J.B. Hunt Transport Services Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 17, 2022

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 4th Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Vice President of Finance and Investor Relations, Mr. Brad Delco.

Operator

Please go ahead.

Speaker 1

Good afternoon. Before I introduce the speakers,

Speaker 2

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. End of the call, 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.

Speaker 2

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 more information regarding risk factors, please refer to J. B. Hunt's annual report on Form 10 ks and other reports and filings with the Securities and Exchange Commission. Now I would like to introduce speakers on today's call.

Speaker 2

Conference call, this afternoon, I am joined by our CEO, John Roberts our CFO, John Culow Shelly Simpson, Chief Commercial Officer Board and EVP of Human and People of Human Resources Nick Hobbs, Chief Operating Officer and President of Contract Services conference call, Darren Field, President of Intermodal and Brad Hicks, President of Highway Services. At this time, I'd like time, I'll turn the call to our CEO, Mr. John Roberts for some opening comments. John?

Speaker 3

Thank you, Good afternoon. Thank you for joining our call today. We all thought 2020 was a remarkable year in our history, but I'll

Speaker 2

the customer's ability to thrive.

Speaker 3

In 2021, our leaders made bold calls to increase investments in our people, our technologies has risen to the opportunities presented in this current environment. Accordingly, we have done exhaustive research on where we stand regarding being competitive in total compensation for our people as we move into 2022. Our team leaders have unilaterally approved comprehensive changes to our base wages, insurance compensation creating the most efficient transportation network in North America. The overall growth we experienced in 2021 is unprecedented, We added 1778 tractors to DCS, 6,284 containers at intermodal with 531 net tractor adds and 2,605 trailers for our 360 box program in highway. We continue to work strategically with our equipment providers on build and delivery planned as we head into 2022.

Speaker 3

With the growth coming out of 2021, we anticipate ongoing demand for all types of power and trailer equipment. We also look forward to working with our rail service providers to find improvements across all aspects of intermodal service, capacity management and utilization. Lastly, I will comment on our efforts relating to sustainability. Over the past several years, we have worked to better understand, communicate and advance our positioning in this important area. While we have seen good progress and have been recognized by many third parties for our efforts, end of the call, we also believe we have important work to do.

Speaker 3

We're committed to our mission to create the most efficient transportation network in North America, end of the call, our executives will provide more specific information. So I would like to turn the call over to our CFO, John Cullo.

Speaker 4

End of Q1, I will now turn the call over to Mr. John. Thank you, John, and good afternoon, everyone. My comments today will follow a similar pattern as our previous calls, conference call, I'll review our recent performance on a consolidated level. I'll then provide some commentary on our CapEx plans for 2022 and as well as our approach to capital allocation.

Speaker 4

And then I'll close with some thoughts on our financial priorities for the coming year. Overall, we are pleased with our 4th quarter performance highlighted by growing revenues 28% and positive operating income performance in all segments except for DCS, which Nick will cover in greater detail in his remarks. As I look across our business, the common denominator in terms of our pain points continues to be labor related in wages, salaries, benefits and recruiting fronts in both driver and non driver. We continue to elevate investments in our people as was evidenced by our decision to provide a special bonus in December end of the quarter of nearly $11,000,000 to our frontline workers for their efforts in working through the supply chain challenges facing our customers and

Speaker 5

the industry.

Speaker 4

Below the line, interest expense was slightly lower and the tax rate slightly higher than the prior period, resulting in GAAP EPS of $2.28 a end of the quarter or a 58% increase versus the prior year period. As has been stated in previous call, the impacts of network congestion, labor shortages and general supply chain challenges are well known and have continued to have a meaningful impact on our business

Speaker 3

end of the

Speaker 4

quarter, we ended the quarter with $356,000,000 of cash, which was slightly higher than planned. Last quarter, I provided you with updated thoughts by approximately $130,000,000 This miss was almost entirely due to supply chain delays continuing to impact our ability to take timely delivery of our equipment. We remain committed to these investments and capacity to help serve our customers, and we anticipate net CapEx end of 2020 2 to approximate $1,500,000,000 We continue to prioritize our capital to invest in our business, support our dividend, repurchase shares and opportunistically execute on our M and A strategy, all while maintaining a modest net leverage ratio of around 1x EBITDA and importantly, continuing to maintain our investment grade status. Before I close out my comments and in light of expecting some questions around our 2022 outlook, end of the call, I'd like to provide you some context, not guidance, but context for our financial priorities in 2022. These priorities include continuing investments in our people, maintaining a strong balance sheet to support all of our planned investments and focusing on generating appropriate returns on the capital we are investing to grow our businesses and serve our customers.

Speaker 4

This disciplined focus on the priorities enables us to manage the business for long term growth and success. That concludes my remarks. I'll turn it over to Shelly.

Speaker 5

Thank you, John, and good afternoon. End of the call, today I want my commercial update to focus first on a quick review of 2021 and how we were able to deliver for our customers. End of the call, I will then focus my comments on the market and how we're going to approach the ongoing supply chain challenges for and on behalf of our customers. End of the call, I'll finish up with some updates on our priorities for J. B.

