J.B. Hunt Transport Services Q1 2022 Earnings Call Transcript

Presentation

[Operator]

Good afternoon. Thank you for attending today's J.B. Hunt First Quarter 2022 Earnings Webcast. My name is Jenna, and I will be your moderator for today's call. [Operator Instructions]

I would now like to pass the conference over to Brad Delco, Senior Vice President of Finance. Please go ahead.

[Brad Delco, Senior Vice President - Finance at J.B. Hunt Transport Services]

Thank you, operator, and 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 more 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 would like to introduce the speakers on today's call. This afternoon, I'm joined by our CEO, John Roberts; our CFO, John Kuhlow; Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources; Nick Hobbs, Chief Operating Officer and President of Contract Services; Darren Field, President of Intermodal; and Brad Hicks, 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 N. Roberts, President Chief Executive Officer at J.B. Hunt Transport Services]

Thanks, Brad, and good afternoon. Thank you for joining our call today. We see the start of 2022 and this first quarter's report as both encouraging and revealing. While overall labor and other supply chain issues have continued, we leveraged experience, focus and technology to move through this period with success. Execution across all disciplines within the organization is running at solid performance levels, yet we have clear opportunities for improvement.

Our equipment utilization continues to underperform due to consistent challenges with velocity and the persistent need for new driver hiring. We added 1,889 net drivers during 2021 and have so far increased our driver force by just over 1,400 this year. Our hiring teams are built out the levels not seen before in our history. The increased ability to improve hiring performance are enabled by the increases in driver compensation, improved benefits, reliable schedules with predictable home time and a company environment centered on growth for future career expansion.

For the past 18 months, our entire people and human resources discipline has been in a comprehensive refresh, presenting the opportunity to make meaningful changes in the quality of services these capable teams can bring to the most critical area of our business, all of our people, current and new. As noted, we announced a multi-year expansion plan for our intermodal fleet recently coinciding with a renewed commitment between BNSF and JBHT. The opportunities that lie ahead in serving our customers are rejuvenated by this commitment. And we anticipate leveraging this unique and industry-leading position, the transportation dynamics of driver shortages and increasing labor cost, high fuel prices, congestion, reliable capacity not to mention the remarkable impacts that intermodal has in the Scope 3 emission reductions for our shippers gives us confidence in our decisions here.

Another important recent development is the formation of our inclusion count, consisting of a highly cross-functional group of managers and executives whose purpose is to continue to guide the organization towards new awareness and actions. This will no doubt make us a better company.

Our leadership team is here and will cover each business more specifically for you. But before that, I will turn the call over to John Kuhlow for his thoughts on the quarter. John?

[John Kuhlow, Chief Financial Officer and Executive Vice President at J.B. Hunt Transport Services]

Thank you, John, and good afternoon, everyone. My comments today will review our recent performance in the quarter, providing some additional perspective to the results on a consolidated level. I'll provide a quick update on capital expenditure plan for the year and then I'll spend a little bit more time talking about our priorities around our capital allocation in light of recent market events and opportunities we see to capitalize on long-term sustainable growth in our business.

Overall, we are pleased with our performance for the first quarter of the year, highlighted by revenue growth of 33% and operating income growth of 61% versus the prior year period. These results were tempered by some fairly meaningful labor challenges at the start of the quarter related to Omicron variant outbreak. The most notable impact from this challenge was in our DCS business as driver availability and productivity were impacted.

We also saw challenges in a rail velocity and intermodal and in product availability in our FMS network. That said, the market tightness presented our highway businesses opportunity to step in, to meet customer needs, and our technology platform, J.B. Hunt 360, provided us an efficient and effective avenue to source capacity for and on behalf of our customers. This continues to prove out the resiliency of our multi-modal business model and our broader mode agnostic supply chain solutions offering.

We have discontinued providing COVID-related costs on a quarterly basis a few quarters ago as the numbers were not meaningful to our consolidated results. But we did incur a little over $7 million in direct COVID-related costs for paid time off for those needing the quarantine and also for those needing time to get vaccinated in the quarter. Weather also presented some challenges to our network businesses, but no more or less than what we had expected given our line of work. I would say similar to my comments last quarter, labor continues to be an area with the greatest inflationary pressure in both professional driver and non-driver salary wages and benefits, and we expect that trend to continue throughout the remainder of the year.

In the first quarter, we recognized approximately $18 million of gains on sale of equipment in the quarter, which are atypical for us. We had very few trades last year as we hold most of our equipment to support our organic growth. Below the line, our tax rate was 24.4%, slightly lower, while our interest expense was modestly higher year-over-year, netting the GAAP EPS of $2.29 or a 67% increase year-over-year.

We continue to maintain a strong balance sheet with $145 million of cash, zero drawn on our revolver and up to $750 million capacity on the revolver and our net debt balance remains below our targeted level of 1 times trailing EBITDA at 0.6. Last quarter, I provided capex plans of $1.5 billion for the year. And while we are slightly behind plan through the first quarter due to continued constraints and equipment availability, $1.5 billion remains our target for 2022.

The quick update on our capital allocation priorities is that it hasn't changed. We will continue to prioritize supporting the growth of our business with reinvestment as needed, remaining committed to our investments in capacity to help serve our growing customer base. We recently increased our quarterly dividend of $0.40 a share or 33% from prior levels and keeping with our dividend strategy. We also intend to incorporate mindful share repurchases and opportunistically execute on M&A opportunities.

We remain conservatively leveraged to maintain our investment-grade rating. However, we are not afraid to increase leverage as opportunities arise. I want to reemphasize that investments in our business will continue to be supported by sound financial discipline and maintaining fair and reasonable returns on our invested capital. This keeps our business strong, healthy and capable of growing to meet the growing needs of our customers.

