J.B. Hunt Transport Services, Inc.

Good day and thank you for standing by. Welcome to the fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After this speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 in 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, Vice President of Finance and Investor Relations, Mr. Brad Delco. 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 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 Kulo, Shelly 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.

Thank you, Brad. And good afternoon. Thank you for joining our call today. We all thought 2020 was a remarkable year in our history, but I'll consider 2021 as a good contender for being equally challenging. And in the midst of perpetual challenge, we have continued to see our collective resiliency and strength carry us during these unique times. Our teams have adjusted and adapted to multiple scenario changes, impacting our customer's ability to thrive. In 2021, our leaders made bold calls to increase investments in our people, our technologies, and in expanding our fleets across our asset base. We have long been committed to following a disciplined approach for all capital allocations and believe these investments are good for our customers in the long term. I can't say enough about the way every one of our team members has risen to the opportunities presented in this current environment. Accordingly, we have done exhaustive research on where we stand regarding being competitive in total compensation for our people as we move into 2022. Our team leaders have unilaterally approved comprehensive changes to our base wages, incentive compensation, and benefits. Increasing our awareness for how we approach attracting and retaining the best talent is critical to our mission of creating the most efficient transportation network in North America. The overall growth we experienced in 2021 is unprecedented, Once again, revealing the necessity of our services and confirming the approach our people take in solving our customers' challenges. We added 1,778 tractors to DCS, 6,284 containers with intermodal with 531 net tractor ads, and 2,605 trailers for our 360 box program and highway. We continue to work strategically with our equipment providers on build and delivery plans as we head into 2022. With the growth coming out of 21, we anticipate ongoing demand for all types of power and trailer equipment. We also look forward to working with our rail service providers to find improvements across all aspects of intermodal service, capacity management, and utilization. Lastly, I will comment on our efforts relating to sustainability. Over the past several years, we have worked to better understand, communicate, and advance our positioning in this important area. While we have seen good progress and have been recognized by many third parties for our efforts, we also believe we have important work to do. We are committed to our mission to create the most efficient transportation network in North America, and we are also committed to being transparent on the progress of our sustainability journey. Our executives will provide more specific information, so I would like to turn the call over to our CFO, John Kula.

Thank you, John, and good afternoon, everyone. My comments today will follow a similar pattern as our previous calls, where I'll review our recent performance on a consolidated level. I'll then provide some commentary on our CapEx plans for 2022, and as well as our approach to capital allocation. And then I'll close with some thoughts on our financial priorities for the coming year. Overall, we were pleased with our fourth quarter performance, highlighted by growing revenues, 28%, and operating income 55% over the prior year period. We saw positive year-over-year revenue performance across all segments and positive operating income performance in all segments, except for DCS, which Nick will cover in greater detail in his remarks. As I look across our business, the common denominator in terms of our pain points continues to be labor-related in wages, salaries, benefits, and recruiting fronts in both driver and non-driver. We continue to elevate investments in our people, as was evidenced by our decision to provide a special bonus in December of nearly $11 million to our frontline workers for their efforts in working through the supply chain challenges facing our customers and the industry. Below the line, interest expense was slightly lower and the tax rate slightly higher than the prior period, resulting in gap EPS of $2.28 a share. for the quarter or a 58% increase versus the prior year period. As has been stated in previous calls, the impacts of network congestion, labor shortages, and general supply chain challenges are well known and have continued to have a meaningful impact on our business and are likely to persist, particularly given the heightened challenges evolving around COVID infections across our country. We ended the quarter with $356 million cash, which was slightly higher than planned. Last quarter, I provided you with updated thoughts on our 2021 net capex, and that would fall within the $1 billion range, which we missed by approximately $130 million. This miss was almost entirely due to supply chain delays contained to impact our ability to take timely delivery of our equipment. We remain committed to these investments and capacity to help serve our customers, and we anticipate net capex for 2022 to approximate $1.5 billion. We continue to prioritize our capital to invest in our business, support our dividend, repurchase shares, and opportunistically execute on our M&A strategy, all while maintaining a modest net leverage ratio of around one times EBITDA. and importantly, continuing to maintain our investment grade status. Before I close out my comments and in light of expecting some questions around our 2022 outlook, I'd like to provide you some context, not guidance, but context for our financial priorities in 2022. These priorities include continuing investments in our people, maintaining a strong balance sheet to support all of our planned investments, and focusing on generating appropriate returns on the capital we are investing to grow our businesses and serve our customers. This disciplined focus on the priorities enables us to manage the business for long-term growth and success. That concludes my remarks, so I'll turn it over to Shelly.

