Company Name: J.B. Hunt Transport Services, Inc. (JBHT) Event: Baird 2018 Global Industrial Conference Date: November 6, 2018

Transcription

1 Company Name: J.B. Hunt Transport Services, Inc. (JBHT) Event: Baird 2018 Global Industrial Conference Date: November 6, 2018 <<John Roberts, President, Chief Executive Officer & Director>> Thanks, Ben. Ben asked to do a quick 30,000-foot overview. For those of us those of you that are not familiar with our company, and so that's we'll try to do. Most of this information is already out on our website, out of our third quarter earnings presentation. In case you want to get any more details, this would be basically an abbreviated version. The obligatory, don't trust anything that I show you or say, so I can't get sued. And J.B. Hunt, basically, we have four business units. We'd like to think that they are both unique and complementary. As you can see here, they are Intermodal, Dedicated Contract Services, Integrated Capacity Solutions and our legacy Truckload business. Intermodal is our biggest business unit, basically consisting of 55% of the revenues, but almost 70% of our operating income. Dedicated is next biggest, with 25% of the revenues or 24% of the revenues and 20% of our operating income and then, ICS, which is our brokerage world and our legacy Truckload business is the last, 11% of revenue and makes up about or I'm sorry, 21% of revenue and 11% of operating income. We utilize we try to cross sell amongst all of our business units for our customers and when we get deep in their pockets and actually, use in all four business units, we have a great retention rate, which is part of our overall marketing strategy. Again, trends, this is out there on our website. We typically provide this every quarter. You can see where we continue to have an upward trend, both on revenues and with the exception of 2017 on operating income had some unique issues regarding rates, customer rates that we felt the impact from. We think that, that has swung back in 2018, and we've made up some of the ground that we lost in So we expect to see the trend line to go back on a positive direction. We kind of when we talk to people about our business, primarily our customers, we'd like to point out that we do have an industry-leading intermodal franchise. We have the largest fleet of containers available to us. We're up to about 93,000. All of our equipment is owned by us. We don't lease anything or rent anything and that includes the chassis. We differentiate our dedicated business from what is commonly referred to in the truckload world is dedicated. Our primary business target, our current private fleets that we outsource or customers outsource to us that business sticks longer. You're deeper inside your customers' business decisions and it doesn't typically swing back to the one-

2 way market, when the one-way market changes there rates to be cheaper than it needs to be inside the industry, it happens on a fairly cyclical basis. We're one of the few asset players that has a totally independent brokerage world. We don't we're not an overflow model. Our competition is just the brokers that you think about out there, the publicly held ones for the most part. And any of the asset players that want to get business through our brokerage world have to earn it. They don't get it first shot. And then we are running towards a lighter truckload model than we have typically done in the past. The goal would be about half of our power supply by third parties and half of it supplied by our own equipment and drivers. We think that has a better return focus for us from our capital that we invest, even though it's a very small part of our business. Again, just more information on why we think we're a little bit different and a little bit differentiated. And Ben, I'll let that go and then let you open it up to questions from there. Was that fast enough for you? I tired to get it under five minutes. Q&A <A John Roberts>: We were very pleased with the movement in quality of rates that we have been able to secure and needed very much. I think the company the guys that run intermodal did a really good job, getting a smooth technology implemented, that we took a long time to decide on and was pretty heavy lift. And I think, this year, it's revealing its value to us in knowing where our containers are trailer container tracking and load or unload. I think there's more for us in that area looking out. Our hiring guys have done a good job of keeping up with the demand in terms of getting drivers onboarded for our dray fleet. There's been some pockets and gaps through the year that were a little more uncomfortable, but we still have pretty rich demand there, and I think our guys are doing good job with that. We have been very pleased with service, having been for some time now. Our value proposition is an efficient model that is reliable, and the customers are paying us to get their freight there on time. So service challenges create a lots of headaches and problems for us. And I think that's that along with some of the rate dynamics have been contributing factors to a less-thanattractive growth rate for me. I'm looking for more load count adds and we have really seen that this year. So some need just kind of a some good and some things that need some improvement. <A John Roberts>: Sure. Two part answer. One is, I think, the freights out there to be converted. I think, there's highway volume that still fits the model, that's the right length of haul, origin destinations ride, the components of the load makes sense for intermodal.

