J.B. HUNT TRANSPORT

JBHT
Delayed Nasdaq - 04:00 2022-12-09 pm EST
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Transcript : J.B. Hunt Transport Services, Inc. Presents at Morgan Stanley 10th Annual Laguna Conference, Sep-14-2022 08:45 AM

09/14/2022 | 11:45am

Presenter Speech
Ravi Shanker (Analysts)

Let's keep the ball rolling. Next up, we have J.B. Hunt and joining us from the company are Shelley Simpson, President; John Kuhlow, EVP and CFO; Spencer Frazier, EVP of Sales and Marketing; and Brad Delco, who, as we all know, keeps the lights on. Everyone, thanks so much for joining us today.

Before we kick off, please note that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Question
Ravi Shanker (Analysts)

So frankly, it's a pretty nice quiet period where nothing is going on out there. So very nice if you did join us. Maybe Shelley, do you want to kick off with kind of just your thoughts on the current environment, especially with everything going on in the headlines with potential real strike and how do you see the world right now?

Answer
Shelley Simpson (Executives)

Yes. Well, certainly, I can't speak for the railroads or the unions, but I will just say that. So working closely with the railroads, I would say we are closely talking to our customers, understanding what potential disruption that could cause or not cause. We still have the deadline of Friday. I think our customers are asking us questions, not wanting to be stuck on the rail as shipments are moving. And so we're walking them through that really day by day and hour by hour, any changes that have occurred, and we've seen a few changes come through the process.

I think we have to plan for a potential disruption that we really just don't know. I think if that disruption occurs. We do think that, that will be short-lived, and we think our customers will adjust to that. It could be highly disruptive for a short period of time. But I think for us, we aren't in a position to really comment if things will get resolved or not. But we're trying to plan for all scenarios.

Question
Ravi Shanker (Analysts)

Got it. I will not ask you for probabilities of which scenario is going to play out. But -- so are you thinking of like the other segments of J.B. Hunt, and I say intermodals impacted and you maybe have ICS and dedicated step-up and kind of fill that bottle, that kind of is that how it's going to be?

Answer
Shelley Simpson (Executives)

Sure. So let me say this. If you just look us during the pandemic, when supply chain has been completely disrupted, it was across every part of the supply chain. All 5 of our segments pulled together on behalf of our customers, and we make sure to solve. So we really focused in on our customers, understanding what they needed us to do. And you saw the results of the last 2 years. Our growth across all of our segments had been significant, and that's because our focus on the customer. We are more agnostic with our customers. So we're indifferent as to how they want to move goods and how we can help them.

So for us, we really think about it from a cost service capacity and how do we make sure if service is #1, and we don't know if there's reliability, we're going to move that shipment to whatever mode that we have is going to make sure to deliver on behalf of them. And so we delivered -- we took share during the pandemic in the last 2 years, and I think that's been favorable for our customers. We'll do that same thing. So it's not really something that we have to just have a large meeting or putting people know what to do. They know to center on the customers. They understand. For us, we want to be properly compensated for the work that we do and the value we create. But it's not anything out of the norm for us. Maybe during the pandemic when it very first started, we had to pull our teams together because it was so fluid, but now we're used to disruption, and we adapt through that, and that's what's helped us accelerate.

Question
Ravi Shanker (Analysts)

Yes. Unfortunately, we're all used to every bird in the sky being a black swan these days for the last 2 years. So unfortunately, we have practiced with that. Maybe last question on this topic. I mean, it feels like this is an environment where J.B. 360 can really shine and again, the cross-selling across the divisions and you like just a portion of assets and resources as needed. Can you just kind of unpack that a little bit more kind of is that the case? And how are you using that as a tool?

Answer
Shelley Simpson (Executives)

Yes. Let me let Spencer take that. Spencer leads our sales team and customer team.

Answer
Spencer Frazier (Executives)

Yes. Thanks, Shelley. And I do believe 360 does help our customers in really any scenario. And in this particular event, where there is disruption, where we can add capacity solutions really, as you talk about, things are changing by the hour. 360 gives us flexibility to do that and bring capacity to our customers where they need it. But long term, we really think that's the value overall that it can create by bringing the solutions to our customers in a unique way, meaning whether it's 360box, whether it's our Intermodal or dedicated businesses using that to eliminate empty miles and create a more efficient answer. That platform continues to scale and allow us to do things to create value. So yes, in the moment, but long term, that's definitely a foundational for us.