Speaker 5

Hunt 360 multimodal digital freight platform as we move forward. As we've discussed over the past year, the freight environment has been extremely volatile and unpredictable, end of the call, and not just for capacity providers, but also for those that we are providing capacity for to meet their needs. In this environment, we, as an organization like our customers, have had to adapt to this disruption And I firmly believe that our mode agnostic comprehensive supply chain solutions approach has been a key to help our customers over the last year, conference call where we were able to honor our commitments and particularly during peak season. Another key element of our success end of the quarter, we had a significant commitment and investment in physical assets across all of our business segments from containers and chassis to trucks and trailers. That said, I would be remiss to leave out the most critical element of our success and that is our people, the same time, our drivers, mechanics, load planners and all of those behind the scenes helping our frontline workers succeed.

Speaker 5

Time, it all together, of course, was our technology platform, JBS 360, which I believe gives us a distinct advantage fiscal 2020 1 and has me excited for our future growth as more and more customers are leaning in. As we look at the market today and time of the call, we will continue to focus on our business plan and go to market strategy are similar to those exercised here in our recent past. The end of the call, we will continue to be opportunistic. The market remains challenging, capacity constrained and unpredictable and we will need to remain agile in our approach to securing capacity for our customers. Some unique areas I see impacting capacity is the ability to source new equipment, which is likely to keep used truck prices elevated end of the quarter, and as a result, small carrier rates as well.

Speaker 5

I see customers wanting to lock up more capacity in dedicated arrangements And lean into technologies that drive efficiency in their supply chain and how they procure capacity. As an organization,

Speaker 6

end of the call,

Speaker 5

we see tremendous pent up demand to convert highway freight to intermodal with elevated truck rates, the tight labor market, higher fuel prices and the 60% improvement in carbon efficiency intermodal offers versus truck. End of the call, we will continue to be opportunistic. We will continue to see the opportunities we have As I look at the investments we've made building out and scaling JVAMP 360, I continue to be encouraged where we are relative to our long term plan. As we have discussed, user activity and engagement continue to accelerate and break records across both carrier and shipper platforms, solidifying the value of optimizing and transacting in real time in a frictionless process. As we look ahead to this year, end of the call, we see opportunities to further acceleration as we continue to rollout of our new automated tools and to drive even greater efficiency enhance and leverage our people and core technologies to drive more efficiencies in the marketplace, which gets us even closer to our mission Investor Relations Conference Call to create the most efficient transportation network in North America.

Speaker 5

To wrap up, we continue to uncover Innovative ways to accomplish that mission, including the collaborative work with Google and the recently announced strategic alliance with Waymo, conference call, where I see tremendous opportunity for us to explore solutions that merge 2 of the most innovative companies

Speaker 6

in the

Speaker 5

transportation industry, autonomous driving and our multimodal digital freight platform, JV Hunt 360. That concludes my comments, And I'd now like to turn it over to Nick.

Speaker 1

Thank you, Shelly, and good afternoon. Today, I'm going to review the performance of both Final Mile and Dedicated segments as well as provide some thoughts on the priorities for these businesses as we move forward. I will also provide some Investor Day, we have updated thoughts from an operational perspective on our ability to source equipment and some updated views on the driver market. That trend continued in Q4 as service quality and safety will be a cornerstone to the long term growth and success of our business. These investments, labor challenges as well as supply chain disruptions for some key markets that we serve have continued to weigh on margin performance the most recent quarter, in addition to some start up costs for some newer accounts.

Speaker 1

As we set out to differentiate our service product, We've also set out to demonstrate the differentiated value we bring to our customers and the market. We believe some of that differentiation is being recognized as we are coming of our largest sales year for new business in 2021. That said, in the coming months, we do expect to put some business at risk as we focus and put even greater emphasis on generating the appropriate financial returns on these investments. Going forward, we continue to see a solid 1 of organic growth opportunities with potential to supplement some of that growth with small tuck in acquisitions as a way to build out our service capabilities and customer list. Shifting to dedicated.

Speaker 1

Our dedicated business continues to have a lot 2021. In terms of truck sales, we sold over 2,500 trucks of new business in the year, a new record for us for an incremental 6 63 units specifically in the 4th quarter. Historically, we have shared a target to sell 800 to 1,000 trucks per year And at this point, we feel it's appropriate to update that long term target to 1,000 to 1200 based on our team's ability to execute. As planned or expected, these startups do put near term pressure on margin performance as does elevated driver pay and recruiting costs and specific to the quarter, the special bonus we provided our frontline employees, but we remain confident in our ability to price and manage each of our accounts to the appropriate levels of profitability and returns, which should reveal itself in the coming quarters. In terms of priorities going forward, we will remain

Speaker 2

focused on the execution of our growth plan as

Speaker 1

well as maintaining our culture for execution of our growth plan as well as maintaining our culture for operational excellence, high service and safety, while maintaining closing out with some operational updates. As you could tell by my dedicated comments, there's a lot of momentum, which has us That said, we are working closely with our OEMs to get delivery of product and continue to recruit tirelessly to meet the driver demands across our organization. That concludes my remarks. So I'll turn it over to Darren.

