J.B. HUNT TRANSPORT

JBHT
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Transcript : J.B. Hunt Transport Services, Inc. Presents at Stephens Annual Investment Conference 2022, Nov-15-2022 11:00 AM

15/11/2022 | 18:00

Presenter Speech
Justin Long (Analysts)

All right. This is Justin Long with Stephens. I want to welcome everyone to our next fireside chat with J.B. Hunt, and I want to thank the team for joining us again in Nashville this year. Representing the company is Shelley Simpson, sitting to my left. She's President. We've got Nick Hobbs, COO, President of Contract Services; John Kuhlow, CFO; and then Brad Delco, SVP of Finance, on the end.

I'm going to turn it over to Shelley and team to make a few opening remarks, and then we can get into Q&A. As a reminder, this will be a fireside chat format. I'll start with a few questions and then open it up to the audience. And I'll try to repeat questions into the mic so that the webcast catches those questions as well.

So Shelley, with that, thanks for being here, and I'll turn it to you.

Presenter Speech
Shelley Simpson (Executives)

Thank you, Justin. So we thought we'd spend 10, 15 minutes just walking you through where we're at as an organization and our strategy and that, hopefully, will help set up for good questions.

There's never a greater time than right now to help our customers and to reach our mission statement, which is to create the most efficient transportation network in North America. I have said several times that the supply chain is completely inefficient over the last several years. During the pandemic, we have focused with our customers in creating value primarily with capacity.

So customers are very concerned about what was happening on their store shelves and being able to meet sales in total. That has shifted in the last, I would say, several weeks from a value proposition, from a service capacity and cost, where our customers are very focused from a cost perspective and also service, with capacity really being just a given in the market. So we certainly see a flip that's happening inside that.

With us, we're very focused on creating more value for our customers that drives industry-leading growth and returns, that allows us to invest in our shareholders and our people. We think about that really with the nearly 38,000 people that we have inside our organization, with about 25,000 of those being our professional drivers. That's round about $14.7 billion in the trailing 12 months. We're located in about 400 different locations, but we're also on site with about 700 customers at different locations throughout North America. We have about 23,000 or just over in tractors and ICs, helping support our customers; and then in our trailing units, over 150,000 trailing units and continuing to grow.

One of the ways we create value for our customers is continuing to think about the capacity that they will need, and we'll talk about that inside our segments. But what we think about really is the experience that we have as an organization.

So it's not unusual for you to come into J.B. Hunt and experience somebody very similar to myself or Nick that started their career at J.B. Hunt and will be retiring from J.B. Hunt. The average tenure in our executive leadership team with the company is 24 years. And that means that we've seen the up cycles and the down cycles.

And we really know what the playbook looks like. It does tweak from time to time, but we think that's a distinct advantage in the market and working with our customers. Because oftentimes, we will live through several customer changes, so we're able to keep a continuity for them to understand how we can create more value with them.

Our foundational pillars as an organization, we are always set very firmly in safety, and that's at the forefront of what we do. But we really think about people, technology and capacity, helping support the work that we can do for our customers. So we really hone in on people you trust, capacity to deliver and technology that empowers for our customers.

We also are constantly thinking about innovation, and we do that in several different ways, but our largest focus is how we create value for our customers every day in every market.

We do take a mode-indifferent approach, and I think that's really important here. It might be one of the most misunderstood parts of the way we go to market. We don't really sell to our customers based on the type of segment or service that we have. We really try to solve for our customers in the most efficient way to move goods. Thankfully for us, we are able to move every shipment for our customer with the exception of a letter.

So anything that they need to do with us, we're able to solve for that, and that's going to be our objective that really then helps us create what our capacity plan looks like as a result. It's allowed us to grow the company substantially, and we have grown. It took us about 59 years to get to nearly a $10 billion company. And here 2 years later, we're just underneath $15 billion. So we've grown a lot on behalf of our customers focusing on what that value looks like.

The largest part of our company is going to be inside Intermodal from both profitability, but also value proposition to our customers. It is the most efficient land transportation in North America in total, and that's going to be one of the ways that we're going to be focused on saving money with our customers. There is a lot of freight moving on the highway with our customers that really can't find a more efficient way to move goods in total.

We do use our J.B. Hunt 360 platform to really help our customers get access, transparency and visibility to all capacity that's available in the market. So we don't just think about the 25,000 drivers we have. We think about 3.5 million drivers located throughout the U.S. and how we can create a more efficient network on behalf of our customers.

Our revenue trend has really grown over the last several years, but for us, we like to think of it in growing with being disciplined on what our margins look like on behalf of our customers. But we do have 3 key priorities in '22 that haven't changed over the pandemic and will continue to be our focus.