Thank you, John, and good afternoon. Today I want my commercial update to focus first on a quick review of 2021 and how we were able to deliver for our customers. I will then focus my comments on the market and how we're going to approach the ongoing supply chain challenges for and on behalf of our customers. Finally, I'll finish up with some updates on our priorities for JB Hunt 360 multimodal digital freight platform as we move forward. As we've discussed over the past year, the freight environment has been extremely volatile and unpredictable, and not just for capacity providers, but also for those that we are providing capacity for to meet their needs. In this environment, we, as an organization like our customers, have had to adapt to this disruption, and I firmly believe that our mode-agnostic, comprehensive supply chain solutions approach has been a key to help our customers over the last year, where we were able to honor our commitments, and particularly during peak seasons. Another key element of our success was the significant commitment and investment in physical assets across all of our business segments, from containers and chassis to trucks and trailers. That said, I would be remiss to leave out the most critical element of our success, and that is our people, our drivers, mechanics, load planners, and all of those behind the scenes helping our frontline workers succeed. Tying it all together, of course, was our technology platform, JBN 360, which I believe gives us a distinct advantage in sourcing efficient capacity for our customers. Simply put, our investments, people, and technology put us in a position to say yes in 2021 and has me excited for our future growth as more and more customers are leaning in. As we look at the market today and try to prepare for the year ahead, many components of our business plan and go-to-market strategy are similar to those exercised here in our recent past. The market remains challenging, capacity constrained, and unpredictable, and we will need to remain agile in our approach to securing capacity for our customers. Some unique areas I see impacting capacity is the ability to source new equipment, which is likely to keep used truck prices elevated, and as a result, small carrier rates as well. I see customers wanting to lock up more capacity in dedicated arrangements, and lean into technologies that drive efficiency in their supply chain and how they procure capacity. As an organization, we see tremendous pent-up demand to convert highway freight to intermodal with elevated truck rates, the tight labor market, higher fuel prices, and a 60% improvement in carbon efficiency intermodal offers versus truck. Needless to say, 2022 will present us with many opportunities to grow, and we will approach the market similar to how we always have, serving our customers as our top priority while maintaining sound financial discipline. Finally, as I look at the investments we've made building out and scaling JVM 360, I continue to be encouraged where we are relative to our long-term plan. As we have discussed, user activity and engagement continue to accelerate and break records across both carrier and shipper platforms, solidifying the value of optimizing and transacting in real time in a frictionless process. As we look ahead to this year, we see opportunities to further acceleration as we continue the rollout of our new automated tools and to drive even greater efficiency in our organization and higher service quality for our customers. These tools will enable, enhance, and leverage our people and core technologies to drive more efficiencies in the marketplace, which gets us even closer to our mission to create the most efficient transportation network in North America. To wrap up, we continue to uncover innovative ways to accomplish that mission, including the collaborative work with Google and the recently announced strategic alliance with Waymo, where I see tremendous opportunity for us to explore solutions that merged two of the most innovative companies in the transportation industry, autonomous driving and our multimodal digital freight platform, JB Hunt 360. That concludes my comments, and I'd now like to turn it over to Nick.

Thank you, Shelly, and good afternoon. Today I'm going to review the performance of both final mile and dedicated segments, as well as provide some thoughts on the priorities for these businesses as we move forward. I will also provide some updates updated thoughts from an operational perspective on our ability to source equipment and some updated views on the driver market. I'll start with Final Mile. As we have discussed over the last several quarters, we have been focused on making the right investments in our people and processes to ensure a high level of service quality and execution for the safe and timely delivery of our customers' products into their customers' homes. That trend continued in Q4 as service quality and safety will be a cornerstone to the long-term growth and success of our business. These investments, labor challenges, as well as supply chain disruptions for some key markets that we serve have continued to weigh on margin performance in the most recent quarter, in addition to some start-ups for some newer accounts. As we set out to differentiate our service product, We've also set out to demonstrate the differentiated value we bring to our customers and the market. We believe some of that differentiation is being recognized as we are coming off our largest sales year for new business in 2021. That said, in the coming months, we do expect to put some business at risk as we focus and put even greater emphasis on generating the appropriate financial returns on these investments. Going forward, we continue to see a solid pipeline of organic growth opportunities with potential to supplement some of that growth with small tuck-in acquisitions as a way to build out our service capabilities and customer list. Shifting to dedicated. Our dedicated business continues to have a lot of momentum as our backlog and pipeline for new businesses and startups continue to build to record levels. Despite the onboarding of nearly 1,800 new trucks in 2021, In terms of truck sales, we sold over 2,500 trucks of new business in the year, a new record for us, or an incremental 663 units specifically in the fourth quarter. Historically, we have shared a target to sell 800 to 1,000 trucks per year, and at this point, we feel it's appropriate to update that long-term target to 1,000 to 1,200 based on our team's ability to execute. As planned or expected, these startups do put near-term pressure on margin performance, as does elevated driver pay and recruiting costs, and specific to the quarter, the special bonus we provided our frontline employees. But we remain confident in our ability to price and manage each of our accounts to the appropriate levels of profitability and returns, which should reveal itself in the coming quarters. In terms of priorities going forward, we will remain focused on the execution of our growth plan, as well as maintaining our culture for operational excellence, high service and safety while maintaining through some challenges around a modestly less experienced team as our pace of growth has been robust. Closing out with some operational updates. As you could tell by my dedicated comments, there's a lot of momentum which has us put additional pressure on our organization to source both drivers and equipment. I would say that both the truck and trailer market as well as the driver market remain extremely tight and does give me some concern for our ability to execute on our growth plan to meet the demands of the business. That said, we are working closely with our OEMs to get delivery of product and continue to recruit tirelessly to meet the driver demands across our organization. That concludes my remarks, so I'll turn it over to Darren.