Speaker 7

Thank you, Dick. Good afternoon, everyone. End of the call today, my comments will recap the performance of our intermodal business in 2021 and specifically the 4th quarter. End of the call, I will also provide an update on our significant investment to expand our capacity with our equipment orders and finish up with some thoughts end of Q1, we anticipate strong demand for our services as a result of our investments and the value of intermodal in the truck to rail conversion equation. I'd like to start by reviewing our same time, we are pleased to report that

Speaker 6

the Q4 was a reflection performance. Demand for our intermodal

Speaker 7

service remained strong in the Q4, but similar to recent trends wasn't reflected in the volume performance That said, I am proud of our team and its ability to onboard the equipment available to us to ensure that we met the commitments to our customers during their peak period of On a positive note, we did see improvements in the quarter in parts of the network, specifically the speed in which customers namely Rail Velocity. For the quarter, box turns achieved minimal improvement from the Q3. Needless to say, lots of work remains to be done. As a result, volumes for the quarter were down 3% year over year and by month volumes were down 4% in October, down 3% in November and down 1% in December. The onboarding of new equipment was slower than we anticipated, taking delivery of only 2,700 units in the quarter and approximately half of our 12,000 orders for the year.

Speaker 7

Naturally, this will push more units into our delivery plan for the first half of twenty twenty two. This investment in additional capacity and the corresponding investment in additional trucks and chassis and most importantly, our people the customers and rail service providers to improve velocity in the system to unlock the latent capacity in the network, As we look forward to the year ahead and similar to what you've heard earlier, we are optimistic about our opportunities to grow the business. We have executed a plan that puts us on a solid growth trajectory based on items within our control. Consistent with our strategy, historically, we will focus on striking the right balance between volume and price, while maintaining our financial discipline on targeting appropriate returns on our business. Of course, returns and margins are impacted by items like velocity and asset utilization, end of the call, which will also be a key component in terms of how we manage the business as we progress through the year.

Speaker 7

In anticipation of questions on both volume and margin expectations for the year, my answer is, it depends, but know that the business will be managed to protect our investment and our returns on that investment. In closing, Intermodal's value proposition remains Strong supporting our view of long term sustainable growth. We continue to see ample opportunities to convert highway freight as end of the quarter, we are

Speaker 6

also seeing a significant increase in the market

Speaker 7

and even more so when combined with the power of the JV Hunt 360 platform that allows us to source capacity efficiently when needed. That concludes my remarks. So I'll turn it over to Brad Hicks.

Speaker 8

Thank you, Darren, and good afternoon, everyone. I'm going to cover the performance of Highway Services, which includes both Integrated Capacity Solutions conference call. But before I do, I would just like to stop for a second and thank all the members in ICS and JBT for how they continue to rise to the occasion to deliver on behalf of our customers, particularly during what was another tight and capacity constrained peak season. You've heard us talk call, we are now for quite some time about how we plan on leveraging our investment in our people and our technology to support rapid growth in this area of our business. And as I look back on the past year, I couldn't be more pleased with how this team has responded to deliver on that statement.

Speaker 8

I'd like to first cover IPS or our Integrated Capacity Solutions segment. We delivered $739,000,000 end of the quarter with year over year growth of 26%. This growth was driven primarily by an increase in revenue per load as total loads were down 1% year over year in the quarter. Truckload volume was up 3% versus the prior year period. Going into peak, we felt like our volume comps would decelerate based on our rapid growth a year ago from 3rd to 4th quarter, In addition to some of the discipline we instilled in our bid strategy earlier in the year, which combined with scaling and productivity benefits is reflected in our profitability improvement.

Speaker 8

As we look forward, I know our teams are excited about the rollout of 2 technology enhancements this year that will enable greater productivity of our people and greater service for our customers and carriers, which will support our growth and scaling of the business even further. End of the call, I would like to establish some priorities for the year, which include continuing to invest in and leverage our people and technology, end of the call and create value for customers and carriers that would support further market share gains. Shifting gears now to truck or JBT. Revenue grew 85 percent year over year to $259,000,000 while operating income improved to $26,000,000 in the quarter end of the quarter and delivering results this segment hasn't achieved since 2,005. I think it's important to highlight that our go to market strategy has evolved As the makeup of our truck service offering has continued to gravitate to a more asset light model, I remain encouraged by our ability to disrupt the traditional way of serving customers in this segment to discover new and innovative ways to scale into the large addressable drop trailer market that has normally been served by the large asset based carriers.

Speaker 8

By leveraging the power and investments we've made in our J. B. Hunt 360 platform, Similar to ICS, these investments will focus on building out further capabilities with our technology, investing more in our people and investment in our physical assets, which in this case is additional trailing capacity. We will continue to maintain our discipline on our capital allocation in this area of investment, end of the call, I am encouraged by our progress and the opportunities for long term sustainable growth in the segment. In closing, we continue to see a lot of opportunities in our highway service businesses to provide an efficient source of capacity for our customers conference call by leveraging our investments in our people and JB Hunt 360, our multimodal digital freight platform.