Our number one will be our people. We believe if we lean into our people, our people will trust us. Through the experiences that they have, they'll trust each other. And ultimately, our customers will trust us as a result.

We believe in honoring our commitments. We take a long-term view with our customers. And that means we honor the capacity we give them at the prices we give them in the up and in the down cycle. I think that's really important because it would have been very easy for us to be opportunistic with our customers over the last couple of years, but instead, we took a long-term view. I think that helped us with our growth plan, and I think you'll see that play out here over this next part of the cycle. And then we will continue to invest heavily on behalf of our customers.

I talked a little bit about Intermodal and the most efficient way in land transportation. But one of the areas that we're focused on not only in mode conversion off of Highway into Intermodal, but the other way is really in international shipments and being able to transload our customers really at the port of origin or near the port of origin, which I think is important.

It's also convincing our customers that L.A. Long Beach is the most efficient way to move goods from a port perspective. A lot of our customers were nervous about what happened the last 2 years in getting products to the shelves that made those decisions early on diversified away from L.A. Long Beach. I do believe as things stabilize there that they'll move back into that more efficient mode as well.

And then finally, our relationship with the BNSF that we have shared in growing our capacity and also making sure that we can grow together, that's been an important component. For those of you that were just at the [ BN ], certainly that's important to us as well as the CSX and the Eastern network in total.

We are going to grow to 150,000 units over the next 3 to 5 years. It's really one of the biggest growth opportunities we have been presented, I would say, since the last Great Recession in Intermodal primarily because there'll be plenty of capacity on the BNSF. We're jointly aligned and we are their primary channel partner on the West Coast as the East Coast is continuing to work through labor issues and service and feel confident that, that will get resolved as well.

Then finally, on the highway side, this is where we leverage our technology. So J.B. Hunt 360, really bringing to the largest segment of the market that we serve for our customers, bringing the most efficient way to move goods, whether that's in a drop-and-hook scenario, so giving them capacity through a trailing fleet; or giving them a live load, live unload. That's where we are able to use nearly 1 million trucks to serve our customers. It is a growing part of our company. All 5 of our segments are growing in total, and I feel like that will be a big part of our strategy with our customers, long term as well.

With that, I'll turn it over to Nick to give an update.

Presenter Speech
Nicholas Hobbs (Executives)

All right. I'll start with equipment before we get into the segment. But this past year has been a challenge for us with OEMs and getting enough equipment. We were needing -- let's say, over the last 18 months, we've added over 3,000 trucks. But to do that, we've had to hold trucks much longer than what we would like, our normal trade cycle, because the OEMs couldn't get us enough production as they were having chip shortages.

This year, going into '23, it's still going to be limited production. They're not going to be back up to full speed. So we're facing challenges there again, but will -- the production will tick up some. So what we're doing is going from 2 providers to 3. So we're expanding out to 3 providers to help us meet that. And so we will still be holding trades at the end of '23 as part of our plan, just not near as many as we're holding today. So we're solving that problem and feel good longer term. We've got that.

The issue is we've not been able to take gains like some of our competitors. We've chosen to hold on for the long term for our customers to be able to grow. Most of our competitors during this time, other than acquisitions, have not been growing. But we saw a lot of demand both in Intermodal, but primarily, a lot of that truck growth was in the Dedicated side. So we're seeing a lot of demand there, and I'll talk about that in a second.

On the trailer side, our containers, we've -- we're continuing to source containers and not had any issues recently with production. So on the container side, the production is good -- flowing pretty good into the U.S., so we feel good about that.

On the chassis side, we've gone to a second chassis provider to make sure we've got plenty there. So we feel good about our chassis supply for our containers. On the trailer side, dray is, I would say, good. We're a little bit behind on that. But for the most part, they've caught up and have done a really good job on that.

On the reefer side, we're still facing immense problems getting it. It could be 6 to 9 months from the time we place an order for a reefer unit until we get it. So we're leasing units. We're doing various different things. We've done some leasing on the dray side as well. But that market is very challenging to do that, but we've been able to source some.

So this next year is still going to be a challenge for us on the equipment side, but we see ourselves positioned better, coming out stronger on the other side. When I think about drivers, our driver situation is much better. We've taken raises for a lot of our drivers, and the market's loosened up a little bit.

And so we're in the best spot we've been probably in 14 to 16 months from a driver standpoint even with all of our growth. That's cost us a lot of money. Our cost per hire is up to source that, but we've been able to come through for our customer in that situation. So we're much better there.