Question
Ravi Shanker (Analysts)

Got it. Just moving past the uncertainty in the next few days. If you go back to the good old days of a week ago, I think 3Q rail volumes were actually pretty decent compared to the first half of the year. It seems like some of the congestion is improving. Obviously, that's been the kind of key focus area for J.B. for their entire rail space for the last 2.5 years. How has that been kind of -- were you seeing any signs of light at the inner-tunnel, and kind of a pause out of the congestion? Or kind of what was the quarter shaping up like before the last week?

Answer
John Kuhlow (Executives)

Well, I'll just talk about -- when you think about where we were at coming into -- or after Q2, the railroads did a great job, I'd say, kind of resetting their networks. And that was challenging for them, challenging for them to get their network set up to where they can move more efficiently. And even as you walk through today, there are still opportunities to where there are inefficient parts of their network that are causing them challenges. When those things back up, that creates issues and slowdowns across the network. So what we're hoping for is continued acceleration of the Intermodal network and speed. We know when that happens, we can continue to provide more capacity for our customers. Our customers continue to want to lean into Intermodal. The value proposition is there. And as the reliability increases, we know that we're going to have the opportunity to serve them.

Answer
Shelley Simpson (Executives)

I might add to that. I think Darren talked about this on the earnings call that he said the second half, we were really looking for better performance from the rails weren't really sure win. I think they're all focused on it. We would like to see more improvement than where we are today. I think we've seen modest improvement, but it's certainly nowhere near what our customers expect us to do.

So I would say maybe we've come off the bottom, we're not sure. I think we've probably said that several times. So we don't want to look in the crystal ball for that. I think the labor negotiations will be important for them to move forward and help us with our customers. But we do believe that it's going to get better. It is getting slightly better. The deterioration that occurred was the worst performance we have seen.

Time will tell when that will actually occur. But I can't say we're super optimistic about the third quarter. I can't really comment on that. But longer term, we're very optimistic about their focus in what they're doing to make sure that we restore what our customers have known us for years. And there's so much pent-up demand from our customers wanting that reliability and what they know to expect a reliable service consistency and capacity and cost. And so once we get to that, it's why we have so much confidence in 2023 that we're going to be able to deliver on that for our customers.

Question
Ravi Shanker (Analysts)

Got it. Just to follow up on that. What do you mean by pent-up demand? I mean surely, these customers are not like, I'm going to keep my freight into the yard until you can do it, right? Obviously not. What you're saying is, are they coming to you saying, I want to do business with you. I cannot do business with you. Let me know when I can do it. Is that what you mean by the...

Answer
John Kuhlow (Executives)

I'll talk about that for a second. Really, that pent-up demand is where Intermodal pretty much lost share back to the highway. The customers are still moving their freight to your point, they're not just sitting on there. But the opportunity for that freight that's on the highway today to come back to Intermodal is significant. And again, they're looking for that reliability, the predictability and service, the consistency. And when that happens, then I think that business moves back. But there's also ways for us to work together with the railroads to create differentiating value and I think, ultimately, expand the market. As the market was growing in the past, it can grow again when that reliability comes back. So that's what we're really excited about.

Question
Ravi Shanker (Analysts)

Sounds good. Maybe just speak a little bit of a step back here. We have record attendance at the Laguna Conference this year. And I think the #1 question on everyone's minds is, are we going into a recession or not? I mean, I don't think you guys know more than any of us. But I think you probably have better insight into what's going on in the ground. So I'll put the question to you, are we going to recession or not? Obviously, have been -- there are so many conflicting data points and signals and the gap between the leading indicators that are not good and the actual real-time data points that actually [ are adjacent ], what do you think macro does the next month?

Answer
John Kuhlow (Executives)

I'll just start from a customer perspective. I wish we could predict the future and all of our customers do too. Right now, each one of them are in such a unique place in their business, whether they're still kind of resetting from an inventory perspective and even ordering to try to find the way to best match their business to the demand from their customers. And they are still guessing. We have conversations with them even this morning about different topics even going through the fall and into next year, and there's still a lot of unknowns. So we're working with them, really trying to use the data that we have and project out what that demand might be and say, "Okay. Hey, is our forecast right for you." And really just trying to collaborate with them.

Right now, that I'm staying in sync with still several things that are moving around. A lot of people just don't know. Now again, whatever we get into this fall and into next year, we're going to prepare for any scenario although to support them and ultimately, still win in any market by creating different value for them.

Question
Ravi Shanker (Analysts)

Got it. If I were to poke your crystal ball a little bit, like between your customers who have too much inventory -- too much inventory, but of the wrong thing and not enough inventory, kind of how would you like bucket those 3 categories? And like when do you think we might start to restock again?

