Here, J.B. Hunt, Shelley Simpson from the company, president; Brad Hicks, president of Highway Services, which we'll dig into in a second; and Brad Delco, SVP of Finance. So, appreciate you guys coming down here. Before we turn it over to Shelley, just real quick, can we cue the audience response system? I'm sure you guys know the drill by now. We can get question one up for J.B. Hunt. All right, do you currently own this stock? Just pick up that strawberry-looking thing. Yes, overweight; two, market weight; three, underweight; or four, no.
Can we vote?
I'll get you guys some clickers later. Question Number 2, got some potential owners in the room, what is your general bias towards J.B. Hunt right now? Positive, negative, or neutral? All right. Got some potential folks to run over here. Then question Number 3: in your opinion, through-cycle EPS growth for J.B. Hunt will be above peers, in line with peers, or below peers? All right. Appreciate the responses, everyone.
So Shelley, Brad, and Brad, thank you for coming down to the conference. Really appreciate you guys being here. I know you spoke yesterday at another event as well. Can you just give us an update on where freight markets are? I mean, I want to focus this conversation on the long term, but obviously, some folks do care about the near term as well. What can you tell us about, you know, past year, the freight recession, where we sit today, what the path forward is in 2024?
Well, first, Brandon, thank you for having us here. We're excited to be at the conference. You know, I talked about two main themes yesterday. First was we felt like the translation of what we were seeing on inbound, imports wasn't necessarily correlated directly to our volumes. I think that was somewhat of a surprise, because I think people were interpolating what they were seeing on the inbound imports into, directly into our volume, both on BNSF and then just largely overall.
That was one of the comments I made. The other comment that I made was just it's a very competitive bid season, surprisingly so for us. And so those were kind of the two of yesterday. You know, we've talked about being in a freight recession now, and we're on month 21 or so of a freight recession, in total. Can't really say when freight recession's going to end, but, you know, for us, we're—we're really focused on long term and how we drive more value for our consumers.
Okay. Appreciate that clarification. And does that mean that you're just not seeing a lot of volume expansion in the network, or are there things within your control of customer wins that are relative outcomes?
Well, I think what I'm saying is the volume increases that you saw on the West Coast ports in particular, I believe it was up 20%, and I think BNSF volume was up 29%, is not a direct correlation to what our business is doing. So we haven't seen that same change in our business today.
Okay. Understood. And from a customer perspective, what are you hearing from a destock perspective, from consumer appetite?
I mean, for the most part, our customers have said they're in good shape from an inventory perspective. You know, every customer's in a little different situation, but if you were to think about 2023, that was a big part of the story of our customers resetting inventory and really working that inventory down. Not to say that customers don't have different objectives for 2024, but that's not been a large headline for us.
Okay. Appreciate that. I guess longer term, though, in the intermodal business, which is your biggest segment, we've seen some changes with the relationship with BNSF and West. BNSF is your rail partner out west. What's been the changed relationship there, and are there more mutual, beneficial targets between the two?
Yes. So, Brandon, I've served on our executive team for the last 17 years, and I spent the majority of my first decade or so on the commercial side, so working with customers. Got the opportunity to work very closely with the BNSF, really, since 2011. And I will tell you, our relationship is just as strong today as I've ever seen our relationship. We announced in March 2022 our joint commitment to really expanding the intermodal marketplace and thinking about intermodal from a long-term, stable and something our customers could really lean into from an overall capacity, cost, and service perspective. We announced that we would be growing to 150,000 containers over the next three to five years. That was in 2022.
And that really comes down to what our customers are asking us to do and also commitments from, we believe, from not only the BNSF but also the eastern network rails have been more focused on service. So it's been a rough go from an intermodal perspective, from overall service, really, for the previous prior to 2022, probably the last six or seven years. Pretty tough service environment for our customers. Certainly, intermodal needs something more resilient than what they were seeing. I think we've seen some of the improvements that have happened there. Intermodal also lost market share during that time over to highway. And so we do have recognized there's a lot of freight that can convert off the highway into intermodal. We're working very closely with the BNSF.
We launched two joint products in 2023 with both Ferromex, which is our Mexico service offering that rides with the BNSF, and also with Quantum, which is more of a truck-like service. So one of the things that we did in the fall of 2022, Katie Farmer, the CEO, and her entire leadership team, as well as our entire leadership team, spent a dinner and all-day session together really solving for our joint customer. So what do our customers need from intermodal to be long-term and sustainable, and how do we drive more value for our customers?