From the segment standpoint, I'll talk about Dedicated and Final Mile. On the Dedicated side, over the last 6 quarters, as Brad said, we've added over 3,000 trucks in Dedicated. That's all been organic. And so we've seen a lot of demand there. Our retention rate is still very, very high. Our customers have been focused on service and capacity. And so we've been able to step up for them there and meet that when others have been challenged with that. So I would say our customers are very pleased with us in that side.

Going forward, as we talk to our customers, they're going to be focused on service and cost. And so we're going to be able to move with them, and we're going to do a lot of things through our customer value delivery process. That's something that we do with all of our Dedicated folks who are on site with our customers, in their plants, in their warehouses and facilities. And so we're very aligned with them.

And so as they adapt and adjust, we adapt and adjust with them. And so we're going to be focusing a lot on costs, so that's going to be driving efficiency, making sure the trailers are fully cubed, changing delivery times. And so we have the logistics engineers really to help us drive out inefficiency in that network, and that's where we're seeing a lot of customers move to, is really focus on efficiency as the cost is kind of what -- or the capacity needs is not quite as strong as what it once was.

So we're adaptable and we're going to adjust through that. So we're excited about that. We've done that. We think with all our growth, our density is really playing in to allowing us to move assets from one customer to another as their seasonality adjust or as various things happen. During COVID, we were able to -- some fleets that were shut down because the manufacturing shut down, we can move over to grocery, to food. And so we were a winner in both sides when they couldn't do that with their private fleets. And our density allowed us probably to do that much more than some of our competition. So we think that was a key to some of our rapid growth. And our retention, again, is 98%. And that might change just to tweak a little bit as the economy changes some because we're flexible with our customers. And as their needs go away, if they think their long-term needs going to go from 12 trucks down to 10, if it's a standard equipment, then we'll redesign, re-optimize and move that somewhere else.

We're still going to be selling deals. As I tell my sales team, they'll flip their hat around, and now they're going to be selling to the CFO and talking about cost of capital and where are you putting your resources, talk about insurance, work comp and things that we can manage better than they can, also design their fleet much more efficient. We have supply chain engineers that can really help us do that. So it's a different sell and so we'll continue to sell.

Our pipeline is full, but our customers are now taking longer to make decisions because of the uncertainty of what the future is. So it just takes a little bit longer for them to make a decision, but they are -- we're selling deals every week. So we think it's -- the future is good for us there. And we think we'll still net 800 to 1,000 trucks, somewhere in there, probably sell more than that. But we think since we've been through this in '08-'09 and '14-'15, we know kind of what our customers will do. So we'll be prepared to adjust to that.

On the Final Mile side, we finished our last acquisition in February, and that was kind of middle mile for furniture when we acquired Zenith. So we think we have a furniture network, first mile, middle mile, last mile built out. We've seen the demand slow on the furniture side. We've seen it slow a little bit on the appliance side as well. But we think we've got a good footprint. And with that footprint, we're really going to be focusing on efficiency, and improving our bottom line is the focus that was this last year, in '22 -- or I guess, I should say the existing year. And then next year, we're going to continue that focus. We'll still sell deals, but we're going to try to get a better return for the great service that we provide. And so we think that's setting up well. We're in off-price retail in that, and that business is doing very well right now. So we're excited about that.

The exercise equipment, fitness equipment is coming back online. We've made a purchase right before COVID in February before we shut down in March, and so the gyms all shut down. So that business is now starting. It was a small acquisition. And so that's starting to start back up now, and we're starting to replace exercise equipment in large gyms, and that's part of our strategy there. So we're seeing a little volume pick up on that. So we're excited about that. So we think we've got a good foundation in Final Mile, and so we're excited about what the future holds there.

Presenter Speech
John Kuhlow (Executives)

Great. Thank you, Nick. I'll just round it out with some capital allocation discussion, talk about the balance sheet. So we are still continuing to believe that the best way to increase shareholder value is through providing these services that we've talked about. And so if you look over the last 10 years, we've had over $10 billion in operating cash flows and have reinvested that nearly 70%, $7 billion, back into providing the equipment and capacity for our customers.

We had over $1 billion in dividends and then also $2 billion in buybacks. And so we -- no major changes in our philosophy around capital allocation. We'll continue that into the future, fully expect to keep paying dividends. We use more of a payout ratio basis as opposed to managing to a yield and then opportunistically buy back stock as those needs arise.

We have a stated 1x leverage. We have been trailing behind that the last 12 to 18 months. We still feel like that's the right balance for us. But if something were to come up, M&A or some other opportunity, I don't have any fear in taking that up. But that kind of seems to be the sweet spot for us. So I'll just leave it at that. I think we can get into some questions then.

