Q4 2022 J B Hunt Transport Services Inc Earnings Call
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Hello, and welcome to JP Hunch fourth quarter 'twenty two earnings conference call. My name is Elliott's and I'll be coordinating your cold stacked.
If you would like to register your question Joanna presentation May do so by pressing star one on your telephone keypad.
100, <unk> senior Vice President of Finance the floor is yours. Please go ahead good morning.
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.
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 can.
Now I'd like to introduce the speakers on today's call. This morning, I am joined by our CEO , John Roberts, Our President Shelley Simpson, our CFO John Kuo.
Nick Hobbs, our COO and president of contract services.
Darren field, President of intermodal and Brad Hicks Executive Vice President of people and President of Highway services at this time I would like to turn the call to our CEO Mr. John Roberts for some opening comments John Thank.
Thank you Brad and good morning, My comments will be brief today as we have members of our leadership team here to cover specific areas of our business with more detail.
As we reflect on the fourth quarter and the full year of 2022, we have seen and experienced a cyclical shift in market dynamics that will present, both challenges and opportunities as we navigate through the upcoming year.
That said, we remain encouraged by trends from our rail providers that present opportunities for faster transit times and in turn greater service quality and value for our customers. We also see some loosening in the labor markets and some modest improvements in equipment availability.
Conversely demand for transportation service in the fourth quarter was seasonally weak as customers managed through levels of elevated inventories.
As we've discussed in the past we have confidence in the collective and complementary nature of our distinct businesses that are built to be resilient and durable through market cycles I have a tremendous amount of confidence in our people led by a 14 officers of our company that have a combined 340 years of experience.
<unk> here at J B Hunt and.
In closing our team will remain disciplined and focused on charting our course to compound returns on the capital we deploy to support our long term growth for the benefit of our stakeholders.
Now I'd like to turn the call over to our President Shelley Simpson Shelley.
Thank you John and good morning, My comments today will mirror many of the themes I shared last quarter, and we will focus on our priorities for 2023 and beyond.
If you recall, we discussed three priorities as an organization first to remain committed to disciplined long term investment in our people technology and capacity.
Second to deliver exceptional value to our customers across our entire organization and third to deliver long term compounding returns for our shareholders.
As we have discussed the last few quarters and as John mentioned, we've seen a shift in our market dynamics, but.
As an organization has not changed.
We continued to manage our business to put us in the best position for long term growth.
We believe first and foremost that it starts with our people who are responsible for delivering exceptional value and service to our customers who in turn trust us to meet their growing transportation needs.
We believe our suite of services across the Jbs squirrel provides customers exceptional value from a company. They have learned to trust over the many years and cycles.
Our challenge for 2023 and to deliver exceptional value for and on behalf of customers in this market.
In the past, we've talked about what customers value from their trusted transportation providers, which is cost service and capacity.
During the pandemic customers valued capacity, most with less weight on costs and service.
We see the shift occurring now where customers are putting more value on cost or how to save them money and on service quality as capacity is less difficult to source.
We believe our suite of services can and will present, our customers opportunities to save money with our industry, leading intermodal franchise.
Daily engineered dedicated capacity.
Our scaled asset light highway services offering and one of the largest final mile services in North America.
In closing I want to say that we're approaching 2023 with some caution around recent demand trends that remain highly confident in our ability to thrive in any environment.
We will focus on controlling what we can control managing our business with a focus on long term growth while remaining nimble.
We will compete in the market to earn reinforce and gain our customers' trust and their freight.
We are excited about the many ways and opportunities we have to deliver value to our customers, which we believe will reveal itself over the course of 2023 and well into our future with that.
Like to turn the call over to our CFO John <unk> John Thank.
Thank you Shelly and good morning, everyone. My comments today will cover our recent performance in the quarter and for the fiscal year 2022.
Also provide you a preliminary view on our capital plan for 2023.
Overall results for the quarter were mixed as freight volumes were pressured by unseasonably soft demand as compared to prior quarters of the year.
It said operating results were fairly resilient in spite of an unusual item that I'll touch on later.
On a consolidated basis revenue for the quarter grew 4% year over year, but operating income declined 13% and GAAP earnings per share declined 16%.