Speaker 8

As I said last quarter, much work has been done, end of the call, we will stay focused on delivering on our mission to create the most efficient transportation network in North America. That concludes my comments. So I'll turn it back over to the operator to open the call for Q and A.

Operator

Your first question will come from Scott Group with Wolfe Research.

Speaker 9

Hey, thanks. Good morning. Let me see if I can squeeze a few into one. Darren, just on the container count, it sounds like 6,000 containers getting pushed into first half of the year. Are you adding additional containers Beyond that in the second half of the year, where do you expect to end?

Speaker 9

And then just from a pricing and margin standpoint, Any directional color on how much of the yield is accessorial? And as long as this environment stays tight like this, now that you're above percent from a margin standpoint, you think you'll stay above 12%.

Speaker 7

Well, my goodness, Scott, you managed Multiple questions there.

Speaker 2

Good morning to you, too, Scott. I don't know where you are, but if it's morning there, I'll probably want to be hanging out with you.

Speaker 7

So listen, yes, we're not satisfied with the flow of the new equipment Again, in the 4th quarter, certainly delays in the transportation of that equipment impacted us and that has pushed 6,000 into 2022. We are going to add capacity in 2022 beyond those. The end of the call, we're not prepared to release a number like that today. As it relates to accessorials and Whatnot, I anticipated this question, of course, and really only want to answer it one time today. We're not going to tell you how much was assetorial and how much was core pricing.

Speaker 7

We set out, I think every time I've been on an earnings call, I've talked about Unusual characteristics and the equipment utilization was hampered and we took action And certainly that has is part of our results in the 4th quarter. But we also had meaningful cost to recover in the pricing cycle last year. 2020 saw really significant cost increases that we experience, then we were able to communicate that with customers and certainly recovered some of those costs. Time, we certainly have additional pressure on driver wages and we're constantly talking to both our customers and rail providers about the need for velocity improvements in our assets. So as we have always done, we will price for a return profile.

Speaker 7

There are probably times if utilization of our equipment is difficult. It may require a slightly higher margin because utilization is hurt. But certainly, as we Can get benefits or better velocity on equipment, maybe the same margin requirement isn't there. The We issued long term margin guidance of 10% to 12%, and for the calendar year 2021, the anticipate in 2022, we're able to continue growing while also pricing in an effort to recover cost exposure that we have.

Operator

Your next question comes from Allison Poliniak with Wells Fargo.

Speaker 10

Hi, good morning or evening, I guess. On J. B. Hunt 360, it's certainly unique environment and the business has grown or the technology has expanded. Has this environment at all altered?

Speaker 10

I know you're talking you're in that path that's long term goals, but has this environment altered kind of where you want to take the offering as you go forward, is there new opportunities or needs that are out there that you think you could pursue with that?

Speaker 5

The Good morning and good afternoon. This is Shelly. I'll try to take that. Certainly, the more that we are working With our customers and transportation providers, the more opportunities that we are seeing, hence the announcement we just made recently with Waymo. I think that there is a great opportunity to eliminate the inefficiency that's happening in the market.

Speaker 5

Our At this time, our carriers are helping us drive that strategy. As we said in our opening remarks, we are pleased with the progress. We are ahead of schedule, We do have new ideas on the roadmap and continue to want to explore those ideas. And anything that's logically adjacent, our customers are asking us And that we can give a proper return to. It's something we're going to investigate and continue to move forward with our mission.

Operator

Your next

Speaker 11

Thanks. I wanted to ask about the $11,000,000 special bonus. Could you give us some additional color on how that was spread out across the different segments? And then in dedicated, as we look at margins and how they significant amount of fleet additions you've made sequentially the last couple of quarters. So as we think about the growth in dedicated going forward, what point do you think we can get back to that targeted margin range of 12% to 14%?

Speaker 2

Hey, Justin, this is Brad. I'll give you the numbers and then kick it over to Nick to give you the response to the second part of your question. Intermodal JDI, the impact was $3,400,000 DCS, the impact was 5,900,000 ICS was $100,000 FMS was $900,000 the JBT was $400,000 for a total of $10,700,000

Speaker 1

Yes. Justin, this is Nick.

Speaker 8

I'll just tell

Speaker 1

you that we feel very good about our ability to operate in that range. When I look at just our base business, We're clearly operating in that range. I can't predict the future. I can just tell you that our pipeline is Much larger today than it was last January. So if I could tell you when the demand will back off on the amount of adds that we have coming, I can tell you when our margins will get back down there.

Speaker 1

On the base business, There's a slight impact just from driver wages that we're seeing, just from the timing of 80% of our business has indexes in it. So the timing of when we may have to give a driver wage as opposed to when we implement that rate increase in the index could be off just a little bit. That impacts us, but our view is we take care of the customer for the long term and not put business at risk just for 2 or 3 months of rate increase. So we feel very solid about our base business and how it's performing. We're excited about the new business that is coming out the And doing well.

