J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) Q4 2022 Earnings Call Transcript

J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) Q4 2022 Earnings Call Transcript January 18, 2023

Operator: Hello and welcome to today’s J.B. Hunt Fourth Quarter 2022 Earnings Conference Call. My name is Elliot, and I’ll be your coordinating you call today. I would now like to hand over to Brad Delco, Senior Vice President of Finance. The floor is yours. Please go ahead.

Brad Delco: Good morning. Before I introduce the speakers, I would like to take some time to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt’s current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For information regarding risk factors, please refer to J.B. Hunt’s annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission.

Now, I’d like to introduce the speakers on today’s call. This morning I’m joined by our CEO, John Roberts; our President, Shelley Simpson; our CFO, John Kuhlow; Nick Hobbs, COO and President of Contract Services; Darren Field, President of Intermodal; and Brad Hicks, Executive Vice President of People and President of Highway Services. At this time, I’d like to turn the call to our CEO, Mr. John Roberts, for some opening comments. John?

John Roberts: Thank you, Brad, and good morning. My comments will be brief today as we have members of our leadership team here to cover specific areas of our business with more detail. As we reflect on the fourth quarter and the full-year of 2022, we have seen and experienced a cyclical shift in market dynamics that will present both challenges and opportunities as we navigate through the upcoming year. That said, we remain encouraged by trends from our real providers that present opportunities for faster transit times and in-turn greater service quality and value for our customers. We also see some loosening in the labor market and some modest improvements in equipment availability. Conversely, demand for transportation service in the fourth quarter was seasonally weak as customers manage through levels of elevated inventories.

As we’ve discussed in the past, we have confidence in the collective and complementary nature of our distinct businesses that are built to be resilient and durable through market cycles. I have a tremendous amount of confidence in our people led by the 14 officers of our company that have a combined 340 years of experience here at J.B. Hunt. In closing, our team will remain disciplined and focused on charting our course to compound returns on the capital we’ve deployed to support our long-term growth for the benefit of our stakeholders. Now, I’d like to turn the call over to our President, Shelley Simpson. Shelley?

Shelley Simpson: Thank you, John, and good morning. My comments today will mirror many of the things I shared last quarter and will focus on our priorities for 2023 and beyond. If you recall, we discussed three priorities as an organization. First, to remain committed to disciplined long-term investments in our people, technology, and capacity. Second, to deliver exceptional value to our customers across our entire organization. And third, to deliver long-term compounding returns for our shareholders. As we have discussed, the last two quarters and as John mentioned, we’ve seen a shift in our market dynamics, but our focus as an organization has not changed. We continue to manage our business to put us in the best position for long-term growth.

We believe first and foremost, that it starts with our people who are responsible for delivering exceptional value and service to our customers, who in-turn trust us to meet their growing transportation needs. We believe our suite of services across the J.B. Hunt scroll provides customers exceptional value from a company they have learned to trust over the many years and cycles. Our challenge for 2023 is to deliver exceptional value for and on behalf of customers in this market. In the past, we talked about what customers value from their trusted transportation providers, which is cost, service, and capacity. During the pandemic, customers value capacity most with less weight on cost and service. We see the shift occurring now where customers are putting more value on cost or how to save the money and on service quality as capacity is less difficult to source.

We believe our suite of services can and will present our customers opportunities to save money with our industry leading intermodal franchise, highly engineered dedicated capacity, a scaled asset light highway services offering, and one of the largest Final Mile Services in North America. In closing, I want to say that we’re approaching 2023 with some caution around recent demand trends, but remain highly confident in our ability to thrive in any environment. We will focus on controlling what we can control, managing our business with a focus on long-term growth while remaining nimble. We will compete in the market to earn, reinforce, and gain our customers’ trust, and their freight. We are excited about the many ways and opportunities we have to deliver value to our customers, which we believe will reveal itself over the course of 2023 and well into our future.

With that, I’d like to turn the call over to our CFO, John Kuhlow. John?

