JB Hunt Transport Services : Robert W. Baird & Co. 2017 Industrials Conference Transcription - November 8, 2017

Company Name: J B Hunt Transport Services Inc (JBHT) Event: Baird's 2017 Global Industrial Conference

Date: November 8, 2017

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We'll go ahead and get started. It's certainly my pleasure to introduce and host J.B. Hunt. We've got John Roberts, President and CEO; and Dave Mee, CFO, representing the company. I'm going to turn it over to John for about five minutes worth of overview of the Company, and then we'll jump into Q&A. I've got the device here for any questions from the audience here.

So, John, I'll turn it to you.

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Sounds good. By this time, usually, we've issued a little bit more color on what we think is happening into the next year. We've changed our planning cycle, so that work is still under way. It gives us a chance to finish the year and go a little deeper. What we want to give you today is just some kind of goals and big rocks.

The first one is pretty straightforward, and it's kind of back to basics. It's a historically sound point of view for us, but we have been able to keep cadence between our revenue and our earnings and our earnings per share, and that's something that we're very focused on going forward. There's been a number of variables through the course of the last couple of years that have interfered with some of that as a strategy. But as we have done we think a disciplined approach to the work we do warrants consistency in this area.

So, that's something that we're calling out and holding ourselves accountable to going into the new year. Some investments have been made in our fleet, particularly in our Intermodal container fleet, with regard to tracking. We think that there are a number of opportunities here that present themselves that we need to capitalize on, and they will not only give us better costing and better planning but should increase our utilization and give us a way to continue to grow this business.

Particularly in the East, we expect to see more pressure on the trucking side of things, and this is a good alternative for our customers. And so it does present us with some upside growth potential. In dedicated, we have really expanded our focus on our Final Mile business. We did an acquisition in August of a company that gives us a bigger footprint and our ability to handle big and bulky heavy goods items much closer to our customers.

We have a big plan here, and we'll continue to update you. You can see that we've got now 114 facilities, 900 trucks and the appropriate employee counts and management that go with that. But definitely, Final Mile is a big and important part of our strategy in our

dedicated business going forward, along with continued growth in our legacy private fleet conversion business.

And in our highway services, this is our truckload and brokerage business, we're sort of talking about these things together because they are really a combined effort to how we serve our customers' needs in a transactional highway basis. We've got efforts to continue to correct profitability and to make sure that we've got the right carrier mix with our own fleet to ensure that we can give our customers the services they need.

In our truckload side, we've actually also integrated that fleet of trailers with tracking, which we think is going to give us some visibility and some opportunities to continue to present capacity and better service for our customers.

And then just a comment on our technology, we called out last year a pretty meaningful change for the company to commit to a $500 million technology build. It's really three parts. The back-office and infrastructure parts are stuff you really can't see. And then the disruption and the innovation side of things are more customer-facing and help us connect our carriers and our customers and our employees together in ways that we haven't in the past.

And we're in the early stages, kind of Phase 1 of about a four phase process. We're about 20% of the spend. We did expect it will have some pretty heavy lifting in this year on the technology front. But so far, all the reads that we have on the pilots and the connectivity and the data that's being presented by this work is encouraging for us, and so we're looking forward to continuing to give you updates and grow that part of the business out. So pretty high-level of color there, and we'll just take it from, Q&A, okay?

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Perfect. So that's all the informal targets for 2018. Let's talk a little bit about 2018. Two - just two fronts. First on the pricing front. Clearly, the environment started - pricing growth has inflected and accelerating. But directionally, as you think about the various segments, let's talk about the highway services truckload and Intermodal. What's a reasonable rate growth target for the industry in both modes for 2018?

> 40%.>

We've heard a lots of anecdotal information out there. I don't know. I think - what I think is and what I am certain of is it's going to be positive. As opposed to the last two years, it's been negative. So do you put a target out there and say, 5% when you know you're going to be trying for 8%? Do you put a target out there and say 8%, and then you're going to end up having to settle? I think that the market is so fluid right now for

conversation on this date on what's going to happen throughout the bid season that is just beginning and going to go all the way through next May, I'm not sure - I know we can't, we don't have a target yet.

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Lets talk about wage inflation then. And what are we seeing right now in the market as it relates to wage inflation?

> It is that they are going out.>

Is it 5% or is it 10% And do you expect that to accelerate as we go into 2018?

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It may accelerate, it may stay the same, it may flatten out.

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So, the timing of it this year is a bit different than I think what we saw in 2014? For 2014, the market tightened up right ahead of bid season, rate growth accelerated and then driver wage inflation accelerated later in the year. This year feels a little bit inverted: driver market tightened up, we're in front of bid season, so..

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So does that put you in a position for 2018 where pricing can be real? Is that a reasonable target, a reasonable expectation that…

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John showed you that. We want revenue to grow at a pace, whatever that pace can be, both on unbalanced volume and price. And then we want to grow EPS and EBIT faster than that, which means, that yes, we expect to try to outpace our cost situation. That's certainly a realistic goal in our view. At what rate does that outpace cost inflation? It's a little early to tell.

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Let's talk about the segments, specifically. Intermodal. Some of the challenges in the third quarter, services is a big topic. What are the expectations at this point in time for rail service to normalize, to get back to a level that's acceptable?

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We at least, we are leveled off, We are hopeful and have good conversation around seeing improvement. We don't think it's, as Terry put it, it's not a quantum leap event. We're not going to jump into new territory here, but if we see steady-state improvement, continue to collaborate with our rail providers, understand where their challenges are and work with them to help get us both through that, I think we'll expect improvement, expect better service. I don't it's going to be radical, but I don't think it has to be for us to continue to do a good job in providing service and value to our customer.

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What, John, is your market growth outlook for Intermodal? Over the past decade or so it's been, let's say, 6% to 8% the market; you've outgrown the market. Some of the components to that equation have changed over the past few years. Crude oil prices have risen. Truck capacity is tightening up. What's a reasonable market growth expectation for Intermodal over the next handful of years?

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I am just forever optimistic that there's still a lot of freight that moves on highway in lanes that's Intermodal that will surpass my career in conversion. The pace of change will be dictated by the customers' alternatives and some other variables that we don't control, like truck capacity, truckload pricing, driver availability, fuel pricing, highway congestion, toll costs, Dave's been talking of some of this, this week about toll costs.

I mean, all those things head us towards an idea where there's still enough demand out there and enough opportunity to say this can be a good growth vehicle for us. And percentages are less and less interesting to me versus just raw load count, because I - the more load count you throw on, the percentages change.

It doesn't mean it's a bad thing, not necessarily. We've seen upper 100,000 numbers in net adds. We've seen just under 100,000 for our system in the last five years. And I think we are coming into 2018 with a more balanced view between rate and volume. I would like to see how our costs move against - and how those rates are responded to. One of the challenges we've had this week is really pinpointing those numbers to the questions you just asked. But when I think about it, I want to go through this first round of bids and understand customer receptivity against the alternatives and backdrop; and it also means to understand more about what's going on with cost.