J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) Q3 2023 Earnings Call Transcript October 17, 2023
J.B. Hunt Transport Services, Inc. misses on earnings expectations. Reported EPS is $1.8 EPS, expectations were $1.87.
Operator: Good afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the J.B. Hunt Transport Services, Inc. Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Brad Delco, Senior Vice President for J.B. Hunt. Please go ahead.
Brad Delco: Good afternoon. Before I introduce the speakers, I would like 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 risk and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to JB Hunt’s Annual Report on Form 10-K and other reports and filings with the Securities and Exchange Commission.
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Now I’d like to introduce the speakers on today’s call. This afternoon, I am 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, EVP of People and President of Highway Services. I’d now like to turn the call over to our CEO, Mr. John Roberts, for some opening comments. John?
John Roberts: Thank you, Brad, and good afternoon. I would like to take a minute to highlight and reinforce some of the key tenets around how we manage the company. While the challenges in the freight cycle are well known and documented, and as a result, there is no need to rehash here,. I will again remind you about our long-term approach to the business. Our focus is on deploying capital in areas of the transportation industry where we see long-term opportunity to compound returns. We participate in an industry with a large, addressable market that is cyclical. Remaining disciplined around our investments with a long-term focus on our people, technology that enables and capacity to deliver for and on behalf of our customers will support and drive long-term growth for the company and our shareholders.
In March of 2022, we announced a joint initiative with BNSF to substantially improve intermodal capacity and service for our customers. We recently announced and closed the acquisition of the brokerage assets of BNSF Logistics. These are key examples of how our companies are working together to best align efficient and value added solutions for our customers. While the brokerage market is challenged, we see lots of opportunities to drive efficiency in the supply chain with our people, powered and enabled by our technology, our J.B. Hunt 360 platform. We continue to work closely with BNSF and all of our rail service providers to strengthen and create a more reliable intermodal product. And I am pleased to see the progress in our intermodal segment relative to the market in our results.
Dedicated and final mile continue to show resiliency in this environment, proving again that our premium service products can be differentiated from the competition. Our J.B. Hunt 360 box product in our truckload segment continues to experience growth, providing an asset light solution, while also leveraging our investments in technology to efficiently serve customers. In closing, we have a tremendous team here at J.B. Hunt with a lot of experience. We will remain disciplined on costs and investments to best prepare the company to serve the growing needs of our customers. We will remain focused on earning appropriate returns on capital and driving efficiency in the supply chain to drive greater value for our customers. I remain confident in the future growth of the company.
Now, I’ll turn the call over to our President, Shelley Simpson.
Shelley Simpson: Thank you, John, and good afternoon. My comments will cover our areas of strategic focus and how we are setting ourselves up for long-term success. Of course, these comments will align with our priorities for 2023, which, as a reminder, are to, first, remain committed to disciplined long-term investments in our people, technology, and capacity; second, deliver exceptional value to our customers; and third, drive long-term compounding returns for our shareholders. As you’ve heard us say since the fourth quarter call earlier this year, we have been in a challenging freight environment or a freight recession, largely driven by excess inventory in the supply chain. Our customers have been working through excess inventory, and as we stated last quarter, we felt like that de-stocking trend started to moderate in June.
As we sit here today, we see further evidence of this trend, and most notably in our intermodal business, which is at the forefront of the North American supply chain. To be clear on the overall environment, we are not at a point yet to say we’re out of the freight recession, but we do feel like we’re coming out of it or said differently, directionally we are seeing signs of things moving in a positive direction. Going forward, our focus remains on how we deliver value for, and grow with our customers over the long term by finding ways to improve efficiency and drive waste out of the supply chain. As you’ve heard us say before, we have a long-term approach to how we manage our business and how we invest across our company foundations, which are our people, technology, and capacity.
Our people have always come first, and we remain committed to our investments in our people, in proper training, in their safety, and in fair and equitable compensation and benefits. Throughout our company, we have the experience and talent to execute in all types of environments. As an example, the officers of our company have a collective 350 years of experience, not just in the industry, but at our company. The experience and talents of our people combined with our capacity to deliver and connected and enhanced by our technology investments are what combine to deliver exceptional value for our customers. I believe we’re seeing evidence of the strength of our brand and service by staying committed to our long-term investments in our people, technology, and capacity.