We incurred a rather large income statement item in the quarter for approximately $64 million or <unk> 46 per diluted share for an incremental pre tax increase and casualty claims expense.
This charge is similar to a charge we incurred in the second quarter of this year are certain claims from prior year incidents continue to settle at much larger amounts than what we have historically experienced.
For the full fiscal year 2022 on a consolidated GAAP basis revenue grew 22% operating income grew 27% and earnings per share grew 29% versus 2021.
Based on our solid performance through the year, we voluntarily paid out $8 8 million appreciation bonus in the fourth quarter to our frontline employees in recognition of their contribution to our fantastic and record year for our company.
Of note, we paid a similar appreciation bonus a year ago. So the year over year impact was not significant but worth calling out when looking at sequential performance.
We continue to focus on maintaining a strong balance sheet, providing us with ample liquidity to deploy capital to drive long term value for our shareholders. Our capital plan for 2023 contemplates between one five and $2 billion of capital for business needs.
This includes elevated levels of replacement demand as a result of equipment challenges experienced over the last two years growth capex to support investments, primarily in <unk> and Tcs and investments in real estate.
Importantly to note a large portion of our growth Capex is success driven based on our ability to secure long term dedicated contracts. This.
This growth component and the timing uncertainty is the reason for this range.
Our capital allocation plan for 2023 also contemplates supporting our dividend consistent with our long term practice as well as taking advantage of opportunities in the market to repurchase shares.
We will continue to monitor and manage our leverage target to around one times EBITDA, but are comfortable going above this level if investment opportunities present themselves.
This concludes my remarks, and I will now turn it over to Nick.
Thank you John and good morning, I'll review the performance of our dedicated and final mile segments and update you on other areas of focus across our operations.
I'll start with dedicated.
Demand for our professional outsourced private fleet solutions remained strong as we sold approximately 330 trucks in the fourth quarter, which was greater than the trucks sold in the third quarter. This brought our full year truck sales number to just over 2000 trucks, which compares to our stated target range of a 1000 to 200 per year.
Our backlog also remained strong with more opportunities in the pipeline today versus the same time a year ago.
But we have seen some moderation in the breadth of the backlog are net truck adds in the quarter declined 197 units as compared to the third quarter largely as a result of us making progress on our equipment trades as new equipment availability improved but also because some of our downsizing of fleets to match our customers' business levels.
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As we've discussed before through our CVD process, our customer value delivery.
We optimize and re optimize our fleets to present value savings opportunities for our customers. This ultimately supports our 98% retention rate of our customers as well as supports future growth opportunities with these same customers going forward, we will remain confident in our ability to demonstrate the strength and resiliency.
This business as we deliver superior value for our customers with our highly engineered outsourced solution.
Shifting to final mile.
We remain focused on improving profitability in this business by working through contracts and making sure. We are fairly compensated for the value we deliver achieving the appropriate level of profitability will support further investment needed to meet the growing needs of our customers and this secular growing segment of the market, we will continue to be.
Disciplined on our commitments and remain willing to put the business at risk to achieve the appropriate levels of profitability.
Which could ultimately influence our topline performance in this segment demand for big and bulky products, including appliances furniture and exercise equipment has moderated some as the headlines might suggest but we are seeing strength in our fulfillment business with off price retailers seeing lots of opportunities with discounted inventory in the <unk>.
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Closing with some general comments on operations.
Similar to my update last quarter, we continue to see improvements in areas around professional driver recruitment and retention, but at elevated cost we.
We are a touch more optimistic about equipment availability and 23, largely as a result of bringing in a third OEM into our mix, but maintenance cost remains elevated across the company. We remain focused on our safety performance, but are doubling down on our strategic initiatives across the company to improve performance in this area.
Given the elevated cost the industry is experiencing.
That concludes my remarks, so I'll turn it over to Dan.
Thank you Mick and Hello to everyone on the call I'll review the performance of our intermodal business in the quarter and talk about our opportunity to deliver exceptional value and capacity to our customers in 2023 and beyond.
I'll start by reviewing the performance in the quarter demand for intermodal capacity was seasonally weaker than normal as peak season activity, leading up to the holidays was absent this year.
