J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) Q1 2023 Earnings Call Transcript April 17, 2023
J.B. Hunt Transport Services, Inc. misses on earnings expectations. Reported EPS is $1.89 EPS, expectations were $2.
Operator Good afternoon, everyone. Thank you for attending today’s J.B. Hunt’s 1Q 2023 Earnings Conference Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for question and answers at the end. [Operator Instructions]I would now like to pass the conference over to our host, Brad Delco, Senior Vice President of Finance with J.B. Hunt. Please proceed.Brad Delco Good afternoon. 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 afternoon I’m joined by our CEO, Mr. 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, EVP 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 afternoon. I’ll touch on a few items, but will be brief with my comments as we have members of our leadership team here to cover specific areas of our business.As we have discussed, shifting dynamics in the market for several quarters now, it should be evident that freight demand is muted even when taking into account seasonal factors. As I stated last quarter, I believe this environment presents both opportunities and challenges for our company that will ultimately put us in a better position in the future. I am seeing, firsthand, how this team and might I add this experienced team is responding to set our company up for long-term success and compounding growth as we navigate through these demand patterns.We remain thoughtful in our approach to managing the business and controlling costs where it makes sense without sacrificing our preparedness to capitalize on large, meaningful and addressable opportunities for the company.
We have and will always manage this business with a focus on long-term growth built on our company foundations, people, technology and capacity.In closing, I remain confident that the collective and complementary nature of our distinct business will again prove resilient in this environment, coupled with experience, a strong balance sheet and a long-term mindset, key elements which will continue to differentiate us in the market. We remain committed to investments and achieving our required return on those investments to support our long-term sustainable growth for the benefit of all our stakeholders.Now I’d like to turn the call over to our President, Shelley Simpson, for more details. Shelley?Shelley Simpson Thank you, John, and good afternoon.
I thought it made sense to talk about where we are as an organization and what we are working on to set us up for long-term success. More importantly, how this aligns with our 2023 priorities that I’ve previously shared, which are to: one, remain committed to disciplined long-term investments and our people, technology and capacity; two, deliver exceptional value to our customers; and three, drive long-term compounding returns for our shareholders.To start, we’re in a challenging freight environment where there is deflationary price pressure for an industry that continues to face inflationary cost pressures. Simply stated, we’re in a freight recession. As we have discussed, we believe we are in a position to deliver exceptional value for our customers by leveraging our full suite of services to deliver maximum efficiency and eliminate waste in the supply chain.
We can do this by providing cost savings opportunities by converting on highway freight to intermodal, designing a highly engineered and efficient solution in our dedicated segment, leveraging vast amounts of market competitive capacity sourced on J.B. Hunt 360 or by providing best-in-class service as one of the largest final mile providers in North America.The strength and resiliency of our organization is supported by our mode neutral approach across all of our businesses and backed by our company foundation, which are, our people, technology, and capacity. And that’s where we are today.So what are we working on? As we’ve committed to disciplined long-term investments in our people, technology and capacity, we admittedly have too much cost in our system right now for the current level of activity in our organization.
And while we want to prudently manage our business in the near-term by focusing on controllable cost, more importantly, we remain focused on our long-term strategy to compound our growth at acceptable returns.As an organization, we have put greater emphasis in areas of our business by reallocating resources that will set us up to accelerate our growth and performance coming out of this current environment.One area in particular that has immense focus is in the area of safety. Also, as you might have noticed in our release, we moved pieces of our JBT and ICS segments into DCS and FMS segments respectively to best position the organization longer-term. While none of our businesses are immune to this environment, I am confident that there are great things happening in our business that set us up for long-term success.
Remaining committed to our disciplined investments while prudently managing our cost is an area of focus for us across our organization.In closing, I want to say, we remain cautious on the outlook for the year. But remain confident in our ability to deliver value for our customers that will enable us to grow and take share through cycles, while maintaining discipline on our returns on capital. As I have stated previously, we will remain focused on the things we can control, but remain committed to managing our business for the long-term. As I look across our organization and see the experience and tenure of our team as a result of the investments made throughout our careers, I am confident in our ability to deliver long-term sustainable returns for our shareholders.With that, I’d like to turn the call over to our CFO, John Kuhlow.