Question
Justin Long (Analysts)

Sounds good. Thanks for that overview. And maybe to get things kicked off, just from a high level, we're now halfway through the quarter. Could you talk about how the business is performing quarter-to-date relative to expectations?

Answer
John Kuhlow (Executives)

Yes. You know we love talking about guidance. But what I would say is we're not going to provide much of an update. I would say, the things that Shelley probably pointed out and probably what generally you hear, customers have a lot of uncertainty. The market is fairly fluid. We're watching inventory levels, as I think a lot of other people are. And I think that's probably the big thing that we're focused on.

In terms of our businesses, generally speaking, I think we're fairly defensively positioned. I think you heard Shelley talk about Intermodal and the value we can provide to customers. There's still significant savings converting highway freight to the railroads. We still have high fuel prices. We think the value proposition can only be enhanced when we see better and more reliable service. We can deliver that to customers.

And then in Nick's business, in Dedicated, I forgot your number, but it's greater than 80% of his contracts have automatic annual price escalators linked to an ECI and CPI index. And so the focus in his organization is, hey, how do we make sure we're -- our service and the design of our customers' networks are engineered to be the most efficient and how we create value for those customers.

There is -- the market is soft. I think we talked about that a little bit on our call. But relative to what we said on our Q3 earnings call, there's really no change or no update to give.

Question
Justin Long (Analysts)

Okay. And I guess building on your comment about being defensively positioned, as we think about 2023 and maybe a base case for a mild recession, where do you see the most resiliency in the J.B. Hunt model? And where do you see the most cyclical risk?

Answer
Shelley Simpson (Executives)

Let me just make one note, and then I'll turn it over to Nick. When I heard Nick talking about Dedicated Contract Services, just started thinking, well, if you don't know DCS very well, you might think this is like a traditional Dedicated business. In reality, this is a private fleet service for our customers.

And so when Nick talks about redeploying assets, contractually, we actually don't have to do that. So we're locked in with our customers for if he sells 20 at a time, those 20 trucks -- it's really our CVD process that allows us to talk to a customer about long-term value that we create. So that's more of a strategy call on Nick's part to have these conversations with customers. We actually don't run a network of dedicated trucks. We run a network for a customer, but they get the advantages of the scale that we have.

And so because of that, Justin, I think our most resilient part of our model sitting in Dedicated Contract Services. And I think that's a real distinction. It's probably the most misunderstood part of our business that it might operate very much like a trucking company. It actually operates like 700 unique private fleets that then gains advantages from the scale that we have.

And so when Nick goes and makes those conversations with customers, he's doing a trade-off long term and strategically with each customer if he chooses to make that decision. So wanted to set that up because I was listening as if I were sitting in the audience and I thought, I think that's really important to understand on the private fleet side, but I'll let Nick talk about that.

Answer
Nicholas Hobbs (Executives)

Yes. I would just say our -- the way we respond to the market and the times is the same thing that we've done in, like I said earlier, '09 and '10. And we listen to our customers because contractually, they are bound. But we found out that if we're flexible with them, then they'll be endeared to us long term. And as they come out, we gave back 2, we'll probably get 4 to 6 on the other side of that.

And so we're in it for the long term with them. We've had some customers -- I was doing a CVD presentation to our executive team the other day. We've been with a lot of customers 20-plus years on the Dedicated in this side. So it's not when the bid is up. It's just renewal.

And so when I think about resiliency, I think of Dedicated. And we're just consistent in our performance. Our margins hadn't been where they've been because we've had all the growth. And so if you follow our stock long enough, you know there's the other side of that. That comes out the other side when our growth slows down some. So we're excited about what '23 holds for us. We still think there's going to be demand. Our pipeline is very long. So on the Dedicated side, I think it's probably, I would agree, the most resilient.

Answer
Shelley Simpson (Executives)

And then I would say at 98% retention, Justin, that's kind of the proof in the pudding and hearing Nick talk about 20-plus years being at -- our customers. When they decide to replace us as their private fleet provider, that's not a decision that's easy for them to do. So it's usually a long-term discussion. So that makes us very resilient with our customers.

The other part of that was in what parts are most at risk. I would say, on the highway side, it's going to be more volatile with the market except that -- this go around during this downturn, we're actually more variable on our cost structure. So we should be able to be more fluid with our customers, allowing them to take advantage of whatever is happening in the market. So when the market was moving up, their prices were moving up as carriage rates are moving up, and the exact will be true there as well.