As we progress in the recovery, I’m confident in our ability to meet the growing needs of our customers as a result. In closing, while the environment is still challenging, it is important to keep in mind that pricing is a lagging indicator, while volume is typically a leading indicator. We are encouraged by the performance of our intermodal business that is gaining share in the market and the resiliency of our dedicated business, they continue to deliver efficient solutions for customers. Our final mile business is holding up well despite seeing varying degrees of demand from the end markets which they serve, highlighting the quality of our premium service product. And in our ICS and JBT business, we continue to see both segments feel the brunt of the freight cycle, most notably in price and volume.
They continue to believe in our ability to scale this business to drive efficient solutions with our brokerage and drop trailer services. We will continue to manage the business for long-term growth, and I remain 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. Good afternoon, everyone. I’ll be brief with my comments, but I want to hit on a few items, including a high-level review of the quarter and an update on our capital plan. So starting with third quarter results, overall freight activity remained under pressure during the quarter as compared to last year. On a consolidated GAAP basis, revenue for the quarter declined 18% year-over-year. Operating income declined 33% and diluted earnings per share decreased 30%. These declines were primarily driven by lower freight volumes and yields combined with inflationary cost pressures primarily in the areas of salaries and wages, capital costs, and insurance and claims expense. We did have a discrete tax item in the quarter which lowered our effective tax rate to 18.2%.
The overall impact to our earnings in the quarter was $0.16 per share spread across the tax and interest expense line items. We continue to make investments in our business for the long term across our company foundations, our people, technology, and capacity. From an invested capital standpoint these investments are in real estate, equipment, both trailing and power, and as previously mentioned, we did close on the purchase of the brokerage assets from BNSF Logistics in the quarter. Our balance sheet remains strong with ample liquidity available to support our investments. We are conservatively leveraged at still below our target of one-times debt to trailing 12 months EBITDA. Our $1 billion revolver remains undrawn and available as needed.
I previously guided to $1.5 billion to $1.8 billion of net capital spent for the year. Excluding the acquisition, we anticipate falling around $1.6 billion for the year. Similar to last quarter, some of this is timing related, but also we are being prudent where it makes sense with our spend. In terms of our capital priorities, no change on this front. First and foremost, we will continue to invest to grow our business. We will maintain an investment-grade credit rating and support our dividend. And finally, we will use excess cash to repurchase stock. In the third quarter we repurchased approximately 267,000 shares and will remain active as opportunities present themselves. This concludes my remarks and I’ll now turn it over to Nick.
Nick Hobbs: Thanks, John, and good afternoon. I’ll provide an update on our dedicated and final mile segments and we’ll give an update on areas of focus across our operations. I’ll start with dedicated. I remain pleased with the performance of our dedicated business in the quarter and the resiliency of our model. Demand for professional outsourced private fleet solutions has held up well in the environment, and we continue to see many opportunities in our pipeline. In the quarter, we sold approximately 265 trucks in new deals, which brings us to over 830 year to day. We are feeling more confident in hitting our gross sales target of 1,000 to 1,200 trucks for the year. Based on the timing of some deals that push from the third quarter into the fourth quarter.
We are seeing some stabilization in terms of our fleet sizes across our accounts, although we have seen some slightly higher customer churn than we previously expected. In the instances where we have lost an account, we believe the business was lost at inadequate rates of return, particularly considering the value proposition we bring to our clients. Going forward, we remain extremely confident in our ability to deliver value in the market that will allow us to compound our growth over many, many years and further penetrate our large addressable market. Now on to final mile. I am pleased with our performance in the quarter and how we have positioned ourselves as a premium service provider in the industry. I believe we have been able to prove our value propositions as we are nearing the end of some of our work to improve the revenue quality of our portfolio of business.
This is evidenced by the year-over-year improvement in profitability in the segment despite lower revenue. In terms of the end markets we serve, we are seeing a slight uptick in demand across some of our end markets in the segment, although furniture deliveries remain in a tough spot. We continue to focus on providing a superior service experience, delivering big and bulky items into the homes of our customer’s customer. This continues to resonate well in the market and as a result we see new brands engaging in discussions and being added to our sales pipeline. Similar to last quarter, I’ll close with some comments on safety in our equipment. We continue to invest in employee training and new equipment and technologies that will improve and enhance our safety performance as an organization.