This concludes my remarks, and I'll now turn it over to Shelley.

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Thank you, John, and good afternoon. My commercial update will focus on general market conditions and how we are serving our customers' needs by leveraging our investments in our people, our physical assets and our multi-modal digital freight platform, J.B. Hunt 360. I'll provide an update a bid season, which will provide some insight into our expectations for the year. And finally, I'll provide some priorities that our organization will be focused on achieving this year for our people and for and on behalf of our customers.

As has been the case much of the last two years, the market remains extremely dynamic, as also evidenced by our experience in the first quarter with disruptions across the supply chain related to the Omicron variant, weather events across the network, labor availability and rapidly rising fuel and commodity costs. We believe our mode agnostic approach with our assets and technology platform, J.B. Hunt 360, both of which are powered and enabled by our people, allow us to dynamically meet and respond to the needs of our customers.

As the quarter progressed, the market finally began to fund more balance, which was evidenced by the expansion in margin we saw in our Highway Services segments. As we have discussed for some time, freight has been moving inefficiently over the last two years, creating additional cost for our customers and additional costs for our business. Five years ago, we launched internally our cycle of innovation to disrupt, adapt and to accelerate, which happened to coincide with the launch of J.B. Hunt 360.

As we hit the five year anniversary for J.B. Hunt 360, I'd like to reflect on our journey and our investments. The investments we have made are intended to disrupt our industry. We as an organization had to adapt and make sure we have the right organizational structure and processes in place to execute our strategy. A month before the pandemic began, our organization transitioned to the theme, accelerate.

Going forward, we will continue with our current theme to accelerate. We will accelerate the speed at which we serve our customers, accelerate our investments in areas with promising long-term growth potential and accelerate our ability to react to the needs of our customers. Under this theme of acceleration, we will remain focused on opportunities to add value to our customers as our people, technology and assets come together to provide highly engineered cost saving solutions. We believe this remains the right recipe for long-term compounding sustainable growth. And we will continue to approach the market that way, while maintaining our financial discipline on fair and appropriate returns on our capital.

We are now almost halfway through bid season. And we're extremely encouraged by the feedback and the confidence that our customers have in us to deliver an efficient and cost effective solution for their shipping needs. As we sit here today, demand for our services, and in particular, the asset side of our business is the strongest I've seen in my 27 year career at the company. And this demand continues to put pressure on our need for more equipment and people.

Going forward, we have a lot of confidence in our plan to grow our capacity. And we believe it's a matter of when not if some of the labor challenges, which includes our rail providers will moderate and ultimately assist us with improved fluidity. With elevated energy prices customers are needing and expecting a lot from us, but capacity and an intermodal network remains extremely tight. Thankfully, our scroll of services allow us to continue to offer capacity solutions and say yes to our customers with our ability to source that capacity in the marketplace for J.B. Hunt 360.

Finally, I want to take some time to provide you some of our priorities for the year. As I've discussed last quarter, we believe that market dynamics will present us with a lot of opportunities to grow, and that remains the case today as well as a priority. But I also believe our opportunity to provide and create efficiencies for our customers is greater this year than at any point in the last two years.

Our investments in our container fleet, trailing fleet, technology and people have us in the best position to provide the right solutions for our customers in three key areas; cost, capacity and service, more than any point since the beginning of this pandemic. I strongly believe in our team's ability to execute for and on behalf of our customers, delivering value and efficient solutions, and this will remain our priority as well as it have always. This strategy, combined with our financial discipline, gives us even greater confidence as we have set out to achieve our mission to create the most efficient transportation network in North America.

That concludes my comments. I'd now like to turn it over to Nick.

[Nick Hobbs, Chief Operating Officer, President - Contract Services and Executive Vice President at J.B. Hunt Transport Services]

Thank you, Shelley, and good afternoon. Today, I'm going to review the performance of both our Dedicated and Final Mile segments as well as give some updated thoughts on current trends and some of our high level expectations as we move throughout the year. I will also provide some perspective on the current challenges we faced and the industry are facing in sourcing both equipment and professional drivers.

I'll start my comments on Dedicated. At the expense of sounding like a broken record, our Dedicated business continues to have a lot of momentum as our backlog and pipeline for new business and start-ups continues to build to record levels. After coming off a record year of selling roughly 2,500 trucks in 2021, the first quarter kept pace with around 600 trucks sold in what is normally a slower time of the year for new business sales.

As it pertains to the results in the quarter, revenue grew 28%, driven primarily by the average fleet size that was about 2,000 trucks or 20% larger than a year ago, which I believe is a true stand-out for our organization and in the industry. Margins in the quarter remained under pressure despite improving sequentially as a result of start-up costs as we onboarded almost half of the accounts in the first quarter than what we did all of last year. I will also share that our operations and productivity were negatively impacted by labor challenges brought on by Omicron variant in January and weather events in February. That only added to some of the start-up expenses we incurred.

That said, and hopefully with COVID and weather events largely behind us, we saw performance and momentum out of this segment in March, which we believe should carry forward. Our new accounts onboarded last year are performing as expected, which gives us confidence in our approach to the market. And our annual price escalators will continue to protect us against broader inflationary pressures.

Our concerns remain on both equipment and labor availability, namely, professional drivers as our needs for both remain extremely elevated and they ultimately govern our pace of growth if demand remains or accelerates from current levels. In terms of priorities going forward, we will remain focused on the execution of our growth plan as well as maintaining our culture of operational excellence, high service and safety, which supports the value we deliver to our customers.