Question
Justin Long (Analysts)

Okay. Great. I'll open it up to questions in the audience. Ted?

Answer
Unknown Attendee (Attendees)

Impressive. It's really sort of a 2-part question. One is on driver pay, and you have a lot of history there. Do you see it as a ratchet, meaning once it goes up, it's very difficult to bring it down even when the economy changes? And then the second part, putting in driver pay with fuel discounts, all the equipment challenges you quoted, Nick. Is -- it seems to us that there's a huge gap between what the bigger, more efficient providers can do with what the smaller ones are doing, which would kind of indicate that this pricing is just preface to a huge, large-scale exit from the business. So I mean sort of 2 macro questions.

Answer
Nicholas Hobbs (Executives)

I'll start on, one, on the drivers.

Question
Justin Long (Analysts)

Sorry to interrupt, but just to repeat the question for those on the webcast, the question was about the progression of driver pay and then the dynamics between some of the large carriers and smaller carriers who drive or drive for pay as well.

Answer
Nicholas Hobbs (Executives)

Yes. So I would say that it's somewhat of a ratchet. I would say that it goes up. The supply of drivers is still not where we need to be in the industry of quality drivers. And so we kind of look at it from '17. I've been here since '84 working in the trucking industry, and it's changed a lot. And our driver pay is really where the drivers need to be right now, so they make a good living and good quality home time. So I think we're in that ballpark. I don't see it coming back down.

Now with that being said, as new entrants come in, they all start at a lower tier than an experienced driver. So I think there's some offsets in that. And it all depends on the pocket where you're at. If we keep building DCs and our models say put distribution centers in the Lehigh Valley and Harrisburg and you just keep cannibalizing others right there, there's not enough CDL holders there. So as you look at different markets, it's going to play out differently. If you put it down in Alabama, you can get drivers at a lower pay. It all depends on very specific driver pay.

As far as big companies versus small companies, I think the drivers are starting to see the value in the big company from the benefits that they can get, not just in pay. We just announced that we're going to do driver disability for any drivers have been with us, short-term disability for 2-plus years.

And so if you just look at all the benefits and vacation and holiday pay and various different things that we do, I think that's something that the small providers can't do. And so I think that we can also utilize the drivers better. Part of the pay we can move back and forth to Intermodal. And so a driver can get a very consistent paycheck week to week. So those are some of the things that I'm seeing from a big provider. Again, I've just been at J.B. Hunt, I know what we can do. And so I think the drivers like that. And I think you kind of see that in some of our turnover numbers.

Answer
Unknown Attendee (Attendees)

That's very helpful. But I was also just talking about your ability to purchase whatever -- your ability to purchase fuel. That's got to be in immense [ hurt ] per mile.

Answer
Nicholas Hobbs (Executives)

Yes. Yes. I think we clearly have an advantage on that. And some of the drivers that went and purchased trucks in the last, I'd say, 18 to 24 months, they're going to be in big trouble because they way overpaid for the equipment because of the shortage. So that's going to be a challenge. So yes, there's a lot of advantages for us that we can take advantage of. And you mentioned 2 or 3 or 4 different areas that we should be able to gain some advantage from.

Answer
Shelley Simpson (Executives)

Ted, I might note, too, that the market, as it's been very tight on capacity, our customers have expanded their carrier base, but they've also leaned more into brokerage companies. And so the share of wallet that brokerage has gained has been substantial over the last -- 2019 to 2021.

If you think about -- that's going to be the small carrier community. There's around 1/3 of control in the market from a truckload perspective. So when you think about what's happening to that W-2, they're living on spot price. And so spot price was way up, and that brought a lot of the new entrants into the market. Now spot price is going down. That also will impact a large portion of the market.

So what Nick said earlier, which drivers are starting to understand, you might not get the up, but you're not going to get the down. So having a more steady, reliable paycheck and work that you do, I think, will prove out even more.

Question
Justin Long (Analysts)

Any other questions in the audience? Well, I know Darren is not here, but Intermodal is your base business, as you mentioned, Shelley. And we're getting pretty close to January 1, where a lot of capacity on BN's network is opening up. How are you feeling about your ability to build that capacity day 1. Can you just talk about the cadence of filling that capacity up and the opportunity that presents in '23?

Answer
Shelley Simpson (Executives)

Well, I mean, certainly, we have changed our conversation with the customers since that announcement, but also our customers have changed conversation as well. It was just a few months ago that they thought they would experience a peak, and we were having to walk our customers through that we would need to be careful through that peak as the railroads are very fragile, and we weren't really sure what we could commit to. So we have a base part of the business that we are fully committed to, but anything above that would be difficult to predict, and that narrative obviously has changed. And so we've been having conversation. I think our customers lean into us as the expert in Intermodal because we do cross all of the railroads. So they're asking us, what can you really deliver?