Thank you, Nick. Good afternoon, everyone. Today, my comments will recap the performance of our intermodal business and and specifically the fourth quarter. I will also provide an update on our significant investment to expand our capacity with our equipment orders and finish up with some thoughts about the outlook for the business in 2022 as we anticipate strong demand for our services as a result of our investments and the value of intermodal in the truck-to-rail conversion equation. I'd like to start by reviewing our recent performance. Demand for our intermodal service remained strong in the fourth quarter, but similar to recent trends, wasn't reflected in the volume performance for the business as network congestion and restrictions hindered a large amount of our potential capacity. That said, I am proud of our team and its ability to onboard the equipment available to us to ensure that we met the commitments to our customers during their peak period of demand. On a positive note, we did see improvements in the quarter in parts of the network, specifically the speed in which customers were able to turn our equipment. However, those improvements were effectively offset by further deterioration in other parts of the network, namely rail velocity. For the quarter, box turns achieved minimal improvement from the third quarter. Needless to say, lots of work remains to be done. As a result, volumes for the quarter were down 3% year over year, and by month, volumes were down 4% in October, down 3% in November, and down 1% in December. The onboarding of new equipment was slower than we anticipated, taking delivery of only 2,700 units in the quarter and approximately half of our 12,000 orders for the year. Naturally, this will push more units into our delivery plan for the first half of 2022. This investment in additional capacity and the corresponding investment in additional trucks and chassis, and most importantly, our people, puts us in a good position to serve our customers and focus on growth in 2022. In addition to these investments, we continue to work closely with our customers and rail service providers to improve velocity in the system to unlock the latent capacity in the networks. Predicting the exact timing of improvement in the network fluidity is difficult, particularly in light of some of the more recent disruption caused by new COVID cases impacting our own and our customers' operations. As we look forward to the year ahead, and similar to what you've heard earlier, we are optimistic about our opportunities to grow the business. We have executed a plan that puts us on a solid growth trajectory. based on items within our control. Consistent with our strategy historically, we will focus on striking the right balance between volume and price while maintaining our financial discipline on targeting appropriate returns on our business. Of course, returns and margins are impacted by items like velocity and asset utilization, which will also be a key component in terms of how we manage the business as we progress through the year. In anticipation of questions on both volume and margin expectations for the year, my answer is it depends, but know that the business will be managed to protect our investment and our returns on that investment. In closing, Intermodal's value proposition remains strong, supporting our view of long-term sustainable growth. We continue to see... ample opportunities to convert highway freight as well as transloading freight 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.

Thank you, Darren, and good afternoon, everyone. I'm going to cover the performance of highway services, which includes both integrated capacity solutions and truck. But before I do, I would just like to stop for a second and thank all the members in ICS and JBT for how they continue to rise to the occasion to deliver on behalf of our customers, particularly during what was another tight and capacity-constrained peak season. You've heard us talk now for quite some time about how we plan on leveraging our investment in our people and our technology to support rapid growth in this area of our business. And as I look back on the past year, I couldn't be more pleased with how this team has responded to deliver on that statement. I'd like to first cover ICS or our integrated capacity solution segment. We delivered $739 million of revenue in the quarter with year-over-year growth of 26%. This growth was driven primarily by an increase in revenue per load as total loads were down 1% year over year in the quarter. Truckload volume was up 3% versus the prior year period. Going into peak, we felt like our volume comps would decelerate based on our rapid growth a year ago from third to fourth quarter, in addition to some of the discipline we instilled in our bid strategy earlier in the year, which combined with scaling and productivity benefits is reflected in our profitability improvement. As we look forward, I know our teams are excited about the rollout of two technology enhancements this year that will enable greater productivity of our people and greater service for our customers and carriers, which will support our growth and scaling of the business even further. To close out my comments on ICS, I would like to establish some priorities for the year, which include continuing to invest in and leverage our people in technology, Focus on operational excellence so customers and carriers have a world-class experience utilizing the J.B. Hunt 360 platform and create value for customers and carriers that would support further market share gains. Shifting gears now to truck or JBT. Revenue grew 85% year-over-year to $259 million, while operating income improved to $26 million in the quarter, and delivering results this segment hasn't achieved since 2005. I think it's important to highlight that our go-to-market strategy has evolved as the makeup of our truck service offering has continued to gravitate to a more asset-light model. I remain encouraged by our ability to disrupt the traditional way of serving customers in this segment to discover new and innovative ways to scale into the large addressable drop trailer market that has normally been served by the large asset-based carriers. By leveraging the power and investments we've made in our JB Hunt 360 platform, our people, and building out our 360 box network and capacity, we are positioned for growth as financial returns support our strategy and further investment. Similar to ICS, these investments will focus on building out further capabilities with our technology, investing more in our people, and investment in our physical assets, which in this case is additional trailing capacity. We will continue to maintain our discipline on our capital allocation in this area of but I am encouraged by our progress and the opportunities for long-term sustainable growth in the segment. In closing, we continue to see a lot of opportunities in our highway service businesses to provide an efficient source of capacity for our customers by leveraging our investments in our people and JB Hunt 360, our multimodal digital freight platform. As I said last quarter, much work has been done, but much more remains, and we will stay focused on delivering on our mission to create the most efficient transportation network in North America. That concludes my comments, so I'll turn it back over to the operator to open the call for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Per company request, please limit your questions to just one question per person, no follow-up questions. Again, please limit your questions to just one question per person, no follow-up questions. Your first question will come from Scott Group with Wolf Research.