Answer
John Kuhlow (Executives)

Yes. I think they've done a really good job over the last few quarters, trying to get things right. I think the next couple will be a big opportunity for them to hopefully see that change and get back to maybe a normal situation. And then what normal looks like into '23, we'll have to wait and see.

Question
Ravi Shanker (Analysts)

Got it. So given the uncertain volume or demand environment, what are your pricing discussions like with your customers, especially in IM? Because obviously, on the one hand, you to get paid for the service you provide and things are a little tight and congestion like pretty bad. On the other hand, the truck market is getting much looser. The environment is dicey. So you're in a tough job. I can see that. But how do you go into your negotiations? And what's the outlook for Intermodal pricing over the next 12 months?

Answer
John Kuhlow (Executives)

Yes. I think Shelley mentioned the three things that we fully try to work with our customers on and balancing the trade-offs between service capacity and cost. And we feel like we can create a value proposition to meet them where they are and where price goes, we're unsure, but we do know the value of Intermodal is still very, very significant, considering where fuels at, things like that. But we're going to work through each customer conversation in a unique way and find that value spot for them.

Answer
Shelley Simpson (Executives)

Maybe I could add to that. We are focused on creating more value for our customers. So we want to look at the supply chain. I've mentioned this a couple of different calls that there -- we are inefficient right now, more inefficient than ever in the supply chain. There is opportunity for us to help our customers to help them save money on their budgets. Any time that we just have to have a conversation on where the price is, tells me we're not talking enough about the big picture and how do they move goods in the supply chain? And is there a more efficient way to do that? Can we build a fleet for them so they can get out of the unpredictability? Should they convert more into Intermodal?

Remember for 2023, for us, our capacity is going to open up even more, particularly on the BNSF. And so our ability to go to a customer and help them save money right away is giving create conversation that says, how do we help you meet your objectives? How do we create more value? And then we're going to have a conversation on what our costs are doing. There are structural cost changes that have occurred. And I think the customers understand it because they have structural cost changes that have occurred. But any of our costs that have been transitory in nature, we are planning to share that back to our customers.

So we're going to be flexible and fluid. We don't know what's going to happen to the economy, but we do know this. We're great at taking care of our customers. We're financially disciplined. We're going to continue to move forward with that as a strategy with our customers. In a downturn, we can win. We can do a lot of great work for our customers because people have a chance to slow down and actually evaluate their network. Today, they are still just moving at a speed that if we just had a little more time, we probably could give them a lot more efficient answers even if we had a significant price change up. We think that we can take that holistic view and create a differentiated value for our customers. That's how we're going to be focused.

We don't think about it as much as what will price specifically do because all of that will change. And you talked about the Truckload market, we have a variable cost structure now. We have the ability to talk to our customers about a price change, up or down, depending on what the market is doing in the moment. And so a large part of our segment through our J.B. Hunt 360 platform has flexibility around cost. And so that's going to be favorable for our customers. We have the opportunity [ that may convert ], we have the opportunity to build fleet. All of those things will be positive for our customers. It should yield a good result for them and for us.

Question
Ravi Shanker (Analysts)

Got it. I want to get in J.B. truck and to the power-only segment in a second. But I did want to follow up on your -- you mentioned BNSF, obviously, huge opportunity for you guys going into '23, as you mentioned. But at the same time, you go to your competitor on the rail side, and they are also really excited about the opportunities that they have with the movement there, right? So how does this play out, right? On the one hand, it seems like both sides have pretty strong opportunity. But unless there is meaningful over-the-road conversion over the next 12 months, it feels like there may be a little bit of share kind of back and forth in the 2 of themselves?

Answer
Shelley Simpson (Executives)

Well, we think that there's not the Intermodal opportunity that everyone can win. So there is so much. You have to see, it's not just a pent-up demand over the last year or 2, several years going through PSR has been difficult. It's been years upon years of creating this expectation to expect not a lot. Anything that can be improved upon that will create this natural appetite for our customers to want to have a share shift, and I'm certain that our competitors can do a good job with that as well. What we know is about our business.

So we know with the Burlington Northern Santa Fe that as of January 1, there will be open slots on the train and J.B. Hunt plans to fill those. And we don't think about it as a share shift. We think about it -- in Intermodal, we think about it as a share shift from Truckload. It's inefficient. We think that we have enough opportunity that we can talk to our customers about that. We feel confident about the plants, in particular, the BNSF that has, that we think that we can have a successful season with our customers in 2023. Having said that, it doesn't mean somebody else can't either.