Volumes for the quarter declined 1% year over year and by month were up 4% in October down 3% in November and down 5% in December we experienced improvements in rail velocity in the quarter and also saw some modest improvements in customer detention of equipment on a sequential basis.
That said, we still believe we can see further progress on both fronts, which will further improve velocity and decreased transit times in our system. We believe the current trends around velocity present opportunities for us to sell a higher valued and reliable service product in the market.
As we think about 2023, we see a lot of opportunities to deliver value to our customers with our industry, leading intermodal service product.
Shelly discussed customers have shifted their focus more on cost and service versus capacity, we believe our intermodal service product presents our customers with opportunities to save money by converting highway freight back to intermodal, which reduces their cost and is further supported by fuel cost and carbon.
Emissions savings.
In port volumes have been weak, we still see opportunities to gain customers wallet share by converting highway freight and trans loading more international freight into our domestic containers. Additionally, we are in the best position to commit more intermodal capacity to our customers as we progress through the current bid season.
Based on solid improvement in rail service levels, and our investment to expand our capacity.
Finally, because I anticipate this being a question I thought I'd address it here as you are aware, we have more capacity and better alignment with our western rail provider be NSF and we are both committed to the long term growth of our collective intermodal service offering.
We will compete in the market on the basis of cost capacity in service and we feel confident in our ability to earn our customers' business and grow our wallet share we're not approaching 2023 with a volume versus price mentality, but how do we set up our business to drive the greatest shareholder value.
Over the long term. This was my eloquent way of saying, we historically have not given any guidance on price volume or margins and we will continue that streak, but also the streak of managing our business to compounding our growth and returns over the long term.
That concludes my prepared remarks, so I'll turn it over to Brad Hicks.
Thank you Darin and good morning, everyone.
I'll review the performance of our integrated capacity solutions and truckload segments, what we collectively call Highway services.
I'll also provide an update on J B Hunt 360, and how we continue to see the platform, bringing together our scroll, but specifically highway solutions to drive value for and on behalf of our customers, whether with or without a drop trailer solution.
I'll start off with Icf's ICF topline revenue was down 33% comprised of a 27% decline in volume and a 9% decline in revenue per load.
Our truckload volume in the quarter was down 21%.
Transactional or spot truckload volume was down year over year, but contractual volume was up slightly year over year.
We experienced additional pressure on our transactional and contractual business in the fourth quarter as demand and volume were unusually soft during what is normally considered peak season.
Maybe said differently there was no peak and demand was actually weaker in the fourth quarter versus the third quarter, which is atypical as.
As we've discussed in the past our goal remains to leverage our platform and make investments that will allow us to scale our business by outpacing the market.
Despite the poor performance on our top line, which did influence our profitability. We do remain in our people and our platform J B Hunt 360 to deliver exceptional value for our customers and our shareholders over the long term.
Shifting to truckload, while the freight environment was challenging in the quarter. We continued to see evidence of demand for dropped trailing capacity holding up better relative to the overall market, which we believe was demonstrated in the quarter.
Volume in JBT increased 6% versus the prior year quarter.
We believe customers continue to see value in the blending of their live and drop trailer capacity needs that we can provide by leveraging our platform powered by J B Hunt 360.
As we move into 2023, we will remain focused on leveraging our investments in our people technology and capacity to further scale. The business, we see a long runway of opportunity for future growth and 360 box supported by disciplined investments solid execution and earning an appropriate return on our capital.
Wrapping up on J B Hunt 360, I wanted to take the last minute here to make sure the investment community understands that our digital freight marketplace is a tool that drives value across our entire enterprise.
For example, it allows us to source third party intermodal dray capacity. It provides us backhaul freight opportunities in Dcs and allows us to prop up a startup fleet as we hire drivers or source equipment.
Believe more obvious you see the results in Ics and JBT as we are able to run non asset or an asset light business, leveraging our data and systems to provide almost unlimited capacity for and on behalf of our customers.
Ics and JBT collectively as our highway solution for our customers representing the largest segment of the North American transportation market.
The customer needs drop trailers that historically could only be provided by large asset truckload carriers or a spot load in a live load live unload network. We are one solution on one system backed by the J B Hunt brand.
That concludes my comments, so I'll turn it over to Brad Delco to give instructions before the operator opens the call for Q&A.