Hey, thanks. Good morning. Let me see if I can squeeze a few into one. Darren, just on the container count, it sounds like 6,000 containers getting pushed into first half of the year. Are you adding additional containers beyond that in the second half of the year? Where do you expect to end? And then just from a um pricing and margin standpoint any directional color on on how much of the yield is is accessorial and um as long as this environment stays tight like this now that you're above 12 from a margin standpoint you think you'll stay above 12. well my goodness scott you managed multiple questions there um and good morning to you too scott i don't know where you are but if it's morning there i'll probably want to be hanging out with you

So listen, yeah, we're not satisfied with the flow of the new equipment in the fourth quarter. Certainly delays in the transportation of that equipment impacted us, and that has pushed 6,000 into 2022. We are going to add capacity in 2022 beyond those. We're not prepared to release a number like that today. As it relates to accessorials and whatnot, you know, I anticipated this question, of course, and I really only want to answer it one time today. We're not going to tell you how much was accessorial and how much was core pricing. We set out, I think every time I've been on an earnings call, I've talked about our focus on pricing to return profile. That continues to be the case. Certainly in 2021, we experienced some unusual characteristics and the equipment utilization was hampered and we took action and certainly that is part of our results in the fourth quarter. But we also had meaningful costs to recover in the pricing cycle last year. 2020 saw really significant cost increases that we experienced and we were able to communicate that with customers and certainly recovered some of those costs. We certainly have additional pressure on driver wages and we're constantly talking to both our customers and rail providers about the need for velocity improvements in our assets. So, as we have always done, we will price for a return profile. There are probably times if utilization of our equipment is is difficult, it may require a slightly higher margin because utilization is hurt. But certainly as we can get benefits or better velocity on the equipment, maybe the same margin requirement isn't there. You know, we issued long-term margin guidance of 10 to 12. And for the calendar year 2021, we hit an 89 OR and 11% margin. So we're right in the middle of our long-term guidance. And I certainly would anticipate in 2022, we're able to continue growing while also pricing in an effort to recover cost exposure that we have.

Your next question comes from Allison Poliniak with Wells Fargo.

Hi, good morning or evening, I guess. On J.B. Hunt 360, you know, it's certainly a unique environment and the business has grown or the technology has expanded. Has this environment at all altered? I know you're talking, you're in that path of its long-term goals, but has this environment altered kind of where you want to take that, you know, offering as you go forward? Is there new opportunities or needs that are out there that you think you could pursue with that?

Hey, good morning and good afternoon. This is Shelly. I'll try to take that. You know, certainly the more that we are working with our customers and transportation providers, the more opportunities that we are seeing. Hence the announcement we just made recently with Waymo. I think that there is a great opportunity to eliminate the inefficiency that's happening in the market. Our customers are helping us drive that strategy. Our carriers are helping us drive that strategy. As we said in our opening remarks, we are pleased with the progress. We are ahead of schedule, but we do have new ideas on the roadmap and continue to want to explore those ideas. And anything that's logically adjacent, our customers are asking us and that we can implement give a proper return to. It's something we're going to investigate and continue to move forward with our mission.

Your next question comes from Justin Long with Stevens.

Thanks. I wanted to ask about the $11 million special bonus. Could you give us some additional color on how that was spread out across the different segments? And then in dedicated, as we look at margins and how they've progressed sequentially, And that bonus may be part of the 4Q decline, but I'm guessing a lot of it's coming from the significant amount of fleet additions you've made sequentially the last couple of quarters. So as we think about the growth in dedicated going forward, at what point do you think we can get back to that targeted margin range of 12 to 14%?

Hey, Justin, this is Brad. I'll give you the numbers and then kick it over to Nick to give you the response to the second part of your question. Intermodal JBI, the impact was $3.4 million. DCS, the impact was $5.9 million. ICS was $100,000. FMS was $900,000. And JBT was $400,000 for a total of $10.7 million. Justin, this is Nick.