This very much aligns with our company foundations taking care of our people, but also the motoring public. We continue to roll out inward facing cameras in our fleet and remain on track to be 60% complete of our fleet by the end of the year. We are encouraged by the data we have seen so far since this initiative has gotten underway and also encouraged by the impact this should have on our cost to serve our customers. As the industry is well aware, the cost of claims continue to just move higher and higher, and we are feverishly working to mitigate the risk. Finally, a quick update on equipment. I previously stated that we would be complete with cleaning our older equipment by the end of the third quarter. We’ve had a couple hundred units spill into the fourth quarter, but I would say we are in a very good position with our equipment across all businesses.
I would say we are finally caught up with some of the backlogs that were created as a result of the pandemic and our rapid growth over the last few years. This concludes my remarks, so I would like to now turn the call over to Darren.
Darren Field: Thank you, Nick, and thanks, everyone, for joining us this afternoon. I’ll review the performance of the intermodal business during the quarter, give an update on the market and service performance, and highlight the continued opportunity we have to deliver value for our customers and long-term growth for all of our stakeholders. I’ll start by reviewing intermodal’s performance in the quarter. As I said last quarter, and you heard Shelley say earlier, we believe the inventory destocking trend started to moderate in June. And we saw evidence of that trend continue throughout the quarter as our volumes inflected positive for the first time in three quarters. By month, our volumes were down 1% in July, up 1% in August, and up 4% in September.
In September, we had our largest intermodal volume week in our history and we’re able to meet the strong demand with exceptional service. I’m encouraged by the fact that we are seeing the volume lift across both our transcontinental and eastern network highlighting overall increased customer demand for our intermodal service. We believe this is driven by the overall market, but also we believe we are taking market share with our strong service that is outperforming the competition. During the quarter, we did see margin pressure both year-over-year and sequentially, largely related to the full implementation of the recently repriced bids, which is a reminder trended toward the lower end of our pricing expectations as bid season progressed. We continue to carry resources and capacity and the related costs to ensure that the quality of our service holds up as customer demand for a differentiated service product grows.
With regard to rail service providers, we have been pleased with the service from each of our providers, their commitment to the intermodal offering and growing the overall market. In fact, I’d say that our rail providers are dialed in both in the East and the West. We believe that the railroads realize that the true test of their service will come once freight volumes increase with overall demand on their networks. But we and they are confident in their ability to maintain high service levels throughout the recovery. We are very encouraged by the current work we are doing with BNSF in the West and feel even more confident about our differentiated service. We now have J.B. Hunt employees in their headquarters in Fort Worth working side by side together to create and customize solutions for our customers and solving to eliminate service challenges as they arise.
We continue to work collaboratively to solve for and on behalf of our customers a clear differentiation in the market. We believe Intermodal presents a strong value proposition to customers with significantly improved rail service at a discount to truck pricing, all while cutting carbon emissions on a load by 60% compared to the truck alternative. As such, we see an enormous amount of freight that we believe should be converted from truck to intermodal. We continue to work closely with the rail providers and are encouraged to see the strong service which contributes to a better overall experience for customers. In closing, we strongly believe in the strength of our intermodal franchise and the opportunities to drive significant growth over many, many years.
Our customers trust us, believe in our product, and want more of it. We have the people, the technology to enable, and the capacity to handle significantly more volume than what we are handling today, and are excited to work with customers to meet their growing demand for efficient transportation solutions. That wraps up my prepared remarks and I’ll turn it over to Brad Hicks.
Brad Hicks: Thank you, Darren, and good afternoon, everyone. I’ll review the performance of our integrated capacity solutions and truckload segments. I will also provide an update on J.B. Hunt 360. Before I begin, I would like to publicly welcome the new employees we recently onboarded, as well as the agents from our acquisition of the brokerage operations of BNSF Logistics. We are excited about the opportunities this creates to leverage our investments in technology and the breadth of services we provide to better serve our customers. Starting with ICS, overall, the brokerage environment remains challenged and competitive. Segment gross revenue was down 48% year-over-year, driven by a 38% decline in volume and a 17% decline in revenue per load.