And so just think of the CIOs speaking together, the COOs, every part of our organization collaborating on our joint customer. One of the biggest changes that allowed us to do that was we really are the primary channel provider on the BNSF. So, you know, in the past, there were competing channel providers. Now it's just primarily us. So I think we can think more strategically. We can think longer term about our prospects and what we can do together. And that's one of the reasons that we launched our joint services.
Well, I think rail service has been a recurring issue, like you said, probably for half a decade now.
A long time.
What has been the challenge more recently, and have you seen a pickup in service either on the West or in the East?
Well, I will say we've had a pickup in service. I think for our customers, they have a long history in, you know, how service has been over several years that has a thought pattern in their mind of what is available to move intermodal and what is not. And so that isn't necessarily what we believe for our future because the rails have been focused on providing good service. The BNSF, NS, and CSX, all three major railroads that we do business with, have improved in performance. We're pleased with that performance. We want to see that continue, and we want to see it sustained. I think that's really important.
If Darren Field were here, he's who leads our intermodal segment for us, one of the things he would say is, "If last year was a prove-it year for our customers, you know, our customers are saying, 'Well, there's not any volume, so service is naturally going to be better.' What's going to happen when there's some pressure points on the system? Can you really perform, you know, in fourth quarter?" We had a surprise peak, and that peak we executed, we, the railroads, and ourselves executed pretty flawlessly. I think that was a major prove-it moment for our customers to say, "You know what? Maybe things are different, but that's going to take time." And they have to have a repeated experience with our company and with the railroads that says intermodal is a good solution for long term.
I mean, I think some of the skeptical investors might say, you know, intermodal saw a lot of growth maybe five years ago, but have we just converted a lot of the low-hanging fruit in the market? Therefore, going forward, it's much more like a market growth opportunity. Or do you guys still see this as a long-term growth vertical?
Well, we think it's a long-term growth. If you look at our addressable market, there's $625 billion across our 5 segments, so across our organization. If you look at the largest part of that market, $400 billion of that market is in the truckload space. So think about how our customers think and what they're focused on. We, because we serve that part of the market as well, get access to over $100 billion of freight every year. From that data point, we know that there's between 7 million and 11 million shipments on the highway that can move intermodal. I think if we're telling our customers, "Listen, this is the service, and we need you to convert," without listening to what they need from us, then it would be more difficult. But that's one of the reasons that we've launched things like Quantum.
When we talk to customers to say, "What do you need to get you to convert, you know, West Coast to Chicago? What are the things that we need to be thinking about?" and they want a more truck-like experience. If you think about the original intent of intermodal back in 1989 when Mr. Haverty and Mr. Hunt really struck the deal, it really was to take freight off the highway. That's the exact same scenario that we're in today. So the product that we've developed really is more of a concierge service. It allows our customers to say, "Okay. I know that you care about this freight as much as I care about this freight.
It could be a discount to truck, so the truckload price can be more stable from a capacity and service perspective. So, I do think that with the railroads committed to having long-term sustainable service, there is a segment of the market, just traditional intermodal, that will move back into intermodal. And then on top of that, I think we can create the market from a truckload perspective in the intermodal.
Brandon, maybe one thing I'd add to that. When we think about our go-to-market strategy, it really isn't just predicated on highway conversion. I mean, if you look at I would call it a long-term secular trend between international and domestic intermodal. We've seen, you know, freight that comes into the country, transload into domestic containers.
That's been a trend that's been occurring for a long period of time. You know, there have been recent announcements where specifically BNSF is investing a considerable amount of capital in the Barstow International Gateway. And I think that creates an opportunity for an acceleration of transloading freight that's coming into the country out of international boxes, 40-foot boxes, 20-foot boxes, into 53-foot boxes, which could also accelerate the addressable market, if you will, for our domestic intermodal growth in the future.
And that, that was part of the CapEx last year, right? Because you guys did have a pretty large spend last year, investment.
If you look, I believe we spent just over $1.6 billion in net CapEx. I wish we did have our slides up here today, but there's a wonderful chart where we look historically at our cash operations and how we deploy or how we put that cash to use. An overwhelming majority of our capital is used at reinvesting in our business. We have been supporting dividend growth over a long period of time. I think we're at 21 years or so of consecutively growing our dividend. And then we opportunistically buy back stock. The CapEx last year, we won as Shelley alluded to in March of 2022.