I'll just tell you that we feel very good about our ability to operate in that range. When I look at just our base business, we're clearly operating in that range. I can't predict the future. I can just tell you that our pipeline is much larger today than it was last January. So if I could tell you when the demand will back off on the amount of ads that we have coming, I can tell you when our margins will get back down there. On the base business, there's a slight impact just from driver wages that we're seeing, just from a timing of 80% of our business has indexes in it. So the timing of when we may have to give a driver wage as opposed to when we implement That rate increase in the index could be off just a little bit. That impacts us, but our view is we take care of the customer for the long term and not put business at risk just for two or three months of rate increase. So we feel very solid about our base business and how it's performing. We're excited about the new business, that it's coming out and doing well. So we just barely got outside the range for the year, so I think that's pretty good. If I look at that with adding over 1,800 trucks and selling over 2,500.

Your next question comes from John Chappell with Evercore ISI.

Thank you. Good evening, everyone. Darren, in the last call, you said that you implemented some programs to better encourage equipment turns, and then you noted earlier in your prepared remarks that you're seeing some of the benefits there, but it's effectively being offset. at some of the rail velocity, where do you think you are on these initiatives so that if rail service does, and we all hope it does, gets back to quote-unquote normal in the next month or so, you can really see an inflection in those box turns, especially as you're onboarding the rest of those 12,000 that you didn't get in 2021?

Well, I mean, certainly... We did see some minor improvement in the fourth quarter from the third quarter. But minor, I mean very, very minor, effectively flat. You know, and then we highlighted that rail velocity took a little bit of a step back in the fourth quarter. Like you said, we would anticipate rail velocity to have some improvements. I know that all of our rail providers want nothing more. than for velocity to improve, so I'm confident that the effort's underway. As that takes hold, you know, there is really significant capacity available in the market from intermodal to move more loads. The good news is demand remains extremely strong. We have customer business that we could have onboarded in the fourth quarter that we weren't able to because of a slowdown in velocity and capacity, so we remain really bullish on our opportunity to fill up that capacity in the combination of new containers coming on board and a return to maybe pre-pandemic velocity statistics. We really feel strongly that we have a lot of demand. And we see that in other parts of our business. There's business operating inside the J.B. Hunt enterprise today, then intermodal is the correct solution for. But in 2021, truckload remained a solution. Maybe it was a transit time requirement for that customer or a lack of capacity in the market from intermodal. But both of those factors play a role in a lot of confidence we have as the ability to grow as velocity improves.

Your next question comes from Amit Nahotra with Deutsche Bank.

Hey, thanks. Darren, just on intermodal volume, is there a better opportunity to access rail capacity on the BN this year because of maybe some of the market share shifts that have occurred? If you could just talk about what impact that has, if any, on your ability to grow volumes. And then I just wanted to follow up on the pricing question earlier. You talk about cost and pricing for cost, but obviously, it's a very tight market. fuel costs are up. I'm just trying to understand what you think the market-based pricing opportunity is this year, and do you think that market opportunity allows for double-digit pricing growth for contracts that come up in 2022? Thank you.

Okay, well, you know, the market is going to answer that question for us. We're certainly always out there competing. We're aware of, you know, prices that are winning business and we're aware of prices that are losing business in the competition. And so certainly if the market presents an opportunity for double-digit increases, I would tell you my experience always says that without cost increases, it's not likely that double-digit rate increases present themselves without significant cost pressure. It would be I would consider it highly unusual for our rates to climb in the double-digit range without corresponding cost challenges coming at the market. Those are going to dominate with driver wage predominantly, but certainly the asset utilization is also playing a role.

And Amit, what was the second part of your question? I'm sorry. Did we address both of them? Capacity.

Oh, capacity on BNSF. Let me just, you know, we're aware of another channel that certainly left BNSF and went to Union Pacific, and certainly that presents an opportunity. I mean, those lifts were occurring on BNSF. We're aligned with BNSF in a growth strategy. We have discussions with BNSF daily about our efforts to grow together, and we have a lot of focus in that area in 22.

Your next question will come from Jason Seidel with Cowen.

Hey, thank you, Robert. Good evening, everybody. I wanted to look a little bit at the volume growth on the intermodal side. You know, clearly you were impacted by some of the congestion on the rails and the supply chain. If you would have to put it into a numbers context, what percentage impact would you think it would have on the volumes in 2021? I'm just trying to frame it so how we can think about it. This clears up what kind of opportunity presents itself in 22 and beyond.

Hey, Jason, this is Brad. I mean, I'll take a crack at that, but, you know, we don't give specific targets or guidance or, you know, haven't set an expectation on what realistic intermodal turns are. But if you, you know, assume we've been running mid 1.6 to low 1.6 on monthly box turns and assume, you know, I don't know, 185, which is probably where we were running pre-pandemic. That's probably an approximate way to get to a number that says what the opportunity is if we got back to those pre-pandemic velocity levels that supply chain was moving from both a customer and rail capacity service perspective.