Shifting to Final Mile. Revenue grew about 8% versus previous year period, driven by newly awarded accounts over the last year, but offset by some of the supply chain challenges impacting some of the primary markets we serve in this segment, namely, appliances and furniture. We also announced and closed on the acquisition of Zenith Freight Lines in the quarter, which contributed about $10 million in revenue for the one month it was consolidated in our results.

We continue to make investments in our service quality and performance in order to differentiate ourselves in the market. We believe these investments are wise over the long-term as safety and service will be the cornerstone to our long-term growth and success. As we discussed last quarter, we are coming off a strong year of new business sales giving us confidence in our differentiated service product. This confidence supported our decision to cut some of our underperforming business at risk, which we have done over the last few months.

While it is too early to come to conclusions on all the underperforming accounts, we have been successful at getting meaningful rate increases at several accounts that should support better earnings and margin performance ahead. We remain focused on generating appropriate financial returns on our business so we can reinvest to provide more capacity and services for our customers. Going forward, our priorities remain investing in the business to support its growth, but with some greater emphasis on improving the profitability in this segment in 2022.

Closing out with some operational updates. As I alluded to in my Dedicated comments, the equipment market and professional driver market remained extremely tight. We have clearly had success growing our equipment levels in professional driver workforce to meet the most of the needs of our Intermodal and Dedicated businesses. But let me be clear, it hasn't been easy and it certainly hasn't been cheap. We have relied heavily on some of our key OEMs to help support our growth. But I'm afraid it's not enough, and we are exploring new suppliers across all of our areas of need to support our growth.

That concludes my remarks, so I'll turn it over to Darren.

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

Thank you, Nick, and hello to everyone on the call. My comments this afternoon will recap the performance of our Intermodal business in the quarter. I will also want to give some comments on our recent joint announcement with the BNSF to improve intermodal capacity challenges and what our priorities are for the business as we continue to invest in our people and capacity for meeting the strong and growing demand for intermodal services in the months, quarters and years ahead.

I'll start with the performance of the Intermodal segment in the quarter. Demand for the intermodal capacity remained extremely strong throughout the first quarter and importantly remains so today. As has been the case for some time, our ability to execute on all of the demand for our intermodal capacity was hampered by rail velocity, and to a lesser extent, the detention of our equipment from customers.

Box turns did deteriorate sequentially from fourth quarter, which is in line with seasonality, but nonetheless, still disappointing at current levels. The Omicron variant did impact labor availability for our rail providers and our customers and in our operations as well, and thankfully, those trends did improve as the quarter progressed, particularly for our customers as well as in our operations.

Volumes for the month, for the quarter were down 1% in January, plus 17% in February and plus 6% in March. Keep in mind, February was a fairly easy comp due to some weather events in 2021. We were successful at onboarding over 4,300 containers in the quarter. And I'm proud of our team for their execution on that front, which puts us in better position to meet the growing needs of our customers.

We plan on taking delivery of the remaining balance of the 6,000 containers from our 2021 order during the second quarter. We did see approximately $14 million in gains on sale of equipment, which is unusual for us, but nonetheless, should be transparently disclosed. Importantly, the core of our business is performing well in light of the inflationary and fluidity challenges facing the business and network, which is supported by our people running the operations and our customers who value our service offering.

During the last quarter, J.B. Hunt and BNSF announced a joint initiative to substantially improve capacity in the intermodal marketplace, while meeting the expanding needs of our current customers. This is an important moment for our organization as the largest railroad and domestic intermodal carrier will be collaborating even more closely together to provide an unparalleled intermodal product, leveraging the talents, skills and technologies of both companies to provide a seamless door-to-door solutions for our customers.

With some channel partners leaving to BNSF network, we were provided an opportunity and have developed a plan to grow our intermodal container count to 150,000 in the next three to five years. This represents 40% growth from our count at the end of 2021. For the record, let me state, the easiest thing we can do is go out and buy more containers. This will be a significant endeavor for our organization and will require investment in people, equipment and technology to get our desired outcomes. Importantly, these investments will be done with the same financial discipline as in the past. Needless to say, I'm excited and energized for our organization as we grow to meet the needs of our customers.

As we look forward, I thought I would share a little bit of perspective about our priorities for intermodal this year. As Shelley discussed, we are encouraged by the level of demand we are seeing throughout the bid process for our capacity, which continues to give us confidence to make investments. We strongly believe in the value proposition we can deliver on the three key items our customers care about, which is cost, capacity and service.

As it stands today, there are inefficiencies across the supply chain and within the rail network that is impacting velocity. We are cautiously optimistic that velocity will improve, which will create more capacity for our customers, while improving efficiencies and costs in our operations. Simply put, this is a good outcome for our rail providers, our customers and for J.B. Hunt. We will continue to prioritize investments needed to support our growth to help us meet the robust demand we are seeing for intermodal capacity.

In closing, intermodal's value proposition remained strong supporting our view of long-term sustainable growth. We continue to see ample opportunities to convert highway freight as well as transloading cargo into our domestic containers. We believe our service backed by our people and the ownership of our equipment is differentiated in the market, and even more so, when combined with the power of the J.B. 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.

[Brad Hicks, President - Highway Services and Executive Vice President at J.B. Hunt Transport Services]

Thank you, Darren, and good afternoon, everyone. I'm going to cover the performance of our Highway Services businesses, which includes both Integrated Capacity Solutions and Truck. We continue to see tremendous opportunity to leverage our investments in our people, asset and technology to support the growth opportunities presented to us by our customers. As evidenced by our results, I think we were able to demonstrate that in the first quarter.