We committed to growing our domestic intermodal fleet to 150,000 containers by the end of 2027. We understand the market's tough. I would say, if we also had another one of our investor slides up, we would show the tenure of our management team. If you looked at our named executive officers, they have over 366 years of experience at J.B. Hunt. So on average, it's about 25 years per. But that's also throughout our organization. If you look at our senior VPs, I think it's 21. VPs, it's 19.
20.
20. Senior directors are 14.
All directors are 14.
All directors are 14. So we have tenure throughout our organization. A point here on the capital side was a lot of that capital we spent last year, one, to continue along our process or our progress towards the 150,000 containers. But we were really challenged to support our growth during the peak of COVID in light of some of the supply chain disruptions that were impacting our vendors.
Think about trailing equipment. Think about purchasing trucks. Think about all the chips and the technology that goes into trucks for some of the safety technologies and advances that have been made. So we played catch-up, really, most of last year, based on how little we were able to replace or replenish some of the aging of our fleet during that period of time. Our capital budget for this year is $800 million-$1 billion.
So a pretty significant step down from where we were last year. But now and into the future, we will always remain ROIC-focused. And so when we deploy capital, we will do so in a very disciplined way and be very thoughtful of how this creates value for our people, how it creates value for our customers, and ultimately how it creates value for our shareholders.
Yeah. I appreciate that. And I want to get into capital maybe a little bit later too. But Brad, maybe this is a great segue. You know, the Highway Services division, I think that's somewhat of a new development for the company because it used to have a dedicated asset-based trucking business, right? Maybe a truck. But that's morphed over the years. Maybe can you talk about the changing priorities in that business?
Yeah, Brandon. Well, thanks for having us. And you're doing the very best job at freezing us out up here. I, I don't know if you all feel it. It's oh my gosh, it's cold in this room. So thanks for finally throwing me a question so I can get my blood moving. But, but, you know, I lead what we call Highway Services. It's two of our five reported segments. It's our truckload segment. And it's ICS, which is our brokerage segment. Our truckload segment really is the foundational roots of our organization that goes back 62 years, Mr. and Mrs. Hunt. I started our company, and we were an over-the-road trucker. We, we owned our equipment. We had employee drivers, for the vast majority of those 62 years. More recently, really, maybe let me bend back up and say, "Okay.
That's 62 years in running." Then we have our brokerage segment that we officially launched, I guess, in 2007. Shelley, so not as long of a timeline. And that was focused entirely on leveraging third-party capacity and broadening our ability to offer solutions to our customers for a variety of their needs. You fast-forward, and we made technology investments into J.B. Hunt 360. It really is our operating platform. It's how we conduct business. And it largely is the way that we access the carrier community for those freight needs. That's really what birthed the new idea for us in JBT, where we didn't necessarily have to have the truck and employ the driver. How can we leverage the platform to get the power that we need? And we're going to go ahead and supply the trailer. And so we own the trailer fleet.
It's a lot like the network that we have in intermodal, where we have hundreds, 100+ thousand containers. That's our focus for JBT with our box strategy. 360 box is what we call that product. And really, only 3-4 years in, at this point, but we have seen growth. So where our truck line was pretty stagnant in terms of its revenue growth over, say, the prior decade, we've really been able to accelerate growth. It's a product that our customers are wanting and needing from us. It offers a higher level of flexibility than an asset provider only. But it also has the fixed component of the trailer, which you don't largely get in a pure brokerage solution. And so, you know, really, our brokerage model and our highway, our JBT, are focused on that $400 billion segment that Shelley spoke to.
About 50/50 is drop opportunity versus live opportunity. So our brokerage answer leads the way for us when it's a live solution. Our JBT 360 box leads the way when it's a drop solution. But there are many times where we're able to merge those two systems to create sustainable solutions for our customers, reduce empty miles, fill empty legs, so to speak, how we maneuver our network when we have to perhaps do empty repositioning that would have largely been a cost for us as an asset provider. We're able to leverage the live market so that we can move that equipment to the next destination more effectively and more efficiently. I'll make maybe just one more comment about where we're at today. It's been an incredibly difficult freight environment.
Really, in particular, in the brokerage segment, it's been very pronounced not only for us but for the industry. You know, you heard Shelley mention that we're 21 months into this freight recession. The way we look at that is, what spot rates are doing against carrier costs. And when those go negative, inflect negative, historically, in freight cycles, we've seen that last on average 18 months. And then rates start to inflect. Capacity has balanced itself against demand better. And then, you know, we're on our way on the next part of the cycle. Here we are in month 21. We've not seen that yet materially. I believe that it can't last forever. Certainly would anticipate at some point this year us see that inflect.
