cost of equipment adds, the cost of drags, the cost of chassis, the cost to our rail providers, it's an industry-wide challenge. And so as we onboard, we did make the announcement of growing the fleet to 150,000 over the next 3 to 5 years. That doesn't mean we went out and ordered 40,000 containers, and they're flowing in. We are being disciplined about how we do that. We're in dialogue with our customers every day about how can we jointly remove cost. And we're certainly -- and I have said now for as many times as I've been asked, as we take cost out of the system, I fully anticipate to pass that benefit on to the customer.

We needed to repair our margins coming out of 2020, and I think we were effective at that. And at this point, we need to grow our business and get utilization up on our assets and our resources. And so as we do that, that's a cost benefit that can be passed back to our customers. It really arms us in a conversation with them. You know what, if price has to be a little bit negative because we're picking up efficiency, that doesn't have to hurt our margins. It doesn't hurt our return profile at all. It really gives us an opportunity to solve for our customers and help save them money, and that's certainly our focus.

Answer
Unknown Executive (Executives)

I think one more thing to add to that, too, just understanding that question is probably related to more Intermodal than anything else. These containers are 20-year assets. And so if you were to model anything out over 20 years, I think you would expect that there would be cycles where pricing is stronger and pricing is not so strong. And so I think over time, we've seen that the investments in that container capacity has proven to be very beneficial to generating consistent returns on invested capital over the life of the asset, and 20-year life on those assets is quite a bit of time and a lot of opportunities to generate a good return with that investment.

Answer
John Kuhlow (Executives)

And I will just add just, I do think that was a little bit more Intermodal focus, but on our Dedicated segment, which is also -- has significant capital investment. All of those deals, all of those contracts have a pricing mechanism that has a stated calculated ROI. And so before any equipment is purchased or deal signed, we need to see that pricing metric. And so that's how we get comfortable with the returns in that segment.

Question
Garrett Holland (Analysts)

That's great. Just turning to the budgeting process for next year and thinking about building flexibility of the plan. How do you defend profitability? Or is that designed by the stated margin targets across the segments? Can you hold the line there on the low end during a recession? What's the right way to think about trough earnings power at J.B. Hunt resilient business mix? Any perspective on financial planning for next year?

Answer
John Kuhlow (Executives)

You want me to take that?

Answer
Shelley Simpson (Executives)

Sure.

Answer
John Kuhlow (Executives)

Okay. So again, not to be a broken record, but it is return on invested capital focus and not necessarily margin. Obviously, there's -- we pay attention to that, but our main criteria is getting the proper returns on our investments. We are going through a process of planning for '23. But really, this is a long term, as Brad mentioned, these are 20-year assets. And Darren's business and 5 and 6 and Dedicated. And so this is a long-term play. And so we are focused on more so on productivity and getting returns on the investments that we've made in people and technology going into '23 as opposed to just sheer cost take out.

But as I said, this is a longer-term play. And I think we have set up these businesses to be in the best position to flex with the market. And it may put pressure on margins, but that's why we provide the margin ranges that we do.

Question
Garrett Holland (Analysts)

Perfect. One more question on nearshore. And it's a question that we're talking to a lot of companies about, have you started to see those benefits materialize in conversations with shippers? How big of an opportunity do you see that longer term?

Answer
Darren Field (Executives)

I would say that our Intermodal and our Highway Services solutions serving Mexico have continued to grow at a faster pace than any other part of our company. At the same time, that's been the case for many years. So I don't know how much of a factor that is in this more recent dialogue about near-shoring. Certainly, we have had a handful of opportunities where customers are talking about building plants in the U.S., but those are still pretty small. But certainly, activity in Mexico has been increasing, and we're ready to solve in that market for growth for sure.

Question
Garrett Holland (Analysts)

Perfect. Well with that, we're out of time, but a special thanks to J.B. Hunt team, Shelley, Darren. John, Brad, thank you so much. I really appreciate it. And I hope everyone has a great rest of the conference. Thank you.

Answer
John Kuhlow (Executives)

Thank you.

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