So with that, let me go ahead and dive into the performance of the segments that make up highway and provide some perspective on our priorities moving forward as well as some perspective on the market currently. I'd like to start with Truckload JBT. Revenue grew 77% year-over-year to $264 million, while operating income improved to $31.5 million in the quarter. This represents some of the strongest quarterly performances in the segment going back to 2005, yet with less than 20% of the company trucks or assets than we had running in this segment at that time. This continues to support our decision to invest in trailing assets for this segment, while leveraging our investments in our technology, specifically J.B. Hunt 360, to source the most efficient capacity to move freight for and on behalf of our customers.

As Shelley mentioned in her comments, demand for our trailing assets, which is our 360box product, remained strong as customers continue to realize the efficiencies and benefits of giving us a holistic view of their freight and allow us to blend their live and drive trailer networks with a single source solution. We continue to see strong customer demand for this product and service offering as they recognize these benefits. Going forward, we will continue to prioritize our investments in our people, growing our trailing fleet and leveraging our technology to support long-term sustainable growth in the segment, while maintaining our financial discipline around acceptable returns on invested capital.

To close out on JBT, you might have noticed an update to some of the stats we shared on this segment, which we believe better aligns with how the business has transformed with the introduction of our 360box service offering by managing a trailing capacity fleet and sourcing the most efficient capacity to move it for our customers whether it's our trucker asset or someone else's.

Shifting gears now to ICS, we delivered $675 million of revenue in the quarter with year-over-year growth of 29% versus the prior year period. This growth was driven by more balance between volumes and revenue per load than in our more recent periods as our segment's volume grew 12% year-over-year. Specific to truckload volumes, our growth was 15% versus the prior year period. We have seen a moderation in spot opportunities as of late, which we attribute partly to more customers shipping freight out of the spot market into published or contractual business, but also recognizing any movement in the market towards more balance.

Taking that a step further, for the quarter, our published business was up more than 20%, while our spot business was up low-single-digits. That said, we continue to see record levels of freight opportunities from our customers to execute in our platform, J.B. Hunt 360, which we think demonstrates the power of our platform to source the most efficient means of moving freight for and on behalf of our customers. Going forward, we will continue to focus on leveraging our people and our technology to provide an efficient solution for our customers. We believe this will support our long-term growth and will be supported by fair and adequate returns on invested capital.

In closing, I'd like to leave you with our confidence to continue to invest in the areas I've highlighted for you, and that is our trailing capacity, our people and our technology. We continued to see how each complements one another to provide the most efficient solution for our customers. Our customers have and always will remain focused on cost, capacity and service. And if we can differentiate ourselves and deliver on all three, we believe that is the right recipe for long-term compounding sustainable growth. As we continue to deliver on our value proposition for customers, we stay true to our mission to create the most efficient transportation network in North America.

That concludes my comments, so I will turn it back to the operator to open the call for Q&A.

Questions and Answers

[Operator]

Certainly. [Operator Instructions] The first question is from the line of Chris Wetherbee with Citi. You may proceed.

[Christian Wetherbee, Analyst at Smith Barney Citigroup]

Hey, thanks. Good afternoon. Maybe just start with the sort of most, I guess, pressing question that we're getting asked in the market is sort of the view on the freight cycle and if you're seeing some incremental weakness maybe thoughts on the potential for consumer-led freight recession over the course of maybe the next several quarters? And then specifically within that, how should we think about intermodal volumes performing? See, there is a downturn in overall consumer freight would seem, I think you guys noted that there is demand above what you're able to sort of fill in the market today. So kind of curious, how you think that would play out if we were to see a slowdown in the broader freight? Maybe that's a question for John or Shelley.

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Okay. Thank you, Chris. So I will say that there are varying signals in the market and a lot of what you're hearing in the market is in the spot market. So small carrier capacity for the most part, and I think that's what's causing a lot of conversation. If you look across all of our five segments, you will see differing viewpoints inside the segments overall.

I do think there has been a temporary relief in the dislocation from labor shortages and also just where shipments are located. We do forecast that to get a lot worse as we come into the summer months, particularly with what's happening in the supply chain from an ocean perspective or in China coming inbound. So we have had a lot of customers talk to us about that.

Also, I did mention that our bid season is the best bid season that I have seen, and very pleased with our customers leaning into us for solutions. I will say, if there is something that were to occur, and we see a lot of inefficiency in the market, we are constantly talking to our customers about what that is. That's why you hear us and have heard us talk about creating most efficient transportation network in North America, because we see a lack of efficiency, part of that's labor-driven, but another part of that is most of our customers have been primarily concerned with on-shelf availability, not as much around efficiency.

So we see opportunity to help our customers increase payload and get freight into its most optimal mode. We happen to have the most optimal way and transportation mode in intermodal. And so whether it's a downturn or even in the current environment, we do think there is a lot of freight from what we see in bid season that can move into a more efficient mode like intermodal. But I would say, across the segments, I think that there are costs and structural issues that will continue to remain.

I think it's too early to say if there is anything happening with the consumer over the long-term, but certainly, we're watching all of those signals. I would tell you, customers are leaning into us more now even including the most recent data. So I think that would say there are more supply chain disruptions happening that could be lending to what we're seeing in the market today.

[Christian Wetherbee, Analyst at Smith Barney Citigroup]

Okay. That's helpful color. I'll leave at one. Thank you.

[Operator]

Thank you, Mr. Wetherbee. The next question is from the line of Scott Group with Wolfe Research. You may proceed.