John Kuhlow: Thank you, Shelley, and good morning, everyone. My comments today will cover our recent performance in the quarter and for the fiscal year 2022. I will also provide you a preliminary view on our capital plan for 2023. Overall, results for the quarter were mixed. As freight volumes were pressured by unseasonably soft demand as compared to prior quarters of the year. That said, operating results were fairly resilient in spite of an unusual item that I’ll touch on later. On a consolidated basis, revenue for the quarter grew 4% year-over-year, but operating income declined 13% and GAAP earnings per share declined 16%. We incurred a rather large income statement item in the quarter for approximately $64 million or $0.46 per diluted share for an incremental pretax increase in casualty claims expense.

This charge is similar to a charge we incurred in the second quarter of this year as certain claims from prior year incidents continue to settle at much larger amounts than what we have historically experienced. For the full fiscal year 2022, on a consolidated GAAP basis, revenue grew 22%, operating income grew 27%, and earnings per share grew 29% versus 2021. Based on the solid performance for the year, we voluntarily paid out an 8.8 million appreciation bonus in the fourth quarter to our frontline employees in recognition of their contribution to a fantastic and record year for our company. Of note, we paid a similar appreciation bonus a year ago, so the year-over-year impact was not significant, but worth calling out when looking at sequential performance.

We continue to focus on and maintain a strong balance sheet providing us with ample liquidity to deploy capital to drive long-term value for our shareholders. Our capital plan for 2023 contemplates between 1.5 billion and 2.0 billion of capital for business needs. This includes elevated levels of replacement demand as a result of equipment challenges experienced over the last two years; growth CapEx to support investments, primarily in JBI and DCS, and investments in real estate. Importantly to note, a large portion of our growth CapEx is success driven based on our ability to secure long-term dedicated contracts. This growth component and the timing uncertainty is the reason for this range. Our capital allocation plan for 2023 also contemplates supporting our dividend consistent with our long-term practice, as well as taking advantage of opportunities in the market to repurchase shares.

We will continue to monitor and manage our leverage target to around 1x EBITDA, but are comfortable going above this level if investment opportunities present themselves. This concludes my remarks. And I will now turn it over to Nick.

Nick Hobbs: Thank you, John, and good morning. I’ll review the performance of our Dedicated and Final Mile segments and update you on other areas of focus across our operations. I’ll start with Dedicated. Demand for our professional outsourced private fleet solutions remain strong as we sold approximately 330 truck in the fourth quarter, which was greater than the trucks sold in the third quarter. This brought our full-year truck sales number to just over 2,000 trucks, which compares to our stated target range of 1,000 to 1,200 per year. Our backlog also remains strong with more opportunities in the pipeline today versus the same time a year ago, but we have seen some moderation in the breadth of the backlog. Our net truck adds in the quarter declined 187 units as compared to the third quarter, largely as a result of us making progress on our equipment trades as new equipment availability improved, but also because some of our downsizing of fleets to match our customers’ business levels.

As we’ve discussed before through our CVD process or Customer Value Delivery, we optimize and re optimize our fleets to present value savings opportunities for our customers. This ultimately supports our 98% retention rate of our customers, as well as supports future growth opportunities with these same customers. Going forward, we will remain confident in our ability to demonstrate the strength and resiliency of this business as we deliver superior value for our customers with our highly engineered outsourced solution. Shifting to Final Mile. We remain focused on improving profitability in this business by working through contracts and making sure we are fairly compensated for the value we deliver, achieving the appropriate level of profitability will support further investment needed to meet the growing needs of our customers and the segment of the market.

We will continue to be disciplined on our commitments and remain willing to put business at risk to achieve the appropriate levels of profitability, which could ultimately influence our top line performance in the segment. Demand for big and bulky products, including appliances, furniture and exercise equipment has moderated some as the headlines might suggest, but we have seen strength in our fulfillment business with off price retailers seeing lots of opportunities with discounted inventory in the channel. Closing with some general comments on operations. Similar to my update last quarter, we continue to see improvements in areas around professional driver recruitment and retention, but at elevated cost. We are a touch more optimistic about equipment availability in 2023, largely as a result of bringing in a third OEM into our mix, but maintenance cost remains elevated across the company.