Question
Ravi Shanker (Analysts)

Sure. Sounds good. Maybe switching segments here. We're a big fan of the dedicated, as you know, and it has been one of the strongest growth areas in the last 2, 2.5 years. But at the same time, in recent quarters, like your peers, you've run into some equipment issues, you're obviously sourcing drivers has been really expensive. What's the near-term outlook there kind of when you look at the new business you're winning, the roll-off of launch costs and kind of some of the fleet and cost issues that you have to grapple right now?

Answer
Shelley Simpson (Executives)

Well, let me say this. I think that our pipeline is still very strong for private fleet conversion. And that's important to us that we're talking to our customers about the long-term opportunity that exists, and we've not really seen a slowdown from that perspective from a dedicated, even with cost changes that you just talked about of drivers. I wouldn't call them expensive. I would say that drivers are properly getting paid for the great work that they do on behalf of our customers. And I think our customers recognize that.

It's much easier to go and talk with the customer about a fleet that they have with drivers that they know. Remember, our drivers are there every day on behalf of our customers. They understand that, that costs are moving and that, that needs to change. I would say, for dedicated, we think the outlook is really great. Although we're very large in the space, the market opportunity is significant. If Nick were here, he would tell you, it's a $60 billion market that we've prequalified. We just saw data last week that said that market has expanded. And so we're going to do a little more work on that. But we're going to continue to be a growth company across all of our segments on behalf of our customers.

For us, our margin target. We have stated where those are. We feel comfortable with where we're at there. We're going to ebb and flow with what's happening in the market. If you just think about from an equipment perspective, we are holding on. By the end of the year, we will hold on to about 4,000 tractors more than we anticipated. Just think of the size of that fleet, our ability to say yes when a customer needs us. To do that, our size and scale allows us to do that, we'll be trading into new equipment coming into next year.

So I think that's going to be favorable as well. We have cost today because we're holding on to that equipment. We're having conversations that each dedicated operates at a unique P&L, for a unique customer location. It has 700 different customers or customer locations that we have conversations with on a regular basis. Feel really good about our margin targets and our growth potential inside that segment.

Question
Ravi Shanker (Analysts)

Got it. There's obviously a very wide gap between the truck, [ material ] spot rate and contract rate right now. And there are some people who believe that's because the market has kind of migrated away from spot towards contract. And it's probably the reason to believe that the market over the last couple of years also moved from contract into dedicated. Do you believe like that kind of shift towards like stickier business kind of longer-term visibility and contract. Is that real? Is that permanent? Is that structural? And what does that mean for your 3 segments that kind of benefit from that differently from -- different parts of the market internally?

Answer
John Kuhlow (Executives)

I might go start with dedicated. You kind of ended there. But I think when you consider the dedicated value proposition in any market, it might shift a little bit between really 3 things. And that goes back to, okay, if service is given. And we talk about cost, capacity and service, service is given. But really, is it people, capital and risk. And in any different market, those things might be prioritized different by our customers. And so that's where I think the dedicated demand, both in our current pipeline and going forward, we're really confident with.

And then when you think about, okay, well, what's going to happen outside of that into the current environment and the mix for our customers. They're looking for consistent capacity. That was the biggest driver and probably shift back to getting rates relevant with the cost of capacity over time. And then now I think they're going to get back into the fundamentals of executing their business and they're going to get back to really focusing on service, and that's where we think we can create differentiated value for them.

But then from a cost perspective, as Shelley mentioned, we've got a variable cost model that can meet them where we need to be to provide the service that they need, whether that's in a published or spot market environment.

Question
Ravi Shanker (Analysts)

Got it. I definitely want to touch on ICS because as a segment that's pretty close to your heart. Obviously, phenomenal turnaround there. I mean, you told us for a couple of years, bear with us, be patient. This is going to flip. It flipped in a pretty spectacular way, what 6 or 8 quarters ago. What is the future of that business like? What is your algorithm for growth? What is your algorithm for gross margins? What is your algorithm for net margins? How does technology play into that? Because it feels like you've had this huge inflection in the ICS story and the market at the same time, and I'm not quite sure where we sit right now.

Answer
Shelley Simpson (Executives)

Yes. So I would say for us, we are going to be disciplined in our approach with our customers across all 5 of our segments. We're never going to grow our business for market share only. We're going to carefully balance our growth that our customers need us to do on their behalf and the margin expectations that we have as a result. And I think that's really important for us because we never want to set an expectation for a customer that were going to come in and win share and then just raise the price 6, 9, 12 months later.

And so I think that's important because everybody has a different strategy overall. If you think about our whole organization, now the complementing nature of everything that we do, I think it is like the fill-in of every piece of business across our, I'll say, our 4 asset parts of our business. So any time a customer calls probably really important for us to be able to say yes. If a customer calls right now and says, I'm very nervous about the labor negotiations. And I'd like to either truck 500 shipments today right now. We have to say yes. That's where ICS plays.