So whether it's January 1 or a different time period, most of our customers are going to want to start when the bid implements. And so that's going to be important. We do have some customers that have moved up their bid season, as things have changed and they're trying to start out 2023. That would work to our advantage to be able to do that. But for the most part, we're not really looking -- if you think about what business -- we [ can onboard ] business right now, Justin. So we don't have to wait on January 1. The only substantial change there would be Schneider moving to the UP. We're not looking to take their business. There's plenty of business operating on the highway that we can provide on average a nearly $0.30 savings. Brad Delco?

Answer
Brad Delco (Executives)

29.5%.

Answer
Shelley Simpson (Executives)

Thank you. 29.5% savings. And so there's plenty of opportunity just on the Highway side to talk to our customers. So if they're doing business with Schneider today, I would assume they'll continue to do business there. But certainly, if they need to have that conversation with us, we're engaged in that. But we don't have a specific let's get all of our business on January 1. But if a customer can start, especially on mode conversion, then that's a conversation that we're having.

Question
Justin Long (Analysts)

Okay. Great. Any other questions in the audience? Well, maybe one for you, Nick. When you think about the growth in Dedicated, it's been so pronounced here recently. He referenced that. What percentage of your new business is coming from private fleet conversions? And how are you thinking about that value proposition today versus pre-pandemic?

Answer
Nicholas Hobbs (Executives)

Yes. So I would say that roughly about half of our business is from a pure private fleet. The other is a private fleet that was outsourced to one of our competitors and we replaced, we get a big chunk from that as well. And then some is creation of a private fleet for some that decide they want to put a fleet in.

We've seen some fleets, for example, put in at the port where we do it for the customer directly, so that they get more visibility and get the flow of their inventory through there. So we will do some of that. But -- and then from a -- what was the second part of the question?

Question
Justin Long (Analysts)

The value proposition today versus pre-pandemic?

Answer
Nicholas Hobbs (Executives)

Yes. So I alluded to that a little bit. I would say early on, the last, let's say, 24 months, it is "I've got to get my product to the store on time. I'm out of inventory. That is the most important thing." So capacity and service. And so then post the pandemic, now with things slowing down, it's about cost and efficiency.

I can -- I've got product in the store. Let's get it there the most efficient way. So instead of going 2 times a day or once a day, kind of go every other day. So they're really trying to hone in on just in time back to the store or to the consumer if we're going to consumer. So efficiency is really the buzzword. And so I think we set up nicely to be able to help our customers succeed and lower their cost in that method as they're going through this time.

Question
Justin Long (Analysts)

Okay. And maybe going down the line, John, one for you. There have been a lot of inefficiencies in the network this past year. When you think about how that's impacted J.B. Hunt's cost structure, is there a way to think about that number and what the opportunity looks like going into next year as we fix rail service and clear some of these other operational hurdles?

Answer
John Kuhlow (Executives)

Yes. I don't -- I'm not going to provide a number for guidance. But I think that what you mentioned is just the sheer amount of inefficiency in the network, specifically within Intermodal, has just caused an enormous amount of cost structure inflation that we believe with a more fluid environment.

Having our boxes return for use of delivering freight as opposed to temporary storage, freeing up our drivers to be more productive because there's more balance in the network, those efficiencies are what is going to help us in '23 and beyond. And so there is, throughout the organization, just the ineffective, inefficient use of our resources that is putting pressure on our cost structure, and we think that we're going to be able to provide a lot of productivity enhancements going forward.

Answer
Shelley Simpson (Executives)

I might just add to that. One of the things we did through the pandemic early on was we really leaned into, our customers were going to need us, capacity was going to be very important. And we really got out in front of our customers from a capacity, for our people, all of that.

What we've said is now we want to step back and go in lockstep with our customers, so really moving at the same pace that they are. That will allow us to think about our cost structure as well. And certainly, there's lots of opportunity to unlock what we already have.

You've heard Darren talk about this on the earnings call. I've also echoed it from an efficiency perspective. We are very focused on cost takeout, so that we can share that back with our customers. They are not -- I've never met a customer that wanted to increase their budget. So customers are constantly looking to save money.

And if you think about what they've survived in the pandemic over the last 3 years, their costs have escalated to the point it's been difficult to explain it at the C-suite, and our customers are looking for cost takeout and their share of that. And that's been a huge focus for us.