[Scott Group, Analyst at Wolfe Research]

Thanks. Good afternoon. Shelley, can you just clarify those comments about the shutdowns in China and what do you think that means for volumes now and then heading into the summer? And then Darren, just with spot prices down, but fuel up a lot, how are you thinking -- how you see the spread right now between trucking and intermodal rates?

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Yeah. So I'll take that first part. If you actually look at a live screenshot at what's happening in Shanghai, the ships are -- it looks just like a lot of ships and little bit of water. And so that certainly it's going to make its way back into the U.S. here this summer. Our customers are concerned about the July timeframe between that and also what's happening with labor at the port. I think there could be reason for concern or just reason to have different conversations, and this type of an environment just takes a little bit of disruption to really change the environment all over again. And so that's what we're watching out for.

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

So somehow, Scott snuck two questions in there, but I'll try to respond here. Spot prices in the truckload market have always been volatile over time, and we've seen times in the past when they rocketed up, times of really expensive or higher cost of fuel. And in this most recent two year window, I mean, spot prices for Highway Solutions have risen because in some cases intermodal capacity was tapped out. And so all of a sudden, there is a much larger truckload spot market originating from the West Coast, for example.

Those -- the gap between that kind of rate and an intermodal price is north of 2 times. I mean, you're 200% higher to buy spot-rated truckload solution off the West Coast versus an intermodal rate. So there is a very significant gap before truckload prices put any kind of pressure back on the intermodal market. So again, intermodal demand is extraordinarily high. We have cut -- we have more demand from customers than we currently have capacity to serve. And so I'm very encouraged by that demand cycle, feel strongly that intermodal can continue to grow. And I don't really feel like at this time truckload rates falling is putting any pressure on intermodal pricing.

[Scott Group, Analyst at Wolfe Research]

Thank you. I'll get back in queue.

[Operator]

Thank you, Mr. Group. The next question is from the line of Jon Chappell with Evercore ISI. You may proceed.

[Jonathan Chappell, Analyst at Evercore ISI]

Thank you. Good afternoon. Darren, I'm going to stick with you. That 7% volume growth number in 1Q, I understand that February was a very easy comp, but the rails don't have easy comps too and no put up even growth, let alone, almost high-single-digits from a volume perspective. How much of this was just strictly the new equipment that you brought on? How much of it is Hunt-specific market share gains? And when you think about this long-term growth strategy you've set out and when you layer that on top of this really strong relative 1Q, how sustainable is this type of outperformance as you continue to invest in the business?

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

Okay. Well, appreciate that. We're proud of our results, but not yet satisfied because we can actually grow more than that and demand is actually stronger for our product. And that gives us a lot of motivation, a lot of energy. So certainly, the new equipment we added last year and onboarded during the first quarter, obviously, contributed significantly to our growth. When I say we can grow more, I mean six months ago, prior to the -- midway through last year or even in the third quarter of last year, we would have anticipated stronger growth than we achieved, but that equipment we added really was consumed by weakness in velocity.

And I don't want to beat a velocity drum here on the call all day today, our rail providers all know that it needs to get better, they are all working very hard to improve that. We're very aware that they can improve that fully, anticipate that they will. The question remains when does that begin to show up. And certainly, during the first quarter, there were some challenges in that area. We're turning down thousands of loads per week and feel strongly that we have more volume to grow as velocity picks up. And again, we're very encouraged by the way we're communicating with both our customers as well as our rail providers.

[Jonathan Chappell, Analyst at Evercore ISI]

Got it. Thank you, Darren.

[Operator]

Thank you, Mr. Chappell. The next question is from the line of Justin Long with Stephens. You may proceed.

[Justin Long, Analyst at Stephens]

Thanks, and good afternoon. Bigger picture, two of the priorities that you've conveyed historically are a focus on growth and a focus on ROIC. I wanted to ask about the balance between those two items, specifically as it relates to intermodal. As we think about your intermodal container fleet growing 40% plus in the next three to five years, do you feel like that's something you can execute in a way that's accretive to intermodal ROIC? And if the answer to that is yes, I'm curious what the assumptions are from a pricing and box turn perspective to make that math work?

[John N. Roberts, President Chief Executive Officer at J.B. Hunt Transport Services]

My goodness. Justin, you just asked for all of the answers there. So certainly, we've highlighted that returns drive our investment decisions, and that's not any different today with the announcement of the expansion of our equipment. I think that that signals our believe in the long-term growth available in the intermodal system and that that growth can come onboard at the return profiles that we would expect.

Now there comes a point at which whether or not it's accretive or you simply are just sustaining your return profile. I mean, there will be some small cycles whenever if we get the opportunity to take cost out of our system, I could see a world where that transfers to prices that go back to the customers, and that's okay. We fully anticipate a velocity improvement and that could very well result in prices going back a little bit to benefit the customers because frankly today weakness in velocity has been considered inside the intermodal system. But I would certainly believe that we can sustain longstanding success with our ROIC, and we don't -- and we're not willing to grow in a world that would damage that. That's the first thing that would slow down that investment. So that's a -- that is core tenant, number one at J.B. Hunt, and there will be no change to that.

[Justin Long, Analyst at Stephens]

Okay, great. I'll leave it there. Thank you.

[Operator]

Thank you, Mr. Long. The next question is from the line of Ken Hoexter with Bank of America. You may proceed.

[Ken Hoexter, Analyst at Bank of America Merrill Lynch]

Hey, good afternoon. Just a couple of follow-ups on that. The agreement with Burlington, Darren, can you talk about or be any more specific on the timeframe to get that target or what encourages you to speed that up to the three versus five years in terms of growth? And in the agreement, anything that you can specify in terms of -- it sounded like you were aiming to improve service. Are there things you want to work on through that in the long-term part of that agreement? Thanks.