So if you think about the complementary nature, it's also a great way for a customer to get started with us. If you think about the asset parts of our business, in dedicated, we're going to talk to you about a long-term agreement. And that's going to take us time and you might need help right now. In Intermodal, you mentioned earlier where a customer might say, "Well, I have it, but I'm not going to give it to you." We've also had that conversation, we'd really like to pick up your freight, but we have no more capacity. Think about now where ICS sits on top of that across everything that we do. The market is significant in the Truckload space, whether that's in a drop trailer needing more assets or just a pure brokerage model in general.

So for us, we think we can continue to grow our highway services in a disciplined and structural way for our customers. And that will create opportunity for our customers to convert into Intermodal, to create new fleets for them and create a more efficient transportation network. And I think that is the most important view that we have to have about ICS. So if you back up just a bit, when we invested so heavily in J.B. Hunt 360, we had a 5-year model. We said, here's why we want to create this investment, and we don't need to go with that. The core data points that you've looked at historically because we have 3 areas that we're going to focus. We're going to focus on scaling the platform. We're going to get efficiency from our people in general, by getting better in total. And we also think that from a margin perspective, over time, because of the amount that we'll be onboarding we'll figure the margin out over time with our technology investments that we've made.

And so what we've said back to you every quarter is we were meeting and exceeding the expectations we had. We'll continue to create. We have just looked at our 5- and 10-year plans last week. And so we feel really comfortable about the whole company. So ICS is a complement, but it's also a big segment in itself. And so we're going to compete from a margin perspective with the sectors that it competes with. But overall, our objective will be able to say yes to our customers.

Question
Ravi Shanker (Analysts)

Got it. So just to wrap up all these segments and all the long-term and short-term views in a bow, if you were to just look at where you sit today relative to what you told us on the 2Q conference call, assuming that rail network does not grind to a halt on Saturday morning, are you happy of being consistent? Any deviations on the plan? Any positives, negatives kind of how would you kind of price? What the quarter has been like?

Answer
Shelley Simpson (Executives)

Well, I would say we don't really have any change from our second quarter call. I think the comments that we made in our opening comments as well as the questions that we answered, we have a similar view. There might be a few ups and a few downs from that view. But in general, we feel confident with what we've said. And regardless of what happens in the short term for us, we're long-term focused. So we're focused on generating more value for our customers and our shareholders. And that's going to be a focus for our company. And we're going to weather any downturn that occurs because that will be short term in nature for us. We think we can win in a downturn. That's going to be important for our strategy as well. But I would say, no major change.

Question
Ravi Shanker (Analysts)

Got it. Any questions in the audience?

Answer
Unknown Attendee (Attendees)

[indiscernible]

Answer
Shelley Simpson (Executives)

As I said, we'll figure it out -- I don't think I was referring to margin. Margin for us, we have margin targets inside ICS, and I think we'll be within our margin target and within our 5-year plan. We're going to figure out how to help our customers. So I'm not exactly sure what my statement was there to really help for any clarification. I probably just jumbled two ideas together.

Question
Ravi Shanker (Analysts)

Any more questions? So maybe kind of in the few seconds we have left, kind of just taking a longer-term view kind of again, you guys have been leaders in investing in technology from an ICS standpoint, also electric, autonomous, the kind of all of the bleeding effect of the future, what does the world look like 5 years from now, right? I mean, what is going to be materially different? What's going to be much the same? I think I know what's going to be the same, i.e., your dedication to giving your customers value. I mean I can join the management team right here. But kind of what is going to be a different 5 years from now?

Answer
Shelley Simpson (Executives)

That's a great question. I would tell you, I think electrification will have some impact and that can be good. At what time and if that's at 5 years, I can't answer that. I don't know. We're saying in tune and abreast as to what that means. I think what's really great, whether it's fully autonomous, which I'll probably be retired by then, or just electrification for us, we're going to continue to focus on being involved in any of those pilots. We're right in the middle of all that work that you're talking about and really on the front end of that. Craig Harper helps lead that for us. And so I feel like we're going to do what's best for our customers and best for J.B. Hunt, whether that's electrification or any other idea is something we're going to be in front of, if that makes sense for our company.

Question
Ravi Shanker (Analysts)

Great. On that note, Shelley, John, Spencer, thanks so much for joining us. Good luck for the next week. But hopefully, nothing happens.

Answer
Shelley Simpson (Executives)

Thank you.

Answer
John Kuhlow (Executives)

Thank you.

Answer
Spencer Frazier (Executives)

Thank you.

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