We remain focused on our safety performance, but are doubling down on strategic initiatives across the company to improve performance in this area given the elevated cost the industry is experiencing. That concludes my remarks, so I’ll turn it over to Darren.

Darren Field: Thank you, Nick, and hello to everyone on the call. I’ll review the performance of our Intermodal business in the quarter and talk about our opportunity to deliver exceptional value and capacity to our customers in 2023 and beyond. I’ll start by reviewing the performance in the quarter. Demand for Intermodal capacity was seasonally weaker than normal as PCs and activity leading up to the holidays was absent this year. Volumes for the quarter declined 1% year-over-year and by month were up 4% in October, down 3% in November and down 5% in December. We experienced improvements in rail velocity in the quarter and also saw some modest improvements in customer detention of equipment on a sequential basis. That said, we still believe we can see further progress on both fronts, which will further improve velocity and decrease transit times in our system.

We believe that current trends around velocity present opportunities for us to sell a higher valued and reliable service product in the market. As we think about 2023, we see a lot of opportunities to deliver value to our customers with our industry leading Intermodal service product. As Shelley discussed, customers have shifted their focus more on costs and service versus capacity. We believe our intermodal service product presents our customers with opportunities to save money by converting highway freight back to intermodal, which reduces their costs and is further supported by fuel cost and carbon emissions savings, while have been weak, we still see opportunities to gain customers wallet share by converting highway freight and transloading more international freight into our domestic containers.

Additionally, we are in the best position to commit more intermodal capacity to our customers as we progress through the current bid season based on solid improvement in rail service levels and our investment to expand our capacity. Finally, because I anticipate this being a question, I thought I’d address it here. As you are aware, we have more capacity and better alignment with our Western Rail provider, BNSF, and we have both committed to the long-term growth of our collective intermodal service offering. We will compete in the market on the basis of cost capacity and service and we feel confident in our ability to earn our customers’ business and grow our wallet share. We are not approaching 2023 with a volume versus price mentality, but how do we set-up our business to drive the greatest shareholder value over the long-term.

This was my eloquent way of saying, we historically have not given any guidance on price, volume or margins and we will continue that streak, but also the streak of managing our business to compounding our growth and returns over the long-term. That concludes my prepared remarks. So, I’ll turn it over to Brad Hicks.

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Brad Hicks: Thank you, Darren, and good morning, everyone. I’ll review the performance of our Integrated Capacity Solutions and Truckload segments, what we collectively call Highway Services. I’ll also provide an update on J.B. Hunt 360 and how we continue to see the platform bringing together our scroll, but specifically Highway Solutions to drive value for and on-behalf of our customers, whether with or without a drop trailer solution. I’ll start off with ICS. ICS top line revenue was down 33% comprised of a 27% decline in volume and a 9% decline in revenue per load. Our truckload volume in the quarter was down 21%. Transactional or spot truckload volume was down year-over-year, but contractual volume was up slightly year-over-year.

We experienced additional pressure on our transactional and contractual business in the fourth quarter as demand and volume were unusually soft during what is normally considered peak season. Maybe said differently, there was no peak and demand was actually weaker in the fourth quarter versus the third quarter, which is atypical. As we’ve discussed in the past, our goal remains to leverage our platform and make investments that will allow us to scale our business by outpacing the market. Despite the poor performance on our top line, which did influence our profitability, we do remain in our people and our platform J.B. Hunt 360 to deliver exceptional value for our customers and our shareholders over the long-term. Shifting to truckload, while the freight environment was challenging in the quarter, we continue see evidence of demand for drop trailing capacity holding up better relative to the overall market, which we believe was demonstrated in the quarter.