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

Okay. I appreciate the question. I'm not going to call out anything specific in the agreement. I think it's really -- obviously, it's of note that we made that release jointly. And BNSF's logo is on the same press release with ours, and that's because we're very aligned in our efforts around growth, we're aligned in our efforts around how we can use technology and build out our systems in a better way that allows both of us collectively to be more efficient on the whole. That could mean things like, if we get an opportunity to take a load in the gate at a BNSF location and park it track side so we can eliminate a hostile move.

We want to connect our technology so that the planners with BNSF have good visibility into loads that haven't yet picked up but that are going to come in the gate later that day. And that's why you heard in some of the prepared comments that the easiest thing we can do is go buy containers, and that's very true. I mean, the mission we're on has a lot more to do with how we work together, how we work with our customers and how we solve long-term supply chain solutions together. And all of that effort drives into that decision on growing the capacity whether it's in three or five years. I mean, certainly the window is in there because we recognize that there has been a velocity loss in the system.

And over these next couple of years, we anticipate a time when we can get velocity back. We would fully expect to do that. And if that gives us the opportunity to grow and maybe we didn't have to onboard quite as many containers in a given period, that's okay too. I mean, we're -- we also highlighted that our ROIC is going to be the driving landmark behind how we do that. We're so confident in the market size and the magnitude of the opportunity, that's why we made that announcement. And we're more aligned than ever with BNSF, we're very energized by these -- that announcement.

[Ken Hoexter, Analyst at Bank of America Merrill Lynch]

Great. Appreciate the time. Thanks.

[Operator]

The next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Yeah, hi. Just sort of curious in light of your comments around congestion and what may be coming if this load from China starts coming over here. On box turns where you noted it was a little disappointing in the grand scheme of things in the first quarter, although in line with seasonality, how are you thinking about it from here? Whether it be sequentially, normal seasonality? Can you see some year-over-year improvement or is it hard to call at this point? Thanks.

[John N. Roberts, President Chief Executive Officer at J.B. Hunt Transport Services]

I mean, I think that it's a little bit hard to call. I mean, again, we -- our commentary on box turns had a lot more to do with velocity challenges not from anything going on in China. Certainly, demand is very strong. And so we're encouraged by that and would anticipate that box turns will improve as velocity improves.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Thanks.

[Operator]

The next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed.

[Ravi Shanker, Analyst at Morgan Stanley]

Thanks, everyone. So just on the new agreement with BN, is it possible to quantify kind of how much of that 40% growth is likely to come from just expanding the pie in kind of truckloading, etc. versus taking market share, because kind of obviously with your peers also growing capacity by a similar amount that is a lot of capacity coming in. So are you guys like pretty confident you can convert all that in truck or is that going to be kind of a share shift from your peers?

[John N. Roberts, President Chief Executive Officer at J.B. Hunt Transport Services]

So first of all, there is not a new agreement with BNSF, I want to be clear about that. We've had a long-term agreement with BNSF and we're energized by the work we're doing together as we've been energized by that for 30-plus years now. The growth is going to come organically from our customers. The growth is going to come from significant inefficiency in the networks today where a truckload business is moving intermodal that should be intermodal. And lastly, there continues to be a really significant effort amongst some of our customers to grow their transload business and take international intact off of the railroad and replace that with domestic intermodal, and that certainly can present some additional efficiency for our customers.

So we always look to grow in that way. We don't look to grow by just going out in a pricing side with the host of intermodal channels. We believe strongly in presenting supply chain solutions to our customers, and that's going to drive a behavior change or a mode change in the way they're executing it. There will certainly always be business that's in the bid that other people handle. But our mission to grow is off the highway in transload and in organic growth with our existing customers.

[Ravi Shanker, Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

Our next question comes from Amit Mehrotra with Deutsche Bank. Please proceed.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks, operator. Hi, everybody. Darren, could you just talk about where box turns exited in 1Q? I understand, January obviously bringing on the quarter down, but I want to understand where you exited? And when can we see more meaningful improvement, because I understand velocity and train fluidity is obviously key variables. But all else equal, I would imagine that this new initiative helps turn the boxes faster? So if you could just talk about where you exit in the first quarter? And when can we see more meaningful kind of idiosyncratic improvement on the back of this initiative?

And I also think talking about the long-term margin target, which you guys obviously reduced, I guess, it's my understanding that maybe you guys incurred some extra costs associated with the cyclicality of the BN relationship, if I could put it that way. And now obviously with that relationship, both parties kind of growing in the same direction for the first time in a while in this initiative. Is there an opportunity to revisit that margin target or would you use that as kind of a lever for growth? If you could just address those points, please.

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

Well, I'll just quickly start with your second question and say it took us the better part of three or four years to change our margin target. We don't have an update for you today. Certainly, it's our mission to be focused on our return on invested capital. And that's what we're focused on and the margin turns out to be kind of an output from that.

I don't have a good way to describe the turn number coming out of the quarter. What I would just say is, we highlighted that volumes were still slightly negative in January and then we started to experience growth as the quarter went on. We did onboard new equipment as the quarter went on. And we're not satisfied with our turn number, but we're encouraged by what we've seen from our customers and we're beginning to have -- we're encouraged by what we're seeing from the rail network today, but it's nowhere near getting back to where it was prior to the pandemic.

So we have a long ways to go in that area, but there is no lack of motivation from our rail providers to improve their velocity. So as that goes, we're going to continue to work on box turns, that will be a subject forever. But until we can get an improvement in box turns, we have to consider the cost to the ownership of that equipment at the weaker velocity until we can get an improvement. And at that point, I'm certain you will see those results in our results.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much.