John?John Kuhlow Thank you, Shelley, and good afternoon, everyone. I want to touch on three topics with my prepared remarks, including a quick review of the quarter, some details on our capital plan for 2023 and bring to your attention some small changes we made in our segment reporting.First, on the quarter’s results. As previously discussed, overall demand for freight capacity has moderated versus the prior year period as evidenced in our results. On a consolidated GAAP basis, revenue for the quarter declined 7% year-over-year, operating income declined 17% and diluted earnings per share decreased 18%. These declines were primarily driven by lower freight volumes moderating pricing trends and inflationary cost pressures, particularly in the areas of salaries and wages, insurance and claims, and parts and maintenance-related expenses.Our balance sheet remains strong with ample liquidity available to support our investments to drive long-term value for our shareholders.
Regarding those investments, our capital plan still contemplates between $1.5 billion and $2 billion of investment in 2023. To provide some greater detail, we expect about $400 million to $500 million for real estate, which will support our long-term growth plans for the company. The majority of the balance is almost evenly split between our tractor and trailing capacity needs. Keep in mind, trailing capacity includes both dry and temperature controlled trailers and containers, as well as chassis.The growth in our intermodal and dedicated fleets in the past two years, coupled with the lack of availability of new equipment as OEM supply chains were constrained, required us to hold our equipment longer. Accordingly, a large portion of our 2023 tractor capital is for replacement needs.
We did repurchase some shares in the quarter and remain committed to be active in the market as opportunities arise.Finally, we moved the majority of our J.B. Hunt owned tractors out of our JBT segment into DCS. These trucks have consistently operated in a dedicated like manner for customers over many years and makes more strategic sense to be managed out of our DCS segment, while also allowing JBT to focus its efforts on scaling our J.B. Hunt 360 box service offering. Second, we moved our non-asset LTL business out of ICS and into Final Mile, which has similar operating characteristics as our Final Mile business. These realignments best position our organization for our future and focuses each segment’s people and assets in particular areas of expertise.
We have included an addendum in our earnings release to provide a historical perspective for these moves.This concludes my remarks, and I’ll now turn it over to Nick.Nick Hobbs Thanks, John, and good afternoon. I’ll provide some comments on our dedicated contract services and Final Mile segments, and also give an update on areas of focus across our operations.I’ll start with dedicated. While demand for our professional outsourced private fleet solutions remain strong, we have seen some moderation in our pipeline of opportunities. That said, we sold approximately 200 trucks of new business in the first quarter and remain optimistic about hitting our target for the year. Our net truck adds in the quarter increased 426, but included trucks transferred from JBT.
Excluding this, our net truck count increased 28 units in the first quarter. Similar to last quarter, this number was influenced by the cleaning up of extra trucks held due to the age of our fleet and also partly driven by our CVD or customer value delivery process. This process optimizes fleets to manage costs for our customers as demand levels in their business change. This supports our 98% retention and our future growth opportunities. To a lesser extent, we did see some account closures in the quarter. Overall, we continue to carry momentum from our success over the last year, which drove revenue and operating income growth of 13% and 29%, respectively, in the quarter.Now on the Final Mile. As we discussed last quarter, demand for big and bulky products, including appliances, furniture and exercise equipment is soft, but this hasn’t deterred us from our commitment to improving capability in this segment.
Our efforts are focused on ensuring we are getting appropriately compensated for our high quality differentiated service product in the market. We continue to put business at risk during this renewal processes. And at this point, we remain pleased with our ability to retain business. This is, in my opinion, a testament to our service. Encouragingly, we are seeing some activity in the pipeline, but overall demand remains tempered in the segment.I’ll close with some comments on safety. We continue to make significant investments in our training and new technologies to improve safety performance in our operations. As a result, we recently announced the rollout of inward facing cameras across our fleet to help address the distracted driving and other coachable activities with our driving workforce.
This is a big step for our organization, follow our similar board moves in our history to lead in the area of safety, including [1996] (ph) increasing our pay package to attract experienced drivers, which resulted in a 50% reduction in DOT preventable accidents. In 2006, supplementing the DOT urine drug test with hair testing, which resulted in an 87% decrease in DOT post-accident positive rates. Then in 2011, rolling out forward collision warning systems which delivered nearly a 50% reduction in rear end accident frequency. In 2016, rolling out forward facing cameras with drove an 18% reduction in collision frequency per million miles. I am proud of our company’s commitment to the safety of our employees and the motoring public.That concludes my remarks, so I’ll turn it over to Darren.Darren Field Thank you, Nick, and thanks everyone for joining us.