Speaker 1

So we just barely got outside the range for the year. So I think that's pretty good. If I look at that with adding over 1800 trucks and selling over 2,500.

Operator

Your next question comes from Jon Chappell with Evercore ISI.

Speaker 6

Thank you. Good evening, everyone. Darren, in the last call, you said that you'd implemented some programs to better encourage equipment turns. And then you noted early in your prepared remarks You're seeing some of the benefits there, but it's effectively being offset by some of

Speaker 8

the rail velocity. Where do

Speaker 6

you think you are on These initiatives so that if rail service does and we all hope it does, gets back to normal in the next month or so, You can really see an inflection in those box turns, those off box turns, especially you're onboarding the rest of those 12,000 if you didn't get 21.

Speaker 7

The Well, I mean, certainly, we did see some minor improvement in the 4th quarter from the The Q3, but minor, I mean very, very minor effectively flat. And then we highlighted that Rail Velocity took a little bit of a step back in the 4th quarter. Like you said, we would anticipate Rail Velocity to have some improvements. I know that All of our rail providers want nothing more than for velocity to improve. So I'm confident that the effort is underway.

Speaker 7

As that takes hold, there is really significant capacity available in the market from intermodal to move more loads. The good news is demand remains extremely strong. We have customer business that we Could have onboarded in the 4th quarter that we weren't able to because of the slowdown in velocity and capacity. So we remain Really bullish on our opportunity to fill up that capacity in the combination of new containers coming on board And a return to maybe pre pandemic velocity statistics, we really feel strongly that we have a lot of demand. And we see that in other parts of our business.

Speaker 7

There's business operating inside the J. B. Hunt enterprise today, then intermodal is the correct solution for, but in 2021, truckload remained a solution, maybe it was a Transit time requirement for that customer or a lack of capacity in the market from intermodal, but both of those factors

Operator

Your next question comes from Amit Mehrotra with Deutsche Bank.

Speaker 6

Hey, thanks. Darren, just on intermodal volume, is there a better opportunity to access rail capacity on the BM this year because of maybe some of the market share shifts that That have occurred. Can you just talk about what impact that has, if any, on your ability to grow volumes? And then I just wanted to follow-up On the pricing questions earlier, you talk about costs and pricing for costs, but obviously it's a very tight market, fuel costs are up. I'm just trying to understand what you think the market based pricing opportunity is this year?

Speaker 6

Do you think that market opportunity allows for the double digit pricing growth for contracts that come up in 2022? Thank you.

Speaker 7

Okay. Well, The market is going to answer that question for us. We're certainly always out there competing. We're aware of the prices that are winning business and we're aware of prices that are losing business in the competition. And so certainly, if the market I would tell you my experience always says that without the cost increases, it's not likely that double digit rate increases present themselves without significant cost the pressure, it would be I would consider it highly unusual for our rates to climb in the double digit range without corresponding cost challenges coming at the market, those are going to dominate with driver wage predominantly, but certainly The asset utilization is also playing a role.

Speaker 2

And Amit, what was the second part of your question? I'm sorry. Did we address both of them? Capacity on

Speaker 7

Capacity on BNSF, let me just we're aware of another channel that certainly left BNSF and went to Union Pacific and certainly that presents an opportunity. I mean those lifts were occurring on BNSF. We're aligned with BNSF in the growth strategy. We have discussions with BNSF daily about our efforts To grow together, and we have a lot of focus in that area in 2022.

Speaker 5

Your next

Speaker 6

I wanted to look a little bit at the volume growth on the intermodal Clearly, you were impacted by some of the congestion on the rail and the supply chain. If you would have to put it in the numbers conference, what percentage impact would you think it would have on the volumes in 2021? I'm just trying to frame it so how we can think about if this clears up the time of the year, what kind of opportunity presents itself in 2022 beyond?

Speaker 2

Hey, Jason, this is Brad. I mean, I'll take a crack at that, but We don't give specific targets or guidance or haven't set an expectation on what the Realistic intermodal turns are, but if you assume we've been running mid-1.6 to low-1.6 the same time, we're going to be talking about the Probably where we were running pre pandemic, that's probably an approximate way to get to a number that says what the opportunity is. If we got back the to those pre pandemic velocity levels that supply chain was moving from both a customer and rail capacity service perspective.

Operator

Your next question comes from Ravi Shanker with Morgan Stanley.

Speaker 6

Thanks, everyone. This is not a 2022 guidance question, I promise. But just on ICS, Is that now structurally a 3% to 4% top margin business kind of irrespective of what the cycle does? Or kind of the spot rates do roll over next year, kind of could that margin be under pressure? And also as a follow-up on the assetorials, can you confirm with the assetorials, Again, I know you won't quantify it, but was it higher or lower sequentially in the Q4 relative to the Q3?

Speaker 6

Thank you.

Speaker 8

Okay, Rob. I'll start and maybe let Darren speak to the assetorial component there at the end. This is Brad Hicks. We don't give guidance. I do think that if you go back in the last 2 full years, we made substantial investments in the business, both in people and technology that will allow for scale and leveraging of the platform.