3 The limiting factors currently are in part, just the rail system's ability to handle the incremental volume in a timely and efficient way. So it depends on whether we see the railroads increase their service capacities and abilities, whether or not we'll be able to convince our customers to convert their freight off the highway onto the trains. There's a ton of advantages to that, but sort of chief volume proposition, it's got to be on time. And we had some turn down dynamics that happened through the course of this year that tell me that the customers interested in moving their freight into that type of service, but because of some of these other limiting factors, we're having to say no. And man, that drives a sales guy like me crazy, when you say no to an order. <A John Roberts>: Well, I mean, overall, long-term, a railroad making itself more efficient and creating more velocity and being able to scale, if that's part of the outcome is good. I mean, reliability is the name of the game here. The short-term it's probably going to be a little bit, we use the term, disruptive. But I can't help, but think that making their systems run more efficiently should be better in the long run for intermodal. I may be wrong, but that's the best of plan, I'm going to stay with from now. <A John Roberts>: Well, we still see intermodal playing a very important role because of the efficiency it presents for large shipment quantities to move into position for purchase and consumption. A lot of conversation we've had over the last years is, what's really changed is the sort of distribution channels. We still have to take that freight and aggregate it into position of consolidation, so it can be distributed. In the past, we probably put more of that freight into storefronts, and now we probably take more of that freight to fulfillment centers. But it's all moving in similar quantities. The service and the speed are things that continue to put pressure on the need for those intermodal systems to work better. I don't see anybody going slower. So we can't assume that slow is okay. And that's really what we're talking with rail guys about it, about the need for the improved service. But for me, it's not going to put new unwanted pressure on the demand for that kind of service. It's a good way to move products into position for sale and distribution. <A John Roberts>: Yes, we've been in the Final Mile business now for almost two years, a little longer than that, if you count here. But we're focused on heavy goods focused on heavy goods delivery to people. We've been an asset-based model for a long time. In the last two years, we've realized that we also have to offer a contractor model,

4 an agent model, and we think that's in direct response to this whole e-commerce movement. Last year, we purchased a company, we haven't done an acquisition in like 26 years, and we bought a company that is a fulfillment company that we think will help us manage inside that supply chain dynamic that's changing as it relates to e-commerce. And that's a high-priority focus for the company. Final Mile fulfillment, the ability to take an e- commerce answer for delivery to point of consumption to our consumers, not in parcel. We are not interested in the parcel side of the things. So this is more of the stuff that the parcel and the LTL guys don't want to handle. There's a few players in the business right now, but we've got a good start on it, and we got a pretty decent size business running in the Final Mile system right now. <A John Roberts>: You mean operating? <A John Roberts>: It would look more like the brokerage world. I mean, it's priced accordingly. It's operated the same way. <A John Roberts>: From ATS, those guys are going to give me a number that's too low. I think that we've got to understand the size of the business, and probably expect different things from the smaller components, like Final Mile is not nearly as big as DCS. DCS is growing at a pretty healthy clip right now. That business ought to be running in the high double-digits, I think, high teens, I should say. <A John Roberts>: Conversion in some private fleet to contract? <A John Roberts>: Well. Yes, I don't think it has anything reflective on the spot prices I said I don't think anything has reflective on spot prices or anything like that, but when we convert private fleet, it's typically the cost of the private fleet versus what we charge, and I would tell you that right now, there is a lot of interest in getting out of operating their own private fleets, whether it be for driver recruiting, whether it be for risk litigation or redeployment of capital, all those things are all front of mine right now. And so then it's just weighing the cost of us doing it versus what they think they can do it themselves. The need is, full conversion is as high as we've seen it.

5 <A John Roberts>: Well, I would just see the marketplace as a continuation of our brokerage business with technology as a platform to bring together shippers and carriers. What we've experienced this year so far is a good adoption rate and good performance against the desired outcomes of how we bring those two parties together. It's the first of many phases that we have in mind for what is known inside as 360, which is a comprehensive system rebuild and launching of programs that we think enable both our shipper partners and our our shippers and our carriers to do a better job. Right now what you see in marketplace is loads and carriers matching and finding each other at a rate that's a little bit ahead of what we thought it would be. In 2019, we'll take some important steps at modernizing our back office system and finalizing the development of the marketplace and starting to launch, what we call, control tower and what we have called adviser, which are deeper thinking elements of how that freight is working together. Also inside that investment is application into intermodal, into truckload and into the DCS and Final Mile fleet. So it's a heavy lift. <A John Roberts>: That'll depend on the mix. I mean, like this year, you're seeing a high growth in volume, but that's because they targeted the LTL world, which was something that they were behind in. And so if they become and saturate is not the right word, but once they become of size in the brokerage world with LTL, they could end up seeing their volume growth moderate some because they're back to truckload or flatbed or reefer, whatever, which it doesn't create the number of loads that are out there, but definitely could create revenue per load better. <A John Roberts>: Yes, I think the more technology is utilized in that particular part of the industry, I think, you'll see gross margin shrink. And it will be up to the broker to take that smaller gross margin dollar and leverage through the technology to put the same dollar on the operating income line. That would be our goal. <A John Roberts>: Well, we're always going to be open to good ideas that fit our longterm growth path. And I think that any part of the company has the opportunity to present an idea for an acquisition to the management team committee that would consider it and then process the idea out to point of decision. We're happy with the acquisition that we made in It's doing what we thought it would do. It wasn't a Final Mile entry as much as it was a fulfillment entry. It's kind of a step back from the actual Final Mile delivery and the only reason we felt like it was better to acquire than to build is, it was up and running and as all acquisitions have that speed to market quality, it should it filled the gap for us. And yes, we would be open to other acquisitions that make sense.