Volume in JBT increased 6% versus the prior year quarter. We believe customers continue to see value in the blending of their live and drop trailer capacity needs that we can provide by leveraging our platform powered by J.B. Hunt 360. As we move into 2023, we will remain focused on leveraging our investments and our people, technology, and capacity to further scale the business. We see a long runway of opportunity for future growth in 360box supported by disciplined investments, solid execution, and earning appropriate return on our capital. Wrapping up on J.B. Hunt 360, I wanted to take the last minute here to make sure the investment community understands that our digital freight marketplace is a tool that drives value across our entire enterprise.

For example, it allows us to source third party intermodal dray capacity. It provides us backhaul freight opportunities in DCS, and allows us to prop-up a startup fleet as we hire drivers or source equipment. I believe more obvious, you see the results in ICS and JBT as we are able to run non-asset or an asset-light business leveraging our data and systems to provide almost unlimited capacity for and on-behalf of our customers. ICS and JBT collectively is our highway solution for our customers, representing the largest segment of the North American transportation market. Whether the customer needs drop trailers that historically could only be provided by large asset truckload carriers or a and a live load, live unload network, we are one solution on one system backed by the J.B. Hunt brand.

That concludes my comments. So, I’ll turn it over to Brad Delco to give instructions before the operator opens the call for Q&A.

Brad Delco: Thanks Brad. And operator, in the interest of the number of people we have in queue. Can we do just one question per caller? Thanks, Elliot.

Q&A Session

Operator: Of course. Our first question today comes from Chris Wetherbee from Citi. Your line is open.

Chris Wetherbee: Hey, thanks. Good morning, guys. Maybe a question for you, Darren. I know you don’t want to talk a lot about sort of the pricing volume outlook for intermodal, but maybe I could ask the question this way as you, in the beginning of the year and as you noted, you have a different setup with your major rail partner in the West, wanted to get a sense of sort of what customer receptivity has been to that increased capacity and the opportunities to potentially convert loads back onto the intermodal network? I guess maybe the, sort of finer point on that as you think about, sort of the historical relationship with intermodal versus, sort of say macro or truckload, do you think that 2023 can be a year of relative outperformance for intermodal just given some of the macro stuff that we’re seeing right now?

Darren Field: Sure Chris. Appreciate the question. I think universally our customers are positive towards re-converting highway business that should be intermodal. I think they are appropriately cautious in saying, hey, J.B. Hunt and BNSF, I need you to prove it to me that you’re going to get your service and velocity quality back. And I think we’re aligned like we continue to say every quarter more than ever with BNSF on that mission. I have talked to my team at length four months now about rebuilding confidence in our customers. Our customers are looking for ways to save money, and intermodal is a way for them to save money. And as velocity improves, it even helps in inventory carrying costs. And so, there’s a lot of opportunities for us to continue to talk about growing intermodal and certainly, I don’t know of a customer telling us, I’m not interested in converting business to intermodal.

I think across the board, our customer base is very receptive, but I do want to at least acknowledge there’s a bit of a lag in that process and I think we are busy proving to the customers that the service quality of velocity has improved and will continue to improve as the year goes on.

Chris Wetherbee: And just one point of clarification, just the BNSF for rail service where it needs to be to make that value proposition to the customer?

Darren Field: Yeah, you know, I would say, it’s early, but so far in January, our rail service is the best it’s been since the first quarter of 2020. And so, that’s a really positive sign. We’re not quite to where we want to be fully, but there is massive improvement in the rail service today.

Chris Wetherbee: Great. Thank you very much.

Operator: We now turn to Jon Chappell from Evercore ISI. Your line is open.

Jon Chappell: Thank you. Good morning. Darren, sticking with you, obviously, you’re investing on your own in your own capacity, but there’s no, kind of commentary on box turns. into what you just said about service being the best since 1Q 2020, can you give us an update on where box turn stand today? Where do you think it’ll be in the next kind of 3 to 6 months and probably more importantly, outside of your own investments, just when the box turns the velocity, the productivity, the fluidity is alone? How much capacity you think that adds to your network over the next 12 months?