I’ll review the performance of our Intermodal business in the quarter and reiterate the opportunities we have to deliver significant value to our customers with the investments we are making in our people, technology and capacity.I’ll start by reviewing Intermodal’s performance in the quarter. Demand for Intermodal capacity was tempered, driven by overall freight activity. But specifically lower imports and elevated inventory levels across the supply chain. Volumes in the quarter declined 5% year-over-year and by month were down 2% in January, down 4% in February and down 8% in March. As we stated in our earnings release, transcontinental volumes were down 9% in the quarter, but our Eastern volumes were up 1%. I think this is an important call out as we have been growing volumes in the East, which is the most truck competitive market, while being in a depressed truckload environment.
This mix shift to shorter length of haul freight does influence contribution dollars per load which did impact us in the quarter, but also should signal our ability to deliver value to our customers in this market.Rail service predictability and consistency has improved to near pre pandemic levels, while customer detention of equipment improved even further and as the quarter progressed. While we have seen a decline in revenue associated with the detention of equipment, we have not yet offset that impact with the onboarding of new volume. As I’ve stated recently, our network and service offering is a coil spring that can handle significantly greater volume today and unlock a lot of value for our customers and our company. We have the people, the drake capacity, and the containers that could handle upwards of 15% to 20% more volume today.As we have shared recently, we have been meeting with customers and continue to be encouraged by the feedback we are receiving about our service.
Customers trust us and our say/do culture. They believe in our Intermodal product and they want more of it, but part of that is influenced by the economy and overall freight demand. We feel very confident that we have a differentiated product in the market that will support our ability to take share. We are encouraged by the results we are getting so far in the bid process and look forward to the opportunity to prove the value we can deliver to our customers.In closing, we strongly believe in the strength of our Intermodal franchise and its opportunities to drive significant growth over many years. It provides significant value for our customers with opportunities to save money by converting freight from the highway to intermodal which reduces costs and is further supported by fuel costs and carbon emission savings.
We are in the best position to commit more intermodal capacity to our customers as we progress further through the current bid season, which should present meaningful opportunities to unlock value in our network for the benefit of all of our stakeholders.That concludes my prepared remarks, so I’ll turn it over to Brad Hicks.Brad Hicks Thank you, Darren, and good afternoon. I’ll review the performance of our integrated capacity solutions and truckload segments, but we collectively call Highway Services. I will also provide an update on J.B. Hunt 360. But before we begin, as mentioned in our release, we carved out our LTL operations from ICS which are now included in Final Mile. We also carved out most of the operations of our company owned trucks from JBT which are now included in DCS results.
I will speak to our results on a reported basis with the adjustment to our prior period. Regarding this shift, we believe this better aligns the management of these particular businesses and allows Highway to focus our efforts on leveraging our J.B. Hunt 360 platform to source third party capacity for the movement of full truckload freight.Now turning to the business, I’ll start off with ICS. Top line revenue was down 42%, driven largely by a 25% decline in volume. The truckload market continues to see significant pressure on both volume and price and we are certainly seeing that, particularly in the spot market as our contractual truckload volumes were up in the quarter. Touching on our volume performance, we are not immune to the market, but we are also not meeting our expectations.
That said, I want to remind you of the work ICS powered by J.B. Hunt 360 handled a year ago to help meet the needs of our Intermodal and Dedicated customers as congestion and equipment delays tempered our ability to serve their needs. ICS was able to step in and cover freight which is a testament to the power of our scroll and our mode neutral approach. However, as we stand here today, we are clearly facing tougher comps as a result of that dynamic.Now moving to truckload. Similar to my message last quarter, we continue to see demand for drop trailing capacity holding up better than the market, although we are not fully immune from the market dynamics. Our 360 box volumes were up double digits in quarter as customers continue to like the flexibility of blending their live and drop trailer capacity needs by utilizing the J.B. Hunt 360 platform.
As it pertains to both segments, our goal remains to leverage our J.B. Hunt 360 platform and make investments that will allow us to scale our business by outpacing the market. While the market is challenging, we are focused on controlling our costs. That said, we do remain committed to our long-term investments in our people and technology to deliver exceptional value for all of our stakeholders.Rapping up quickly on 360, we have built the foundation of our platform and what we need to commercialize to our customers and carriers. Our task now is to scale and optimize these investments. As you might have noticed, we did back up on some of the stats on 360, both on a dollar and a percentage basis. A significant portion of that is market driven, but some of that was intentional in the quarter.