Your next question comes from Ravi Shankar with Morgan Stanley.

Thanks, everyone. This is not a 2022 guidance question, I promise. But just on ICS, is that now structurally a 3% to 4% top margin business, irrespective of what the cycle does, or if spot rates do roll over next year, could that margin be under pressure? And also just a follow-up on the assessorials. Can you confirm with the assessorials, again, I know you weren't quantified, but was it higher or lower sequentially in the fourth quarter relative to the third quarter? Thank you.

Okay, Rob. I'll start and maybe let Darren speak to the assessorial component there at the end. This is Brad Hicks. You know, we don't give guidance. I do think that if you go back in the last – Two full years, we made substantial investments in the business, both in people and technology that will allow for scale and leveraging of the platform. We continue on that journey. We are satisfied with the progress that we've made, but we still have work to do. So I would anticipate that we would stay on a positive trajectory as we go forward because we are seeing the benefits of the tech investments both through leverage, through efficiency gains, and I think you can see that from our overall growth and results over the last several quarters. And so we're certainly encouraged, but as I said in my prepared comments, we're not satisfied yet, and we have work to do, but I do think that we've continued to show progress and will continue to show progress towards our long-term objectives.

On the accessorial question, sorry, Ravi, we're just not going to answer that question.

Your next question will come from Brian Ostenbeck with JP Morgan.

Hey, good evening. Thanks for taking the question. I wanted to see if you can just give us a broader perspective of the challenges In labor, hiring, retention, I think it was mentioned you made some pretty significant changes across multiple areas. So it may be helpful if you can run through some of the availability and wage pressures and challenges that you're seeing across the warehouses, terminals, drayage. And then specifically, it sounds like dedicated might be more of a short-term impact with some of the unseated truck challenges you have right now, which seems to be somewhat unique for a business that's been growing pretty well the last couple of years. Appreciate the color. Thank you.

Hey, Brian. This is Brad. I'm going to let Nick address the driver side of that and then Shelly kind of address the broader organization side of that question.

I'll go. Yeah, driver wages are significantly pretty much in every division. Again, we don't do anything across the board. It's by site, by location. But our cost per hire is up. We've seen higher sign-on bonuses. And the market is very, very difficult. With the drivers being out there facing COVID, we have a higher percent of our fleet with COVID right now than we've had at any other time. They're not as severe, but more off. So we're seeing impact on that. We're seeing impacts on our orientation because of COVID on schedule versus what actually shows. So we're seeing some short-term impacts there. But we think we've addressed the driver market pretty well. But it still takes a little bit longer to fill up trucks in our startups when we start up, even if they're priced appropriately. And with as many as we have starting up, that's continued to be a challenge. So the other thing is just on the tech side, we're facing a lot of pressure on the maintenance tech side in the shops as well. And that affects some of our turn times. and getting equipment turned so there's just constant new challenges that we're facing all the time around wages and we're facing some wage pressure in the shop as well that we're addressing so i'll talk that that'll do it for me i'll let shelly talk about the office side of things yeah when we look just comprehensively around all of our labor challenges we really moved from a defensive mode with what's happened with covid to an offensive mode

And it's really allowing us to move forward and think about the investments we need to make for growth for our customers. So we've looked across all of compensation and starting with our benefits package. And there were specific changes that we made to our benefits as well as total rewards, whether that was in benefits or also what happened from a short-term cash incentive to also long-term incentives as well. And so we've had a more comprehensive approach. really probably for our first time in quite some time across the entire organization from drivers to our maintenance technicians and our office employees. We are leaning in. We're on the offensive side of that, really preparing for growth inside all of our segments and in all of our support groups. So it's something that we see happening here at the first of this year. We've been investing into our labor all of last year, but as Darren talked about our cost and us really trying to line out our price to what's happening in cost. We've tried to be offensive in that to make sure we have drivers, make sure we have our maintenance technicians, and make sure that we have our office employees ready, equipped, and available to help our customers.

Your next question will come from Chris Weatherby with Citigroup.

Hey, thanks. Maybe for Darren, can we talk a little bit about the fleet again and then our modal? I just want to get a sense of Based on what you're seeing on the ocean today, how many boxes do you think you might expect in 1Q and 2Q out of that 6,000? I know there's a lot of variables out there about 2022, and that's fine. Given how strong the demand environment sounds for intermodal services, assuming you get the boxes and you have some greater fluidity in the market, how many boxes would you want to grow beyond the 6,000 in 2022? What would be what you see like the market opportunity for you that you could grow into?