Speaker 8

We continue on that journey. We are satisfied with the progress that we've made, So we still have work to do. So I would anticipate that we would stay on a positive trajectory as we go forward, because we are seeing the benefits of the tech investments, both through leverage, through efficiency gains, and I think you can see that from our overall growth and results over the last several quarters. And so, we're certainly encouraged. But we as I said in my prepared comments, We're not satisfied yet and we have work to do, but I do think that we've continued to show progress and we'll continue to show progress towards our long term objectives.

Speaker 8

On the assetorial question, sorry, Ravi, we're just not going to answer that question.

Operator

Your next question will come from Brian Ossenbeck with JPMorgan.

Speaker 12

Hey, good evening. Thanks for taking the question.

Speaker 7

I wanted to see

Speaker 12

if you can just give us a broader perspective of the challenges in labor hiring retention. I think it was mentioned you made some pretty significant changes across multiple areas. So maybe helpful if you can run through some of the availability and wage pressures challenges that you're seeing across the warehouses, those strayage, and then specifically, it sounds like dedicated might be more of short term impact with some of the unseated truck challenges you have right now, which seems to be somewhat unique for your business that's been growing pretty well in

Speaker 3

the last couple of years.

Speaker 2

Hey, Brian, this is Brad. I'm going to let Nick address the driver side of that and then Shelly kind of address the broader organization side of that question.

Speaker 1

I'll go. Yes, we're driver wages are up significantly pretty much in every division. Again, we don't do anything across the board. It's by side, location, but our cost per hire is up. We've seen higher sign on bonuses and the market is very, very difficult With the drivers being out there facing COVID, we have a higher percent of our fleet With COVID right now than we've had at any other time, they're not as severe, but more off.

Speaker 1

So we're seeing impact on that. We're seeing impacts on our orientation because of COVID on schedule versus what actually shows. So we're seeing some short term impacts there. But we think we've addressed the driver market pretty well, but it still takes a little bit longer to fill up trucks In our start ups, when we start up, even if they're priced appropriately and with as many as we have starting up, That's continued to be a challenge. So

Speaker 8

the other thing is just on

Speaker 1

the tech side, we're facing a lot of pressure on the maintenance tech side In the shops as well and that affects some of our turn times and getting equipment turned. So there's just constant New challenges that we're facing all the time around wages, and we're facing some wage pressure in

Speaker 2

the shop as well that we're addressing. So I'll

Speaker 1

talk That will do it for me. I'll let Shelly talk about the office side of things.

Speaker 5

Yes. When we looked just comprehensively around all of our labor challenges, We really moved from a defensive mode with what's happened with COVID to an offensive mode. And it's really allowing us the move forward and think about the investments we need to make for growth for our customers. So we've looked across all of compensation and starting with our benefits the package and there were specific changes that we made to our benefits as well as total rewards, whether that was in benefits or Also what happened from a short term cash incentive to also long term incentives as well. And so we've had a more comprehensive approach, Really probably for our first time in quite some time across the entire organization from drivers to our maintenance technicians and our office employees.

Speaker 5

We are leaning in. We're on the offensive side of that, really preparing for growth inside all of our segments and in all of our support groups. So It's something that we see happen here at the 1st of this year. We've been investing into our labor all of last year. But as Darren talked about, the end of the call, our cost and that's really trying to line out our price to what's happening in cost.

Speaker 5

We've tried to be offensive in that Make sure we have drivers, make sure we have our maintenance technicians and make sure that we have our office employees ready, equipped and available to help our customers.

Operator

Your next question will come from Chris Wetherbee with Citigroup.

Speaker 6

Hey, thanks. Maybe for Darren, can we talk a little bit about the fleet again in intermodal? Just want to get a sense of based on what you're seeing on the ocean today, how many boxes you think you might expect 1Q and 2Q out of that $6,000 then. I know there's a lot of variables out there about 2022 and that's fine. I guess given how strong the the end environment sounds for intermodal services, assuming you have the boxes and you have some greater fluidity in the market, how many boxes would you want to grow beyond the 6,000 2022.

Speaker 6

What would be sort of what you see like the market opportunity for you that you could grow into?

Speaker 7

Man, Chris, that's the magic question, isn't it? So we have we certainly We have a meaningful percentage of those 6,000 that are literally on vessels either at anchor waiting to unload or in some form of transportation. I don't know that we've decided yet To break out how many, I think it's a fair assumption to just spread those 6,000 more or less evenly over the first half of the year. If we can move them in faster than that, we will. I'm aware that I've given direction on this call for the last two calls of equipment count expectations and we haven't met either of those.

Speaker 7

So I don't want to give the end of the call, I think that With all of the talk of velocity challenges in 2021,

Speaker 4

we're going to be

Speaker 7

a little bit careful watching What comes from velocity improvements? I mean, there is really a lot of growth capacity system we have today, plus the 6,000 boxes yet to be received, we can really grow a lot. We have a lot of confidence in our rail providers and our rail network and our ability to grow business there. In the event that velocity can't improve, Then certainly, we have to go buy more equipment in an effort to grow at the same pace, but that will come with sort of new challenges. So, I don't have an answer for you on how many we would like to have.