Thanks, Brad and operator in the interest of the number of people we have in Q can we do just one question per per caller.
Thanks Elliot.
Of course as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by.
When preparing to ask your question. Please ensure your devices on mute locally.
Our first question today comes from Chris Wetherbee from Citi. Your line is open.
Hey, Thanks, Good morning, guys maybe.
Maybe a question for you Darren I know you don't want to talk a lot about some of the pricing volume outlook for intermodal, but maybe I could ask the question. This way as you sit here at the beginning of the year and as you noted you have a different setup with your major rail partner in the West wanted to get a sense of sort of what customer receptivity has been too.
That increased capacity and the opportunities to potentially convert loads back onto the intermodal network I guess, maybe that's sort of a finer point on that as you think about sort of.
The historical relationship of intermodal versus service, a macro or truckload do you think that 2023 can be a year of relative outperformance for intermodal just given some of the macro stuff that we're seeing right now.
Sure Chris appreciate the question.
Universally our customers are.
Positive towards.
<unk> converting highway business that should be intermodal I think appropriately cautious in saying, Hey, J B Hunt and BNS, Jeff I need you to prove it to me that youre going to get your service and velocity quality back and I think we're aligned like we continue to say.
Every quarter more than ever with BNS, yet on that mission.
Talk to my team at linked for months now about rebuilding confidence in our customers. Our customers are looking for ways to save money and intermodal is a way for them to save money and as velocity improves it even helps and inventory carrying costs and so.
There is a lot of.
There's a lot of.
The opportunities for us to continue to talk about growing intermodal and certainly.
I don't know if a customer telling us I'm not interested in converting business to intermodal I think across the board our customer base very receptive.
But I do want to at least acknowledge.
There is a bit of.
A lag in that process and I think we are busy proving to the customers that the service quality and velocity has improved and will continue to improve as the year goes on.
And just one point of clarification, just the BNS, if a rail service, where it needs to be to make that value proposition to the customer.
Yes.
I would say.
It's early.
But so.
So far in January our rail service is the best it's been since the first quarter of 2020 and.
And so that's a really positive sign we're not quite to where we wanted to be fully but there is massive improvement in the rail service today.
Okay, great. Thank you very much.
Yeah.
We now turn to Jon Chapelle from Evercore ISI. Your line is open.
Thank you and good morning.
Sticking with you obviously, you're investing on your own your own capacity, but there is no kind of commentary on box turns tying it into what you just said about the service being the best in <unk> 'twenty can you give us an update on where box box turns stand today, where do you think it will be in the next kind of three to six months.
More importantly outside of your own investments just from a box turns the velocity of the productivity.
Alone how much capacity you think that adds to your network over the next 12 months.
Yeah. So.
It's a topic for us daily our box turns in the fourth quarter were 144, nowhere near where we expect them to be.
The realities are we're in a bit of a transition period wind velocity customer unloading a host of challenges created weakness in our churn ratio as we come out of that scenario and get back into a more normalized philosophy process gain productivity with our dray fleet look for productivity.
<unk> in the container fleet, we have lots and lots of capacity to grow into that as an opportunity for us I mean in the fourth quarter and the second half of the year, we're extremely confident in our ability to serve our customers' needs as there will be a return to a peak season shipping.
I don't have a number to give you in terms of how many containers come out of the improvement in velocity. What I would say is we're probably on a long March and I'm not sure. We can accomplish it in 2023, but we anticipate getting back to a turn ratio in the $1 75 to one eight in the future.
And that will be very direct effort on our part and we will be cautious with.
Our container purchases.
But we have to keep that supply chain open and moving and we need to be onboarding equipment at least some but we'll be we'll be looking to grow our volumes as fast as we can for sure.
We now turn to Scott Group from Wolfe Research Your line is open.
Hey, Thanks, good morning.
So stick with intermodal. So you guys have more containers parked in <unk>, then I think we've ever seen in our Q4 and it sounds like Youre expecting box turns to improve so I guess why aren't you dialing back on some of the container adds for this year and then Dan I know you don't want to give specific guidance, but maybe just directionally.
Do you think youre going to grow intermodal volume this year and how do you think about overall revenue segment earnings do you think positive negative distractions.