Man, Chris, that's the magic question, isn't it? So we have, uh, we, we certainly, um, we have a meaningful percentage of those 6,000 that are literally on vessels, either at anchor waiting to unload or in some form of transportation. I don't know that we've decided yet to break out how many, I think it's a fair assumption to just spread those uh six thousand more or less evenly over the first half of the year if we can move them in faster than that we will i'm aware that i've given uh direction on this call for the last two calls of of equipment count expectations and we haven't met either of those so i don't want to give too much uh out there but certainly we're trying to get all of that equipment here just as as soon as as we can you know i think that um with all of the talk of velocity challenges in 2021 we're going to be a little bit careful watching what comes from velocity improvements i mean there is really a lot of growth capacity in the system we have today plus the 6,000 boxes yet to be received, we can really grow a lot. We have a lot of confidence in our rail providers and our rail network and our ability to grow business there. In the event that velocity can't improve, then certainly we have to go buy more equipment in an effort to grow at the same pace, but that will come with sort of new challenges. So I don't have an answer for you on how many we would like to have, We'd like to have as many as we can fill up, to be honest, and there's no great answer to that question, but certainly we have tremendous growth opportunities with our customers. We're confident in the demand equation out there, and we know that if we can improve velocity, we can grow in a hurry, and in the event that we can't improve velocity, then we'll have to go secure more containers and grow that way.

Chris, can I take up one level just for our customers overall? I would say demand is very strong across all of our services. And so whether it's in container ads, 360 box ads, or ads in dedicated or final mile, our customers are asking us to grow. We're really walking through either bid season or communication in those conversations in dedicated and final mile to help us determine what we should do. And then we want to have a balanced approach, making sure that we You know, do what we say with our customers, honor our commitments, and grow as much as possible with proper financial returns. So bid season so far has gone well. We'll continue to get through bid season to help us refine what that can look like across all of our segments.

Your next question will come from Jordan Alliger with Goldman Sachs.

Yeah, hi. So curious from a very high-level standpoint relative to, let's say, I don't know, early December. Are you – would you say you're more or less optimistic on the whole supply chain congestion issue easing, let's say, over the first half, or does it just keep pushing later? And then just a clarification on dedicated fleet, given what you said on purchases and sales. Are we looking at the dedicated fleet down in 2022 versus the fourth quarter of 2021? Thanks.

Yeah. Hey, Jordan. This is Brad. I'm going to ask Shelly to address the first part of your question about our view on, just to rehash your question, our outlook on the supply chain today versus maybe where it was early December. And then to the second part of your question about dedicated and fleet additions, I'll let Nick address that.

So I would say throughout all of 2020 and 2021, when we would make a prediction, typically we were wrong. And so although I would like to be optimistic, I think this latest round of COVID has caught everyone by surprise. So I can't say that I feel optimistic about the supply chain challenges going away in the near term. You know, we're focused on making sure that we help our customers be right. to help them smooth out their supply chain challenges and that we're there for them. I would say anytime there's more crisis in the supply chain, our mode agnostic solutions really come to the forefront because we're fairly indifferent as to how we solve for our customers. We wrap around our customers, solve for yes, and then continue to move business. So for us, we're gonna be there for them. I can't really say if we're optimistic or not because I'm not certain what lies ahead, but we are planning for that. On the offensive side, as I said earlier, on equipment, on people, and on technology, we think we can serve our customers best, even more so this year than last year.

And I will just say that we sold 2,500 trucks and we started about 1,800 of them. And so that means we've got a significant amount to start already in the hopper before we sell anything this year. We are waiting on some trailing equipment to start some stuff, but we're holding trades and doing various other things on the power side. So I would say Q1 is going to be just like the last two or three quarters for us. Right in that ballpark is where we think it's going to be from a number standpoint.

Your next question comes from Ken Hexter with Bank of America.

Hey, good afternoon. John, you mentioned CapEx about, I think it was about a billion and a half. If you're at what net 877, you said 150 million rolls over. Can you kind of walk us through how you get to the billion and a half where, you know, how you see that step up? And then Brad, just real quick as a cleanup, I think you mentioned some new tech at ICS. Should we expect cost to step up there and see margin pressure or is that just blended into the cost?

Hey, Ken. This is John. I'll give a little bit of color on the CapEx. We're not really in a position to give too much detail, but of the 1.5, I would say around 10% is for general corporate purposes, building enhancements and things like that. The rest is probably split evenly between trucks and trailing equipment, and by trailing equipment, I mean containers, I mean dedicated trailers, and also 360 box. So that's probably around $700 million. And then the rest is on tractors, and that's another $700 million. And again, not going to give too much color on that, but that includes both replacement and growth for 22. And I would just like to add, we did comment We gave some guidance for the last couple of quarters on what we thought CapEx would be. We've also given for full year 2022. That's based on both what we want to order, but also what we think we can get. And so there's certainly a lot of noise and uncertainty as the OEMs are trying to meet their plans and get us the equipment we need. We'll continue to update on our progress there. But just know that there's risk in that number based on what we can get in and place in service.

And then, Ken, on part two there, you know, the technology enhancements, it's really on the tail of the investment that we have been making. And what I'm referencing there is that we will be deploying some internal tools that will allow and should allow for our people's productivity to be improved, which we would expect will allow us to – advance our strategy as we move forward. And so I'm just really excited about finally getting done with some of those tools that we're going to be able to utilize to make better decisions, to make decisions faster, and to enhance overall productivity of our workforce.