We are starting to see capacity leave the marketplace, maybe not at an accelerated rate yet, but it is on the decline. So I think that that's favorable. We likely will see it first inflect in a meaningful way in our brokerage segment. That's the near-term polls. What's going on right now today? Haven't quite seen that yet. We've seen little pockets of lift, but nothing with the same momentum at this point. So we're not out of the woods given the difficult backdrop of what 2023 because I know Shelley is very hopeful that that is the very worst of the worst. And I believe that it is because I do think you're going to see meaningful change throughout the year. We're just not quite seeing it yet here in February.
Got it. And I, I think you did mention that the bid season's been kind of different. Is that correct?
It's been more competitive than we expected.
Okay.
When I speak of bid season, I'm speaking about our one-way parts of the business. Primarily intermodal and JBT. ICS, not as competitive. It seems to be a little less competitive than really those other two parts of the market.
Brokerage is less competitive, you'd say?
I would say we.
More in line with expectations, I would say, than less competitive.
Well, and I mean, this is a near-term question, but I guess longer-term, ICS results have been volatile. What is the profitability target for that business? Or is this more we get much larger relationships with many more shippers, so it's worth to run, you know, break even?
No. We certainly have a profit expectation. Our targets are 4%-6%. We know that we've not been there more recently. We kind of had to go through a reset with the boom-bust freight market and the combination of our 360 digital platform. Marry that against, more recently, the unfavorability of theft and fraud and us having to really balance the tech driver of our solution versus manual processes in the near term. There's some freight we've had to pull off the platform because of high risk, high value, and manage that manually, because of the risk severity. You know, the strategic theft, these are criminal networks, very sophisticated. They've kind of bounced on the scene, predominantly where people are using third-party capacity. And they're finding creative ways to imitate.
They're finding creative ways to purchase MC numbers and DOT authorities that, that then they're able to accept tenders. Unbeknownst to us, they're the bad actor, and then the bad things happen. So doing our best to thwart that, we've had to kind of maybe come a little bit more center against our tech-leading platform versus historical manual brokerage, and, and believe that, that we're largely through that reset. And now we need to grow and scale in the investments that we make.
Okay. By the way, if there's any audience questions, just raise your hand. We'll get you a mic. Brad, maybe along those lines, is brokerage just too competitive, or is there a landscape for, excuse me, you know, a number of big platforms in the future?
I think that it creates an advantage for our customers because if you really think about our portfolio of services, brokerage will allow us to fill in any gaps that our other businesses might not be able to provide an answer for. I do think you're always largely going to see more volatility in our brokerage segment relative to cycles than you will see in the other four business units that we have that really have a deeper foundational kind of function that each of them independently. If you go all the way to dedicated, those are largely five to sevenyear contracts that are driven by economic, inflationary indexes around what rate needs to do.
So there's not a whole lot of rebidding and new negotiations all the way to that far extreme where, you know, I do believe that COVID itself drove this really anomaly-driven high, you know, heightening and then a quick decline. I mean, not many industries can endure a +40% rate quality and a -40% on the back end of that.
And oh, by the way, in that three-year, I think we all would agree that we've all felt that inflationary cost pressures are more meaningful in this last few years than they've been, at least in my working lifetime. And so that cost didn't go away even though the downward pressure because of the oversupply. So I think that, hopefully, once we get back to maybe a little bit more normal and distance ourselves from this maybe anomaly, I still think you're going to see greater volatility in brokerage, but maybe not to the extent that we've seen in the last few years.
Okay. Appreciate that. Maybe we can pull up, audience question number four. Oh, Jeremy.
I think the Department of Labor recently came out with a new standard for worker classification. I wonder if, you know, how that standard could play in further lift to the JBT ICS business model.
What was the question again? I'm sorry.
About worker classification for independent contractors.
You know, we're staying close to that. I don't think that it's going to have a material impact, in the way that it's written and the way that we go to market, for our independent contractors. Certainly, there's, there's more information that we need to understand the long-term impact of that. And it really don't come down to us what rulings. If you think about the ABC testing and, and when things get challenged, maybe we'll have to recalibrate a little bit. But at this point, based on my understanding of, of those, those new requirements, how we structure our business with our independent contractors, we don't feel like we need to make a change at this point.