Overall truckload demand, particularly in the spot market, remains muted versus the prior year period. During the quarter, we did elect to focus our efforts on revenue quality and leading the market to push rates on certain lanes and accounts to appropriate levels. As a result, we did cull a decent amount of revenue and freight from our portfolio. As the quarter progressed, though, we did see a sequential improvement in gross profit dollars per load, particularly in our spot business, but also in our contractual business. We continue to invest in areas to mitigate strategic theft, enhance capability in our platform, and right-side resources with our current demand through attrition. Overall we believe some of these changes will position us for better success in the future.
Wrapping up on ICS and to level set a little on expectations in the near term, we are seeing some margin pressure related to peak season so far in Q4, in addition to expecting some dilution from the recent acquisition in the fourth quarter. Shifting now over to JBT or truck load, segment gross revenue was down 17% year-over-year, driven by a 22% decline in revenue per load and partially offset by a 6% increase in volumes. Overall demand for our J.B. Hunt 360 box service offering is outperforming the overall market as volumes in the quarter were up double digits versus the prior year. Customers continue to see value in the flexibility and efficiency of combining the drop trailer capacity with the ability to source the right carrier on the J.B. Hunt 360 platform to move the trailer.
The right carrier on the right load and at the right price, that’s the power of the platform. Going forward, we will continue to make investments in the development of our 360 box offering to strengthen this product and drive greater efficiency for our customers. Overall, we believe there’s growing demand in the market for this service offering and we see long-term opportunities in this area. Wrapping up on 360, as you have heard throughout our comments, we remain committed to investments in our company foundations, our people, technology, and capacity. I think it’s appropriate to point out that technology as a foundation between our people and capacity is the link that connects them. Technology enables our people, helps drive productivity, and creates efficiency in how we source and serve customers with our available capacity.
That capacity comes in the form of our own assets or the assets we can secure for or on behalf of our customers. J.B. Hunt 360 is our platform that empowers and enables our people and helps us access the right capacity to serve our customers efficiently with a valuable service. Our platform, J.B. Hunt 360, informs us about the market and provides a solid foundation to drive productivity in our operations across the organization and eliminate waste in the overall supply chain. While some of the productivity is masked by the current environment, we remain confident in our ability to drive long-term value for our customers and our company with our investments. This concludes my comments, so I’ll turn it over to Brad Delco to provide instructions before the operator opens the call for Q&A.
Brad Delco: Thank you, Brad. And just for the audience, given the number of folks in queue, we’re going to limit the question to one question with no follow-up. Krista, you can go ahead and start the Q&A.
Operator: Your first question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.
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Q&A Session
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Chris Wetherbee: Hey, thanks. Good afternoon. Maybe really wanted to start on the margins, particularly intermodal and maybe get a sense of how you guys are thinking about that and really maybe more specifically from 2Q to 3Q, it seemed like the cost per load went up decently. And I guess I’m trying to make sure I understand if that’s mixed or if it’s just sort of the full brunt of labor costs, labor inflation. And how do we think that that kind of trends going forward because we did see a step up in load sequentially. Curious if we see that continue, if it’ll start to drive some operating leverage in that part of the business.
John Roberts: Well, I’ll start, Chris, just with — we’re not satisfied with our margin. We did have cost pressures in the quarter, certainly fuel is a component of that. And the way I would describe the ability to launch some growth, our growth doesn’t always come neatly packaged. We moved a lot of empties to onboard new business. Our coiled spring is what enabled us to onboard new business quickly. We’re very confident in the product we’re offering. We’re confident in the service we’re offering. And as the next bit cycle comes around, we’re willing to talk to our customers about our cost challenges. Do we think volume can unlock efficiency? Absolutely. But as you’re ramping up rapidly there will be some cost elements that creep in there that we’re going to have to battle. And secondly, we more fully implemented the pricing cycle and as expected our price was down in the quarter and that was part of the margin headwind.
Operator: Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.
