J.B. Hunt Transport Services, Inc.

Greetings. Thank you for standing by. Welcome to the J.B. Hunt First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Brad Delco, Vice President of Finance and Investor Relations. Please go ahead.

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 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'd like to introduce the speakers on today's call. This afternoon I'm joined by our CEO, John Roberts, our CFO, John Kulo, Shelley Simpson, our Chief Commercial Officer and EVP of People and Human Resources, Nick Hobbs, our Chief Operating Officer and President of Contract Services, Brad Hicks, President of Highway Services, and Darren Field, President of Intermodal. At this time, I'd like to turn the call to our CEO, Mr. John Roberts, for some opening comments. John?

Thank you, Brad. As we discussed during our last call, we entered 2021 with a cautious but informed positive outlook on what we could expect in terms of demand and inventory replenishment needs from our customers. Aside from the temporary disruptions presented by weather events in February, most of the data supports a generally optimistic view of those expectations and encourages our direction going forward. As we evaluate current market conditions and the needs of our customers, we have determined that an increase in our capital investment plan is warranted. Accordingly, we are announcing a 40 percent increase in our originally stated plans to enable the procurement of incremental containers trailers and the needed supporting equipment, such as chassis and tractors for JDI. The new projections for our capital investments now reach $1.25 billion for this year, a clear milestone for our company. We have secured contracts to increase our container fleet by another 6,000 units in 2021 for Intermodal, bringing our net addition target to approximately 12,000 units for 2021. a little over 1,000 of which are temperature-controlled containers. We are also increasing our trailer fleet and highway services by 1,500 units, bringing that total fleet expansion to 3,000 for 2021. All of this equates to just above an 80% increase to our original container growth plan and a 100% increase to our trailer fleet expansion plans for our 360 box programs. John Kulo will add his comments. on our capital expenditures in his remarks. Let's discuss margins. After announcing our plans to issue clarification for all segment margin targets during our last call, and with the understanding that we have had these margin goals under specific review for over a year, we will re-establish our targets with you here today. For Intermodal, we lower our margin goals from 11 to 13 percent to 10 to 12 percent. The fundamental reason for this structural change is that it presents the company with the ability to grow with and serve our customers while also generating an appropriate and sustainable ROI fee. As a component of this adjustment, we also see opportunities to improve our asset utilization in the form of box turns per month and to evaluate our tractor and chassis ratios, all of which would be positive for the business and returns. For DCS, we increase our margin goals from 11% to 13% to 12% to 14%. While this change appears to be a step up in margin expectation, it is actually the realization of a fundamental increase in the fleet size, which allows growth and startup expenses to occur without disrupting the core business as it has in the past. Another element revealing clarity for the fleet business is the removal of the final mile activities, which require a lower margin given the lighter asset requirements. As discussed, the margins are set to provide an appropriate return for each business, and given the asset intensity of DCS, a higher margin has always been needed. For JBT, we are adjusting our margin range from 8 to 12 percent to between 8 and 10 percent. The primary reason for this change is a recognition of a lighter asset position as we focus our investments on adding trailers and not tractors going forward. We do point out that we are in the early stages of transforming this model, focused on more trailers, and will continue to evaluate the margin requirements and market support to achieve growth in the appropriate RYC levels to reinvest. For ICS, we reaffirm our long-term target margin range between 4% and 6%. And for final mile services, we reaffirm our long-term target margin range between 4% and 8%. Each segment leader will add comments on the main drivers for these margin targets and the resulting ROIC expectations going forward. Final comment from me on the availability of professional drivers for our asset-based businesses and our carrier providers is under unusual pressure currently. While we have faced driver hiring issues at varying degrees, of difficulty during previous tightening cycles, we see the current pressure being meaningfully more pronounced and likely prolonged. Shelly and Nick will add more color on our perspectives. Accordingly, we are taking some unique steps in our efforts to address this critical challenge. These include reducing the eligibility time for new driver benefits from 90 to 30 days, expanded efforts to explore new ways to train and mentor new entrants to the field of professional drivers and, of course, a comprehensive overview of driver wages and compensation. All in, we believe we are advantaged by our brand, our recruiting and hiring systems, a focus on retention, and the vitally important increasing efforts in improving our inclusion and awareness for the vast diversity currently in place with our amazing driver and field management teams. I will now turn the call over to John Kulo for his comments. Thank you, Don, and good afternoon, everyone. I'd like to start by providing a couple comments on our first quarter of 2021 from a consolidated perspective. Given the weather and other constraints facing the industry, we were pleased with our revenue, operating income, and EPS growth for this quarter, with notable achievements in our highway services revenue, as both ICS and JBT were up significantly over the prior year quarter. With respect to weather, we previously guided to a $15 to $20 million estimated operating income impact from the February winter storms. In closing the quarter, we determined this impact to be approximately $17 million, which primarily includes lost opportunities within our intermodal segment of approximately 25,000 loads. Other cost pressures in the quarter were primarily related to higher driver costs to attract and retain drivers, and higher costs across our various networks and operations due to congestion and the overall labor tightness from increased freight demand and capacity constraints. You will note we ended the quarter with approximately 550 million in cash, with this being driven in part by our review of the capital investments that John had highlighted. We had previously guided CapEx to be between 850 and 900 million for 2021, and we are now updating that to 1.25 billion, primarily driven by the intermodal container ads and the trailers for our 360 box program. This investment is supported by the current environment, but also our longer-term outlook. While not specifically included in the CapEx plans, our cash and liquidity also allows for further consolidation in our final mile businesses as opportunities may arise. With regards to margins, as noted, the conclusion of our review of our segmented margin targets was informed by the current and future state of our business segment in terms of our desired returns on capital, our revenue quality, capital intensity, and the desired market penetration rates. Other inputs to our ranges include underlying risks regarding the nature of our customer contracts, both in terms of reciprocated commitments and contract duration. Finally, from a capital allocation standpoint, we continued stock buybacks in the corner, but found less opportunity in the back half and then fell into our blackout period. While we have guided towards significant capital investment, we still anticipate continuing our buyback approach throughout 2021. A final note on COVID costs, we continue to offer paid time off or PTO to employees that have needed to quarantine. During the quarter, we committed to providing PTO to employees to allow them to be vaccinated, thereby ensuring their W2 is not impacted when needing time away from work to be vaccinated. We've been working with local healthcare organizations to host vaccine clinics at our corporate headquarters to provide vaccinations to employees, their adult family members, and other eligible community members. Together, we have inoculated more than 13,000 members of our community and are working with our field employees to provide vaccination assistance under applicable area guidelines and procedures. As a result of these efforts, we have incurred approximately $8 million in costs in the current quarter, designated as specific COVID costs, compared to the $15 million that we experienced in the first quarter of 2020. That concludes my remarks, and I'd like to now turn it over to Shelly.