Our next question will come from Tom Wadewith with UBS.

Yeah, good afternoon. I wanted to ask, I think, you know, it seems to me like there's a pretty consensus view out there that there will be some supply chain improvement through the year. You know, I share that view. I wanted to get your sense of what if that's wrong and, you know, we don't see supply chain improvement and you kind of have a repeat of 2021 where things are pretty congested through the year. What does that look like for J.B. Hunt? And then just maybe a short second question.

you know what's your best read on gross margin percent for ics in 2022 should we kind of think of it as stable as maybe the base case or any any thoughts on that thank you i feel like i've answered some of this before i think we're in a great position for our customers we did make the call early in 2021 to add more equipment to lean in and you're seeing that equipment now starting to come online so I think we're in a great position with our customers. We're going to continue to be very close with them and make sure that we can answer whatever our customers' needs are. In 2021, more than any other year, I saw us be able to move freight for our customers that wouldn't necessarily have moved in that mode or that type of shipment in the past. When a customer had a shipment, we could say, yes, JVM 360 allowed for a lot of that, but also the interconnectivity of all of our segments. working very closely together, understanding where capacity was at and how we could help our customers. I don't see a lot of negative impacts for our organization if it were to stay congested as is. We are already set up for the as is and we're continuing to talk closely with our customers. When you say that there's consensus that it's going to get a lot better, I'm not sure how much that consensus is optimism versus reality. And I think that that's really key questions that we're asking our customers. Certainly, we want to help our customers get better. We want to help them be more planned and help them reduce costs in their supply chain in total. But if nothing changes from today, we'll continue to lean into our customers. We'll continue to ask them how we can help them more. And we will make more bets on how we can help them through our people, technology, and our equipment.

And then, as we've stated, we're not interested in giving guidance around what our return expectations are for the year. I think that we're early in mid-season. We're going to need to see what the market does and how it continues to respond to the work that we have been doing. If you look back over the last several years, going back to 2018, I'm at least encouraged that we've returned closely to a profitability level we saw before the heavy lift tech investments, but we're not inside of our desired long-term range yet at this point. So we're working every day. The technology that I just referenced is hopeful to aid us in that, and we would anticipate and expect to continue on our journey towards the 4% and 6% range that we've stated previously.

And we have time for one more question, which will come from Brandon Oglenski with Barclays.

Hey, good evening, everyone. Thanks for putting me here at the end. So Shelly, I guess if I could just follow up on that, or maybe for Brad, you know, it looks like headcount is actually down in ICS and, you know, core truckload growth, maybe 3%. Can you just talk about the market dynamics there? And has this reached, you know, more of a level of maturity that we were contemplating, you know, maybe a year and a half ago? Or is there still a lot more to go on that platform?

You know, really what it comes down to is that the headcount that you see there is direct to the business. And because of how we've managed and restructured over time, There are some headcounts that support the business that are not inside of the BU. And so I would say that obviously we're leveraging technology in an effort to grow headcount at a disproportionate level to the growth of the business. And that's really what our focus is. And we're satisfied with the progression we've seen there. Perhaps the numbers that are published aren't entirely revealing of the total headcount inside the organization that supports the business.

And this will conclude our Q&A session. I would now like to turn the call over to CEO John Roberts for closing remarks at this time.

Thank you. And I'd like to first say I appreciate a much more balanced discussion here today. Though we still have work to do, I kept a little score here on the questions that that we're asking for our different leaders. And I am encouraged and we'll continue in that vein. You know, I would say the two big takeaways are that the businesses are all lined up, well positioned, look to grow, look to continue the momentum that we have. And then collectively, because of that individual strength, we have a compounded strength I like the question, what if it doesn't get better? And when Shelley was answering that question, I was thinking to myself, okay, so that means we keep doing what we're doing here. We've learned how to do that. But if you look at the strength that we're demonstrating through this pandemic, through this supply chain disruption, with really a fairly simple focus on invest for customers, serve customers, generate the right amount of return, and then invest for our customers again. We don't really have a predisposition to one element or another as we continue to move down this road of being agnostic. We just want to answer that question. And I think our momentum with the customer base is continuing to gain strength, that they appreciate that we will invest for them in equipment. They appreciate that we will pivot away from and equipment investment if a better answer presents itself. So, you know, closing out the year, we were thrilled with the year, we were thrilled to get to pay our people a special bonus. And I just close by saying that people focus is really where it's at for us. I've never seen the kind of exhaustive work that we've done this year to understand our position and balance that against risks of not taking action versus taking action and then thinking about how we need to make those investments return for us the same way that we think about our assets. But we have great tech, we have great assets and equipment, but our people are the difference. And I know that's a little bit cliche to some of us, but I'm telling you that when it gets down to push and shove, our folks are going to be there and they're going to get the job done. What will this year bring? We'll see. We thank you for your call and your attention today.

This concludes today's conference call. Thank you for participating. You may now disconnect.

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