[Operator]

Our next question comes from Allison Poliniak with Wells Fargo. Please proceed.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Hi, guys. Good evening. I just want to turn to Dedicated. There is, obviously, the pipeline is quite strong in Dedicated, you referenced that, but there was also a comment around the ability to get capacity there, potentially limiting your growth. Is there any way to better understand how that limiting capacity is limiting your growth? Is it a point or two? And do you think you can overcome that based on your current conversations with the OEMs? Thanks.

[John N. Roberts, President Chief Executive Officer at J.B. Hunt Transport Services]

The big challenge and what it limits really is we're having to use whole trucks for up to six months and to help us increase our capacity just because of the chip shortages and other components that the OEMs are facing right now. So we're addressing that. Right now it's not limiting us other than it's pushing what would normally be at 90 days start-up up to 120. So that's pushing out some start-ups a little bit longer. But at this point, it's not really limiting us from mini deals. Our pipeline is still very strong. It's just pushing them out probably another 30 days from what we would normally have out there. We are having good conversations with OEMs, but none of them have any extra capacity at this point.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

Our next question is from the line of Brandon Oglenski with Barclays. Please proceed.

[Brandon Oglenski, Analyst at Barclays]

Hey, good afternoon. Thanks for taking my question. Shelley, maybe just a follow-up on the earlier question around consumer demand just because there's so much conjecture and anecdotes in the market right now about a looming freight recession. I think you said the market is sending you mixed signals, but are you seeing a slowdown in demand in any of your customer segments? And then maybe second to that, as we see spot truck rate come down and everyone is focused on that, how is that going to impact ICS because I think you actually gained pretty good volume gains there, at least through the first quarter? Thank you.

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Okay. So I think we noted that we are seeing strength, particularly in the asset part of our businesses. Part of that's because intermodal is the most efficient way to move business and Dedicated really taking on a private fleet in a long-term agreement, but also in JBT and 360box, we're seeing significant growth and our customers are really pushing us in that space. Part of that is labor challenge, but I think part of it is we're solving for a better way to do business more efficiently by utilizing the box. All of that's power through J.B. Hunt 360. So I think that's one of the biggest benefits we have seen through our technology is the growth that we've seen and also the value we create for our customers.

And ICS' margins were -- excuse me, if there were some kind of downturn, I think margins would change clearly from a margin expansion as most of our bids have been are either locked in or about halfway through or so, so we'll have pricing locked in for a large portion of that business. And then we're going to be flexible in the market from a spot perspective. That really goes across all of our businesses. Anywhere we have a chance to talk to our customers about being dynamic in pricing, in capacity, we're going to do that on behalf of our customers. So that will move with the market and then our contract pricing will stay relatively in line with whatever we finish in bid season.

[Brandon Oglenski, Analyst at Barclays]

Thank you.

[Operator]

The next question comes from Bascome Majors with Susquehanna. Please proceed.

[Bascome Majors, Analyst at Susquehanna Bancshares]

Yeah. Thanks for taking my questions. And just the last six weeks, you've had diesel prices go up $1, you've had the SEC seek to require disclosures of Scope 3 and supply chain emissions and you've announced this investment publicly that you intend to make in your capacity in partnership with BN to deliver on that for your customers. Can you talk a little bit -- is the customer buying behavior in intermodal changing? Do you have customers out there asking for capacity in '23, '24, '25? Is there a chance this could shift to a take or pay type commitment? Just how much visibility do you have? And where are your strategic customers looking to grow with you, not just this year, but the year after and the year after? Thanks.

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Thank you for that. I really should have mentioned it. It's not just our bid season we're encouraged by, but also it's our longer term discussions that we're having with our customers in general. Certainly we have customers right now asking us for intermodal, a lot more of it. You mentioned, fuel, that's part of it, but also just overall our ability to service our customers in an efficient way in intermodal. The more we can do that, the more they want to do that.

PSR has really created a pent-up demand from our customers over the last five to six years. They had to move into the truckload market when really intermodal is the most efficient way to move goods. So I see our customers continuing to lean in long-term, but that's not just in intermodal, that's long-term across all five of our segments. So I see our customers adding two links of agreements and also talking to us across the fast services.

[Operator]

The next question comes from Tom Wadewitz with UBS. Please proceed.

[Tom Wadewitz, Analyst at UBS Group]

Yeah, good afternoon. Wanted to ask you about how you think your businesses will respond to a down cycle. I mean, it seems like the spot market data creates that concern, I guess, it's hard to tell whether that continues or not. Maybe it's noise, maybe it's a downturn, but do you think your businesses will react in a similar fashion to what they did in maybe 2015, '16 or 2019 when we saw a prior downturns in freight or do you think things are different for J.B. Hunt in terms of your biggest businesses and how they might respond to a downturn in freight if that plays out?

[Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources at J.B. Hunt Transport Services]

Well, if you look at -- I'm going to call downturn or recession from 2008-2009 really the last time you could see it dramatically in our business. Intermodal performed very well. We would expect intermodal to continue to perform very well for our customers. It would be a great way for us to deliver more efficiency for them and cost servicing capacity. So we see resiliency in our intermodal model. Certainly, we see resiliency in our Dedicated model. Remember in DCS, that business is really private fleet conversion business. So when they made that decision, they know Joe and Sue coming into their facility on a regular basis much like not an employee, but similar to representing their brand. And so that's a longer term discussion for our Dedicated customers.