6 <A John Roberts>: Well, we have said that we've pre-purchased some Tesla s, correct? I don't think we can say how many, we have not. Notice to the exchange, we think there's a lot of promise in electrification. They're we're far enough down the road to where the machine will do the job. It's the question of how does it charge and how far will it go. We certainly know nothing about its durability or life cycle, but the idea that you go from also get the number 2,000 moving parts to 80, something like that is pretty remarkable. I mean, there's a lot of physics involved in that, that are pretty important. There's a weight challenge with that equipment that's not good, but that feels like that could be managed, and over time, it will get better. I mean, remember your first cellphone, it didn't look anything like that. So I think electrification has got promise much more so than other alternative energy sources that we've talked about over the last decade, for instance, natural gas. And we've got we've already got five units in place. They're light units. They are not Tesla over the road trucks, but they're in the Final Mile world. It happened to be made through a downward part of one of their units, and we were already experimenting with those. But and I think that as the market gets wider, we'll anticipate with everybody. We don't care. Electric vehicles has legs, probably faster and definitely more practical than tons. Yes, I agree. <A John Roberts>: Final Mile and the Intermodal dray, in local dedicated fleets, it could work on. These are short haul yes, you got to come home, that truck's got to come home. And it's got to have place to get charged and we'll get some work to do on where that energy all comes from because it doesn't get to take take a pretty good amount of energy to charge that. But even having said all that, it's real stuff. <A John Roberts>: Well, it certainly has changed. And to your point, I remember working with customers on letting us use our brokerage model to help support overflow business and their answers were always you're an asset-based carrier, and I want you to do this narrow field, and I want to take the other stuff somewhere else. As we've gotten better at executing on those other business lines, customers have become much more receptive out of necessity in part. And so our philosophy is to make sure all our businesses are healthy and then become fully indifferent to where the freight moves and focus on creating value for the customer. And that is happening. We're getting more information from customer. The adviser platform that we're building and the 360 platform will help us analyze even more deeply, what's the right answer here. Is it an intermodal load or truckload is one thing. Is it a team move? Should it be consolidated? Should it be postponed?

7 And that will present more and more alternatives and options for our customers that will draw them closer to us. That will cause them to give us more information, which then we can process inside that 360 platform and study and analyze and use data science and artificial intelligence and machine learning and all the things everybody's talking about, we're seeing happen right now in marketplace as we look at hey, Mr. Customer, Mrs. Customer, let us have your business, and we'll make sure you get the best answer. And we've established a lot of trust too. So I think those things all work together to get us farther into those supply chain answers and management practices. <A John Roberts>: The rate itself, I don't think everything falls. The combination of services and the end cost of the customer probably can get better. <A John Roberts>: That was kind of cool. <A John Roberts>: From our perspective, I do think we would like for it to grow. I think, customers like the idea that we have at our disposal and can continue to grow in the trailer side. So that pre-positioned trailers are a benefit and an asset to them when it comes to their supply chain. Our view then is you service those trailers, you don't necessarily have to own the truck in order to do that. So we could either use independent contractors or third parties through our brokers world to actually move those trailers. I think that I don't want to give a huge amount of credit because the concept wasn't there, but the great trailer pool that Amazon uses is a great example of it doesn't really matter, the box has to move, I just want access to power. I don't care who owns it, how it owns or whatever. Just pick it up, deliver and move from there. And I think that we can utilize that same concept with our customers, with our truck line. It really doesn't need to be a J.B. Hunt-owned asset where they employ driver moving a box for my customer. <<Benjamin Hartford, Analyst, Robert W. Baird & Co.>> So with that, I ll wrap up. Thank you.