Answer
John Kuhlow (Executives)

I'll add, too, just because I think I understand a little bit of the question. I mean the reality is if you look at -- there's been focus on profit per unit or profit per load. And we've said consistently, our focus across our organization is on generating the appropriate return on invested capital. And so we make a lot of investments in our assets. We manage our business to make sure we're generating the right return on those assets.

As we see greater fluidity and greater velocity in the network, we can put more loads on our assets. And then you could see a pretty meaningful improvement in our cost per load. And so when we talk about savings we can deliver to the customer, it's really on the realization of we can lower our cost per load or our unit cost per load. And as a result, we can save customers money, not to mention the fact that, again, 29.5% is the spread between a Truckload contract rate, inclusive of fuel versus where Intermodal is today across our network.

Then on the Dedicated side, if I can touch on that, just to touch, we have seen margin pressure in that business. And -- but we like seeing margin pressure because it -- that margin pressure generally comes from onboarding of new business and the growth that we're sort of planning across the network. And so we've seen that consistently. We have a publicly stated long-term margin range of 12% to 14%, sort of been hovering below that.

We've identified kind of the 3 core areas, 1 of which is the start-ups of new business. And again, onboarding 3,000 trucks over the last 18 months for any trucking company would be a [ monumentous ] challenge. And I feel like Nick and his team should get a lot of credit for being able to do that in the environment we've been in, particularly with COVID, equipment shortages in the driver market.

Number two is, believe it or not, fuel. And not to use fuel as an excuse, but fuel doesn't impact really EBIT dollars. It's a pass-through in our business, but it does dilute margin, right? So if there's no margin on fuel, I think it's worth pointing that out.

And then number three is our maintenance costs. And the fact that we've had to hold trades to support growth to meet customer needs. Obviously, that means our equipment has aged a little bit more, and we've identified that's been about 100 basis points or so of a headwind. So when you think about those costs, not sure what the world looks like. Nick has provided long-term guidance to sell gross 1,000 to 1,200 trucks a year. Historically, that's netted us 800 to 1,000 with some churn.

If for some reason, the economy doesn't present the same level of growth next year, well, maybe we can tackle some of that equipment age [ faster ]. And so my point is that there's opportunities, I think having a team that has 24 years of experience -- they just sort of will know how to pull the right levers and manage through that. And so again, just opportunities to manage cost and think about what that could look like next year.

Question
Justin Long (Analysts)

Okay. Great. That's helpful. I'll do a quick question check. Any questions from the audience? All right. I'll keep going -- well, here, Dan.

Answer
Unknown Attendee (Attendees)

Yes, I have a question. You had mentioned in your -- some of your prepared comments or additional discussion that there was more variability in the business model than gets [ down appearance ]. So I was wondering if -- and I think the idea was that customers were allowing rates to go up, that they should also benefit or well, not necessarily benefit, but we should also see rates come down. Historically, maybe there's more of a mismatch there. Can you elaborate on that?

Answer
Shelley Simpson (Executives)

Sure. Yes. So specifically talking about on the highway side. So in the past, especially during the last Great Recession, we had a lot of fixed assets. So our ability to really take cost out was very difficult. Back to what Ted said, does driver pay change as your asset cost base change?

Now we've moved that model to an asset-light model. So if you think about owning the trailer, we use the power of carriers. And so J.B. Hunt 360, which is our technology platform that we have built, really enables the small carrier community to access our equipment and have a variable cost structure. And so as their cost comes down, that immediately can pass on to our customers in real time.

One thing from a carrier perspective is price changes dynamically. So there's not a lot of fixed pricing from a carrier in both our trucking part of our business or our 360box or in the brokerage part of the business. So that gives customers immediate relief from a cost perspective. That's very different today than what that was back a decade ago.

Question
Justin Long (Analysts)

Shelley, going back to the earnings call, you mentioned the potential for rightsizing. And I think when you made that comment, you were talking about ICS and Final Mile. Those are the 2 businesses that you called out. Could you just elaborate a little bit more on that comment? And any other areas of the business where you might need to pivot given the macro environment?

Answer
Shelley Simpson (Executives)

Well, I mean rightsizing for us is exactly what I talked about earlier, which was really pulling back and getting in step with our customers. And that's going to be important. So every single area of our company, we actually understand the cost base and what that's looked like over the last 5-year period and then the benchmark associated with that.

So every area is taking a review of where we have invested heavily on behalf of our customers. And now it's time for us to really rethink any areas that have opportunities. So that's one thing that we're thinking through.

The other is just in our segments. And so as the market has changed significantly, and ICS felt the brunt of that initially, now it's coming back to the 5-year plan to understand exactly where we're at and making sure that we're hitting metrics based on the 5-year plan.