We did have to insert some manual processes and restrict some third party capacity on the platform to manage risks around several large cargo theft rings. This did impact profitability in both segments in the quarter.That concludes my comments. So I’ll turn it over to Brad Delco to give some instructions before the operator opens the call for Q&A.Brad Delco Thanks, Brad. And Sierra in the interest of time and based on the number of callers we have in queue, we’re going to do one question with no follow ups. Sierra, you can queue for questions.
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Question-and-Answer Session Operator [Operator Instructions]
Our first question today comes from Jordan Alliger with Goldman Sachs. Please proceed.Jordan Alliger Yes. Hi. Question, can you maybe touch base a little bit on — little more color around the customer signals you’re hearing on Intermodal.
I know it’s sort of a cautious outlook, but perhaps relative to what you’re thinking in January with inventory restocking, even thoughts on second half peak season. Is there any sort of change in signaling from when you guys talked to us back in January? Thanks.John Roberts Yeah. So, throughout the quarter, I think we were successful in the bid cycle. And some of that volume hasn’t really materialized. Our customers, throughout the quarter, did remain optimistic for stronger volumes in the second half of the year. We shared at multiple conferences that we are slightly less optimistic than our customers. The end of the day, our volumes and customer bid compliance is at an all-time low. And so that naturally creates some question marks. Our customers want more of what we do when they need it.
Import volumes are clearly not strong.And so there is question marks out there about what will happen in the second half of the year. And so, as the quarter went on, I would say, we’re slightly less optimistic. We’ve said that multiple times. Outside of that, I don’t know what else to say other than I know our customers do want our capacity as soon as the import volumes return to normal.Operator Thank you for your question. Our next question comes from Jon Chappell with Evercore. Please proceed.Jon Chappell Thank you. Good afternoon. Darren, I’m going to stick with you and the bid process. You said you’re encouraged by the results so far. Can you just explain a little bit? Are you encouraged by the wins you’re getting? Are you encouraged by pricing maybe being a bit more resilient than maybe the freight recession that Shelley referenced would typically indicate to the extent that it’s a latter?
Any type of numbers you can give around kind of year-over-year sequential pricing comparisons within those good processes?Darren Field Yeah. So I’m not going to give any guidance on this call to be clear. I think we’re encouraged by both and encouraged by both price and volume, meaning, I think we’re winning volume that our customers believe that they will have. And encouraged by price in that, I don’t think it’s behaved any more challenging than what we expected coming into the year.Look, there’s challenge on price, there’s also cost to take out, part of the cost to take out comes with volume pouring over the top. And so, we’re encouraged by the volume wins we have received on paper. We are — we haven’t seen all that volume yet. So there are, again, kind of like the last question still a handful of question marks out there.
But I would say the bid season — I remain optimistic about our future. There is going to [how many day] (ph) when imports improve from where they are. When will that be? I don’t know the answer to that. But it will improve and we stand to gain tremendously when that happens.Operator Thank you for your question. Our next question is from Scott Group with Wolfe Research. Please proceed.Scott Group Hey, thanks. Afternoon. So, Darren, you’ve got 17% of the boxes parked in Q1. Are you still buying boxes? Are you — and parking more? Are there any green shoots that have you un-parking any boxes? And then, as I look ahead, I suspect Intermodal price probably moves lower from Q1 to Q2. In that kind of environment, can Intermodal margin earnings improve from Q1 to Q2?
Or does price naturally just take the margin earnings down a bit more?Darren Field Well, number one, I’m not going to guide you on that second half of that question. I think as it relates to the equipment and storage, when we buy our equipment, we’re buying it for the long-term. When we announced in March of 2022, a pathway to 150,000 containers over 3 years to 5 years, that’s because the opportunity that presents itself to us for the long-term is significant.We did slow down onboarding equipment during the first quarter from the run rate we had been on in the back half of 2022. Velocity from our rail providers as well as customer unloading has unlocked a tremendous amount of capacity. And so, our opportunity to grow even while equipment is in storage remains intact and we have ample capacity do what we need with our customers.Look, in terms of the margin profile as we move forward, we continue to be confident in our ability to take cost out as we pour volume over the top.