I think how we service this side, we are more variable this time than last time. So in the last recession, we had a lot of trucks and a lot of trailers. Now we have a lot of trailing capacity that allows us to be flexible in the market with J.B. Hunt 360. So both ICF and JBT will be able to be flexible in the market on creating the right cost service and capacity for the right loads at the right time. And then in Final Mile, I think part of that business has a non-asset part to it and part of it is on the asset part of the business. That's a growing sector. So I think that we'll continue to take share from a sector perspective.

Nick, I'd be curious if you have anything to add on that?

[Nick Hobbs, Chief Operating Officer, President - Contract Services and Executive Vice President at J.B. Hunt Transport Services]

No, I just think we have a lot of flexibility depends on one of the four channels that we have. And so when you adjust our cost, when we have the non-asset side. But on the asset side, we have contracts in place that help protect us there as the volume changes. So we feel good about that. So I think we're well protected.

[Tom Wadewitz, Analyst at UBS Group]

Great. Thank you.

[Operator]

The next question comes from the line of Brian Ossenbeck with J.P. Morgan. Please proceed.

[Brian Ossenbeck, Analyst at J.P. Morgan]

Hi. Thanks for taking the question. Maybe one for Brad. If you can talk about the scale, the size, the scope, how you're going to frame it in terms of 360 in the platform in terms of profitability, in terms of loads, headcount, where do you think you are at this point relative to where you want to be in the next, call it, two to three years. Clearly the market tailwind from margin perspective is a little bit at your back here, but maybe you can elaborate on that, especially when you think about the next step being accelerating the phase of the investment you've been through with this platform. Thank you.

[Brad Hicks, President - Highway Services and Executive Vice President at J.B. Hunt Transport Services]

Yeah, Brian. Appreciate the questions. Just to build on what Shelley spoke of in her prepared comments, we just rolled into our five year anniversary of J.B. Hunt 360 and knowing that just in the last 12 months, from a Q1 versus Q1, we grew 36% on the platform. And so I do think that that really speaks to us having made the foundation of the investment in the technology and then beginning to scale.

And so with revenue growth in JBT of 77% year-over-year. Just outstanding performance in an area that for a long time have been relatively flat for us here at J.B. Hunt. So the combination of our assets and now have that models with live it drop inside of Highway Services and how we blend those networks together to create efficiencies and value for our customers, really am encouraged about where we sit today.

As it relates to kind of where we're at in the environment as we speak today and not trying to predict what's in front of us. The variable nature of the power does give us flexibility. And so I do feel like we're going to be able to succeed in any environment given the foundation of our trailing fleet investment. And we will look to continue to make investment there and grow that fleet. And if we can complement [Indecipherable] freight into our drop network, it provides efficiency for our customers.

[Brad Delco, Senior Vice President - Finance at J.B. Hunt Transport Services]

Thank you for the question, Brian. And operator, we have time for one more question.

[Brian Ossenbeck, Analyst at J.P. Morgan]

Thank you.

[Operator]

The next question is from the line of David Vernon with Bernstein. Please proceed.

[David Vernon, Analyst at Sanford C. Bernstein]

Hey, good afternoon, and thanks for fitting me in here. Darren, I wanted to ask a little bit about the new intermodal containers coming into the network. How much of that is just backfilling what BN lost with Schneider and Knight sort of an existing sort of service lanes? And how much of this is about maybe getting the railroads to stretch what they're comfortable doing, opening up new markets that kind of thing? I'm just trying to get a sense for how much of that capacity is just going into a market that's already served versus how much might be coming into come after some new growth opportunities?

[Darren Field, President - Intermodal and Executive Vice President at J.B. Hunt Transport Services]

Well, I think it's hard to answer that. I would just say when we go out and acquire equipment like that, it's to grow with our customers to add new customers. I don't know that we're adding new markets. We're certainly more engaged with customers in discussing the transloading of their international intact intermodal business. So that's certainly an opportunity for us to grow that isn't related to the channels that have exited BNSF. Look, we're not naive. I mean, a lot of lift capacity is exiting BNSF. And so we're -- we know that customers want to diversify their underlying rail providers.

And so we have a host of customers that are talking to us about taking on business that may be another channel handled in the past. So I don't want to act like it's none, it's certainly a part of the decision, but it's certainly not all of it. I don't have a great answer to tell you is it half, is it -- we just want to grow and serve customers and do so at a return on our investment that warrants reinvestment and we're very confident in our ability to do that.

[David Vernon, Analyst at Sanford C. Bernstein]

Thanks.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Brad Delco, Senior Vice President - Finance
• John N. Roberts, President Chief Executive Officer
• John Kuhlow, Chief Financial Officer and Executive Vice President
• Shelley Simpson, Chief Commercial Officer and Executive Vice President, People and Human Resources
• Nick Hobbs, Chief Operating Officer, President - Contract Services and Executive Vice President
• Darren Field, President - Intermodal and Executive Vice President
• Brad Hicks, President - Highway Services and Executive Vice President

Analysts

• Christian Wetherbee, Smith Barney Citigroup
• Scott Group, Wolfe Research
• Jonathan Chappell, Evercore ISI
• Justin Long, Stephens
• Ken Hoexter, Bank of America Merrill Lynch
• Jordan Alliger, The Goldman Sachs Group, Inc.
• Ravi Shanker, Morgan Stanley
• Amit Mehrotra, Deutsche Bank Aktiengesellschaft
• Allison Poliniak, Wells Fargo & Company
• Brandon Oglenski, Barclays PLC
• Bascome Majors, Susquehanna Bancshares, Inc.
• Tom Wadewitz, UBS Group AG
• Brian Ossenbeck, J.P. Morgan
• David Vernon, Sanford C. Bernstein