Speaker 7

We'd like to have as many as we can fill up, To be honest, and there's no great answer to that question, but certainly we have tremendous growth opportunities with our customers. Velocity, we can grow in a hurry. And in the event that we can't improve Velocity, then we'll have to go secure more containers and grow that way.

Speaker 5

Chris, could I take up one level just for our customers overall? I would say demand is very strong across all of our services. And so whether it's in container adds, 3 60 box adds or adds in dedicated or final mile, Our customers are asking us to grow. We're really walking through either bid season or communication in those conversations in dedicated and final mile to help us determine what we should do. And then we want to have a balanced approach, making sure that we do what we say with our customers, honor our commitments and grow as much as possible with proper financial returns.

Speaker 5

So bid season so far has gone well. We'll continue to get through bid season Help us refine what that can look like across all of our segments.

Operator

Your next question will come from Jordan Alliger with Goldman Sachs.

Speaker 6

Yes, hi. So curious from a very high level standpoint relative to let's say, I don't know, early December, Are you would you say you're more or less optimistic on the whole supply chain congestion issue easing, let's say, over the first half or does it just keep pushing later? And just a clarification on dedicated fleet, given what you said on purchases themselves, are we looking at the dedicated fleet down in

Speaker 2

Yes. Hey, Jordan, this is Brad. I'm going to ask Shelly to address the first part of your question about our view on just to rehash your question. Our outlook on the supply chain today versus many where is early where it was early December. And then to the second part of your question about Dedicated and fleet addition, I'll let Nick address that.

Speaker 5

So I would say throughout the fall of 2020 2021, when we would make a prediction, typically we were wrong. And so although, I would like to be I think this latest round of COVID has caught everyone by surprise. So I can't say that I feel end of the quarter, we're optimistic about the supply chain challenges going away in the near term. We're focused on making sure that we help our customers be right to help them smooth out their supply chain challenges and that we're there for them. I would say anytime there's more crisis in the supply chain, Our mode agnostic solutions really come to the forefront because we're fairly indifferent as to how we solve for our customers.

Speaker 5

We wrap around our customers, Sulfur, yes, and then continue to move business. So, for us, we're going to be there for them. I can't really say if we're optimistic or not, because I'm not certain the What lies ahead, but we are planning for that. We are on the offensive side, as I said earlier, on equipment, On people and on technology, we think we can serve our customers that even more so this year than last year.

Speaker 1

And I'll just We've sold 2,500 trucks and we started about 1800 of them. And so that means we've got a significant amount end of the quarter, we're ready in the hopper before we sell anything this year. We are waiting on some trailing equipment to stock some stuff, But we're holding trades and doing various other things on the power side. So I would say Q1 is going to be just like the last 2 or 3 quarters for us. Right in that ballpark is where we think it's going

Speaker 4

to be from a number standpoint.

Operator

Your next question comes from Ken Hoexter with Bank of America.

Speaker 6

Hey, good afternoon. John, you mentioned CapEx about I think it was about $1,500,000,000 If you're at what net of $877,000,000 you said $150,000,000 rolls over. Can you Kind of walk us through how you get to the $1,500,000,000 where how you see that step up? And then Brad, just real quick as a cleanup, I think you mentioned some new tech At ICS, should we expect cost to step up there and see margin pressure or is that just blended into the cost?

Speaker 4

Ken, this is John. I'll give a little bit of color on the CapEx. We're not really in a position to give too much detail, but Of the 1.5%, I would say around 10% is for general corporate purposes, building enhancements and things like that. The rest is probably split evenly between trucks and trailing equipment. And by trailing equipment, I mean containers, I mean, dedicated trailers and also 3.60 box.

Speaker 4

So that's probably around $700,000,000 And then the rest is on Tractors, and that's another $700,000,000 And again, not going to give too much color on that, but that includes both replacement and growth for 2022. And I would just like to add, we did comment, We gave some guidance for the last couple of quarters on what we thought CapEx would be. We've also given for full year 2022. That's based on both what we want to order, but also what we think we can get. And so there is certainly a lot of Noise and uncertainty as the OEMs are trying to meet their plans and get us the equipment we need.

Speaker 4

We'll continue to update on our progress there. But just know that there's risk in that number based on what we can get in and place in service.

Speaker 8

And then Ken, on part 2 there, The technology enhancements, it's really on the tail of the investment that we have been making. And what I'm referencing there is that we will be deploying some internal tools that will allow and should allow for our people's productivity to be improved, which we would expect, will allow us to advance our strategy as we move forward. And so I'm just really excited about finally getting done with some of those tools that we're going to be able to utilize to make better decisions, to make decisions faster and to enhance overall productivity of our workforce.

Operator

Our next question will come from Tom Wadewitz with UBS.