All right. Can we queue up, audience question Number 4? In your opinion, what should J.B. Hunt do with excess cash? Two on the M&A at the top. Share repurchase, dividends. Is that paydown or internal investment?
Yes.
Thank you for that. And then, question Number 5?
The answers.
Sorry about that. In your opinion, what multiple of 2024 earnings should J.B. Hunt trade? We'll give you an option seven, Brad. Greater than 30. All right. And then question Number 6, please. What do you see as the most significant share price headwind facing J.B. Hunt? Core growth, margin performance, capital deployment, or execution and strategy? And, and Shelley, maybe along these lines, we didn't talk about dedicated, but that is a, a large business for you guys too. It's definitely a differentiated trucking business relative to some of the other truckload competitors, which has seen a lot of growth over the years. But I think the outlook this year is a little bit more tepid from a top-line perspective. Is that right?
Well, if you look at 2023, we had a nice sales performance year inside dedicated. Very pleased with the results. And I would say very resilient from a new customer and new startup. We sold 1,150 trucks in 2023. One of the things we did in 2023, we became very offensive in our strategy with our customers as we saw some of our customers' volume really lower than what they needed from a tractor perspective. So we went to our customers and talked to them about lowering their fleet count. That's about half of the change that occurred from a tractor perspective. And then the rest were losses in our business. But this business is the most resilient part of our company. If you looked at our retention with customers, we're at 93% retention.
You know, that has really stayed above that level for the last, oh, five to 10 years or so. And so I, I feel like that part of the business, if you looked at 2023, we did have record revenue and record operating income in DCS. We also experienced that in FMS. But in DCS specifically, we had record profits in a freight recession. Coming into 2024, we're really dealing with a balance of, of 1,150 trucks that we've sold. We had some trucks that we took out. So it's going to be difficult here, in 2024 to grow both top and bottom line as a result of that. Feel really confident about our sales pipeline and what that looks like and what our win rate is as a result, of the sales growth.
But, you know, this business tends to be a business pretty similar to the rest of our company that, in that crisis time, we tend to grow big and then kind of come out of those startup costs. Hopefully, this year, we'll have more startup costs than we expect because that will create what we internally call a wave. So what we do for this year will set us up for 2025 nicely. That's what we're experiencing here in this year.
Okay. And you guys have been acquisitive, I think, Final Mile.
Yes.
What's on the forefront for M&A?
Well, well, we did really build out our Final Mile Services, not only with acquisitions, but some organic growth as well. That really was about size and scale and also being across industries. You know, I think in 2023, you saw us really challenge the services that we provide, the value that we create, and the pricing or the returns were just not equitable for our company. We really challenged that in the market, and found really good results. It's one of the reasons they had record operating income. You know, we don't see an acquisition, today in our future. It's not to say that, that we wouldn't do it. But, we believe that we have the right scale. Now it's about building from here.
Okay. You know, long-term, you guys have historically even focused on ROIC. I don't think that has changed, right?
Right.
I mean, you are near the low end or, or below the low end of intermodal margins right now. What's the path to getting back to the return thresholds that you guys are seeing?
Well, I think I've been pretty clear that pricing in the one-way parts of our business, intermodal, JBT, and ICS, for J.B. Hunt, are unsustainable. You know, the market has to give. Our costs and the inflation around our costs, in a lowering price environment, just does not bode well from a margin perspective. So that's one thing. The other thing is, you know, we have a lot of capacity ready for when our customers are ready, to come out of this freight recession. So you'll see us, naturally gain efficiency from moving more freight and being more efficient with the freight with the current capacity that we have.
Got it. Well, unfortunately, I think we're close to the end here. Just maybe one last one on that 150,000 container fleet. What's lying in sight on when you get to that size and get the utilization you want?
You know, I mean, we've given a range of when we want to get there. We're going to be really careful and thoughtful about our approach. You know, we did look at the recession as a great opportunity for us to use our balance sheet strength, our strengths, as an organization and think about our long-term prospects to be prepared and ready. We're going to do the same thing from a container perspective. But I will say it will be through the lens of creating long-term value for our people, our customers, and our shareholders. And so any moves that we make around container purchases would have that in mind for our long term.
Great. Well, unfortunately, we're out of time. Shelley, Brad, and Brad, thank you so much for coming in.
Thank you, Brandon. Thank you.
Thank you, Brandon.
Thank you, Brandon.