And then you heard Nick talk about in Final Mile, our opportunity. Really, if you actually went with us to a Final Mile, that's what I've spent the last 4 months is trying to get on the road and seeing our core operations. And if you go see our Final Mile locations, you will see it as a replica of DCS.

It is something that I think our customers, if we could walk every customer through, they could actually see the value that we create. But our -- the value we create doesn't necessarily match the margin that we are generating. And so we are trying to rightsize with our customers the value we're creating through that CVD process, and making sure that we take appropriate action that is needed for that business. So we really believe that has a higher-return profile over a longer period of time. And so that's an area that we're focused with our customers, walking them through what that can look like.

We won't do that in one cycle. We'll spend time helping them understand the value. Sometimes they just don't know. It's a little bit like Dedicated was maybe a decade or 15 years ago, that we compare Dedicated to any other kind of Dedicated. Similar is happening in Final Mile. We think we create a differentiated experience. We need our customers to see the value that we create, so that when we really are talking about the cost structure of that, they can understand that and then we get appropriate returns. So that is a focus for us.

Question
Justin Long (Analysts)

Okay. Great. On J.B. Hunt 360, we're roughly 5 years into that journey. As you reflect back, what's worked and what hasn't worked? And how does your answer to that or answers to that, how does that change the way you think about the next 5 years for J.B. Hunt 360?

Answer
Shelley Simpson (Executives)

Yes. In 2017, we not only announced J.B. Hunt 360, which is our multimodal digital freight platform, but we also announced a $500 million commitment to technology investment. That was important for us for our own organization, but also our customers and our shareholders to understand how we were really going to be attacking the market, how we were thinking about what is now our mission statement to create the most efficient transportation network in North America.

And I feel like we were out of the gate near first. I think our customers recognize us from an innovation perspective. And we initially scaled that part of our business through our ICS business segment. And so that part of the business was built and ready for scale. And I think we did a really great job bringing our carriers on board and really carries interacting with us in a completely different way, really having choice, being able to choose the freight they want at an appropriate price and ultimately us serving our customers better.

If you look from 2017 to 2022, ICS grew 2.5x, so about a $2.5 billion broker. I think that J.B. Hunt 360 was a great contributor to that. I think what came out of that actually happened during our Customer Advisory Forum, when we were launching this idea in concept to our customers, they loved the concept, but they wanted us to do this in the traditional trucking part of our business. They felt like that was where they needed help the most.

And we actually went into design, and that's when we launched in 2019 360box. That part of our business is growing. That part of our business is now marching their way to the first $1 billion. That segment just, let's see, 7 or 8 years ago was about a $400 million segment. Now it will be near $1 billion and generating appropriate return on invested capital. That has been a great home run on behalf of our customers in total.

And then finally, I would say our ability to load our equipment. If you think about having a digital freight platform, our own assets should be the most efficient part -- most efficient in the network because of the access that our capacity has to that, and that's been a win.

What I think has been an area of opportunity in 360 is just the small customer side. So I feel like we've won on the carrier side. I think on the customer side, the pandemic has not helped from a small customer perspective. So we're still continuing to work on that.

And the other thing I would say is we don't want to scale or grow volume just for volume. So we have a measured approach where we will grow volume at appropriate returns. I think that that's an important component to our overall brand. We'll never be the cheapest, but we'll always create the most value. And so us having that conversation with customers is important. And so from a competitive landscape, I think there were some competitors that were scaling at losses, and that just doesn't match our model.

Question
Justin Long (Analysts)

Maybe to close, we've got 1 minute left. But I know the organization is very focused on ROIC, and I believe you mentioned that several times. Where are the best ROIC opportunities today as you look across the -- investing in the different businesses?

Answer
John Kuhlow (Executives)

Yes. So that is, as you point out, one of the, we like to say, the North Star for us is in terms of how we evaluate our investments. Nick, for example, in Dedicated, not a deal goes through without providing a proper return on invested capital metric. Before he orders any equipment, we review that, and that is the focus.

Again, on Intermodal, those are 20-year assets that we're purchasing. And so we have developed those and modeled those out to be an ROIC target over that life. And so we continually look at that in terms of how we're investing, where we're sourcing or applying capital, and that will continue to be into the future.

Question
Justin Long (Analysts)

Okay. Great. Well, I want to keep us on time. So I'm going to end it there. Thank you so much for your time.

Answer
Shelley Simpson (Executives)

Thank you, Justin.

Answer
John Kuhlow (Executives)

Thank you.

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