Speaker 7

Yes, good afternoon. So wanted to ask, I think it seems to me like there's a pretty consensus view out there that there will be some supply chain improvement through the year. I share that view. I wanted to get your sense of what if that's wrong and we don't see supply chain improvement and you kind of have a repeat end of 2021 where things are pretty congested through the year. What does that look like for J.

Speaker 7

B. Hunt? And then just maybe short the second question, what's your best read on gross margin percent for ICS in 2022? Should we kind of think of it as stable is maybe the base case or any thoughts on that? Thank you.

Speaker 5

I feel like I've answered some of this before, I think we're in a great position for our customers. We did make the call early in 2021 to Add more equipment to lean in and you're seeing that equipment now starting to come online. So I think we're in a great position with our customers. We're going to continue

Speaker 6

the end of the

Speaker 5

call, to be very close with them and make sure that we can answer whatever our customers' needs are. In 2021, more than any other year, I saw us be able to move freight from our customers that wouldn't necessarily have moved in that mode or that type of shipment in the past. Time when a customer had a shipment, we could say, yes, JVN360 allowed for a lot of that, but also the interconnectivity of all of our segments, Working very closely together, understanding where capacity was at and how we could help our customers. I don't see a lot of negative impacts end of the call, we are already set up for the as is and we're continuing To talk closely with our customers, when you say that there's consensus that it's going to get a lot better, I'm not sure How much that consensus is optimism versus reality? And I think that that's really key questions that we're asking our customers.

Speaker 5

Certainly, we want to help our customers get better. We want to help them be more planned and help them reduce costs in their supply chain in total. But if nothing changes from today, we'll continue to lean into our customers. We'll continue to ask them how we can help them more and we will make more bets on how we can help them through our people, technology and our equipment.

Speaker 8

And then, as we've stated, we're not Interested in giving guidance around what our return expectations are for the year. I think that we're early in this season. We're going to need to see What the market does and how it continues to respond to the work that we have been doing. If you look back over the last the several years going back to 2018, I'm at least encouraged that we've returned closely to a profitability level we saw before the heavy lift tech investments, But we're not inside of our desired long term range yet at this point. So we're working every day.

Speaker 8

The technology that I just referenced It's hopeful to aid us in that and we would anticipate and expect to continue on our journey towards the 4% and 6% range that we stated previously.

Operator

And we have time for one more question, which will come from Brandon Oglenski with Barclays.

Speaker 6

Hey, good evening, everyone. Thanks for putting me here at the end. So, Shelley, I guess if I could just follow-up on that or maybe for Brad, it looks like headcount is actually down in ICS and core truckload growth maybe 3%. Can you just talk about the market dynamics there? And has this reached more of a level of maturity that we are contemplating maybe a year and a half ago?

Speaker 6

Or is there still a lot more to go on that platform?

Speaker 8

Really what it comes down to is that The headcount that you see there is direct to the business and because of how we've managed and restructured over time, There are some headcounts that support the business that are not inside of the BU. And so I would say that Obviously, we're leveraging technology in an effort to grow headcount at a disproportionate level to

Speaker 1

the growth of the business,

Speaker 8

And that's really what our focus is and we're satisfied with the progression we've seen there. Perhaps the numbers that

Operator

And this will conclude our Q and A session. I would now like to turn the call over to CEO, John Roberts for closing remarks at this time.

Speaker 3

Thank you. And I'd like to first say, I appreciate a much more balanced discussion here today. The Though we still have work to do, I kept a little score here on the questions that were asking for our different leaders And I am encouraged and we'll continue in that vein. I would say the 2 big takeaways are The businesses are all lined up, well positioned, look to grow, look to continue the momentum that we have. And then collectively because of that individual strength, we have a compounded strength that I like the question, what if it doesn't get better?

Speaker 3

And when Shelly was answering that question, I was thinking to myself, okay, so that means we keep doing what we're doing here. We've learned how to do that. But if you look at the strength that we're demonstrating through this pandemic, Through this supply chain disruption with really a fairly simple focus on invest for customers, the serve customers, generate the right amount of return and then invest for our customers again. We don't really have a pre disposition to one element or another as we continue to move down this road of being agnostic. We just want to answer that question.

Speaker 3

And I think our momentum with the customer base is continuing to gain strength that the They appreciate that we will invest for them in equipment. They appreciate that we will pivot away from an equipment investment if a better answer presents itself. So closing out the year, we were thrilled with the year. We were thrilled to get to pay our people a special bonus. And I'd just close by saying that people focus is really where it's at for us.

Speaker 3

I've never seen the kind of exhaustive work that we've done this year to understand our position and balance that against risks I'm not taking action versus taking action and then thinking about how we need to make those investments return for us in the same way that we think about our assets. The We have great tech. We have great assets and equipment, but our people are the difference. They and I know that's a little bit cliche to some of us, but I'm telling you that when it gets down to push and shove, our folks are going to be there. They're going to get the job done.

Speaker 3

What will this year bring? We'll see.

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Earnings Conference Call
J.B. Hunt Transport Services Q4 2021
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