Allison Poliniak: Hi. Good evening. Just sort of in line with Chris’s question, there’s the positive, you’re seeing more positive trends. There’s certainly a market share grab from truckload potentially that’s out there. How do you think of releasing that excess capacity into the market at this point, just given your share gain and the opportunity out there? How should we think of that as we kind of move through the progression of the more positive trends here?
John Roberts: Well, I don’t — Allison, I don’t know how to give you a firm guidance on how quickly it’ll come on board. We’re engaged with our customers every day looking for ways to save them money. And one of the primary ways we do that is convert highway business to intermodal. We’re looking to create better balance where we can with onboarding new business that supports our network and those will be our focus areas in terms of how quickly it comes on. I guess that gets determined by how quick our customers grow and how the overall market reflects on us. I’m confident in the service product we’re offering. That’s what we can control right now and so that’s what we’re focused on.
Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.
Jordan Alliger: Yes. Hi. I know it’s hard to put all the moving pieces together, but I’m sort of just curious. The third quarter margin in intermodal, I mean, do you think this could represent the bottom of the cycle if volumes continue to inflect positives and box turns move up sequentially, which occurred in the third quarter? Thanks.
John Roberts: Well, I think when you phrase it like that, it really all depends on what happens with our customer’s volume. But if everything were to remain equal and we can onboard more volume and there’s no violent recession we’re faced with, then yeah, it can be the bottom. But there’s so many external factors that are going to influence that.
Operator: Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.
Ken Hoexter: Hey, good afternoon. It’s Ken Hoexter. Just on intermodal again, I guess your thoughts on the trend up 4% at the end of the quarter, was that due to the Canadian port strike? Is that maybe talk about if that trend is continuing in October? And then just if you’re focused on long term and keep buying the assets, I just want to understand that CapEx comment, because it sounded like you’re slowing down. But if you have all these 15% of assets stored do you lengthen the downturn by continuing to buy and store? Does that make it a longer time turnaround?
Brad Delco: Hey, Ken, this is Brad Delco. I’m going to try to see if we can answer all five or six of those questions with each of the executives. So I’ll let Darren address the intermodal one and let John Kuhlow address the CapEx question. And if we missed one, sue me in email, because I know we already cut you off.
Darren Field: Well, as the quarter went on one thing that intermodal volumes, one of the more positive elements is, we were really growing throughout the network. Certainly imported goods that transload somewhere on the West Coast are a part of that, but we were pleased with growth we were able to see inside our Eastern network as well. So it was really evenly spread. I mean, you might have heard in the prepared comments, we set a single week volume record during the month of September, and that felt really good for our team to see the value of our services and how our customers trust us and are giving us more of their networks.
John Kuhlow: And Ken, just from a CapEx standpoint, broadly speaking, we’ve been talking about how we had to retain a lot of equipment in 2021 and 2022 just because of the inability to get that. I think that we’ve made a lot of great progress on working through our replacements in 2023. We’ll still have some in 2024. As you know, all of our growth CapEx is principally success-based through dedicated and even with intermodal. We are carrying, as we’ve talked about, excess container equipment right now, but we’ll work through that and then we’ll purchase new as our growth plans deem necessary.
Operator: Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Scott Group: Hey, thanks. Afternoon. So Darren, as we enter 2024 bid season, do you think there’s further downside risk to intermodal rates into the first half of the year? Is the next wave of contracts will start to reset or is there a shot that intermodal pricing can start to get better? And then just separately, just quickly, the dedicated retention went from 98% to 94%. Is that a one-off sort of blip or is that sort of a new potential trend?
Darren Field: Well, I’ll start on the intermodal pricing question. Look, I mean, the reality is, it’s both an opportunity and a risk. We don’t know. The freight recession has been a real thing. As you know, we’ve talked about inventory de-stocking, and the role that that played in demand in our industry for several quarters now. And we’re confident that that pressure relief during the third quarter. Questions remain about the U.S. economy, what’s going to happen to the consumer, what will demand be as we head into 2024? I guess, we don’t really know that. Do I think that the quality of our service warrants a good discussion with our customers about our costs? Absolutely. So will there be an attempt? And will we talk about the need that we have and the costs that we’re faced with? Absolutely, we will. But we’re going to have to wait and see how that plays out.