Thoughts thank you.
Well I appreciate your attempt Scott to get me to give guidance, we're not going to be able to do that certainly.
I do expect intermodal to grow this year on all fronts on.
On revenue on earnings certainly on volume I think that as we come out of the first quarter.
There is a lag you can see it in the import economy I mean, there is a significant.
Lagging demand at the moment.
Most of our customers if not all are optimistic about summer and the rest of the year. There is an inventory correction going on we have real opportunities to grow our intermodal business and we're working on that every day certainly we're not going to ignore the fact that right now the market is soft.
Q1, and inventory is trying to correct as far as the boxes, we really haven't made any announcement about how much equipment. We are on boarding this year, what I would say, it's more than zero, but certainly we're going to meet or back a little bit over where we have been as velocity is really really broad.
A lot of capacity to our market.
You May now turn to Justin long from Stephens. Your line is open.
And good morning, all I'll shift to a question on dedicated so Nick maybe you could talk about how much of a headwind you saw in the fourth quarter from fleet, reducing the size of their fleets and then looking into 2023, we've got some moving pieces with new business.
One, but also cyclical pressure how are you thinking about a reasonable target for both gross fleet additions and net fleet additions this year.
Yes, so as we look back at Q4, we felt some pressure I would say.
Modest not a lot.
But there was some accounts that were given early signals of reduction and we did reduce just a handful of fleets at this point.
The primary thing I would say that we addressed was really we've been carrying a lot of older trucks and so we're starting to pick up a few more new trucks and making some headway in reducing that so that was the primary but there was some fleet reduction.
And we're going to stick with our guidance on what we'd said on owned sales.
And the 800 to 1000 range our pipeline is still full we feel good we are experiencing what I would call just some some hesitation from deals that are in there that the customer is trying to figure out what's going to happen in the first part of the year, but we are still signing deals so.
<unk>.
1200 correction on that 800 to one thousands of thousands of 1200 that we would sell.
Also we have 500 trucks already so that we will be adding as we get the equipment available. So.
Have some momentum on that side.
Our next question comes from Amit Mehrotra from Deutsche Bank. Your line is open.
Thanks, Operator, hi, everyone Darrin I just wanted to ask about.
How do you think costs can trend in the intermodal business is yields continue to moderate I'm just trying to understand if you think theres enough cost and efficiency opportunity to offset.
More pressure on the revenue side from yield and then John Kohler I just wanted to ask about $8 8 million bonus payment that's great to see for the whole team just wondering if you could talk about it.
Is it pro rata across the segments or is there one segment that's taken the lion's share of that.
So I'll start I appreciate the question I think.
We have long said that there is real cost to exit our system in the form of velocity and improvements in driver productivity box.
Box turns gets most of the focus because it's an easy metric to see and calculate our driver productivity is a significant element inside our costs that can also improve as we grow our volumes and get more normalized into our system. Our customers are beginning to unload our equipment.
The faster the railroads are operating faster all of which creates some cost takeout. So.
We grow our business, we really feel strongly that we can.
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Kenneth overcome any kind of pricing pressure, we're not looking for any kind of change to our long term margin guidance and feel confident that we can deliver in that area.
In 2023 for sure. We said, we expect it to grow volume expect to grow revenue and expect to grow earnings in 'twenty three.
Oh, Hello, Hey, Amit that feels like a second question, but it's a good topic so granted.
On the appreciation bonus that was for all frontline employees Thats predominantly drivers, but also includes our technicians and then some of our office. So it's primarily in the JV and the dedicated segment, that's where we have most of our drivers.
I will give you of the 883 million was in intermodal and dedicated was another five and the rest is spread throughout the other segments.
Now turning to Ravi Shanker from Morgan Stanley Your line is open.
Thank you morning, everyone, maybe in Ics collection, I think you guys are making.
And the <unk> for Q walk not playing out as expected because of the lack of peak season, how do we think about that going into 'twenty three what's the <unk> walk looking like and is that demand weakness continues.
You would not see as much of a step down sequentially underlying kit.
Yes, good morning, and thank you for the question.
I started to talk about that pivot at the end of Q3, and we certainly saw that play out.
My prepared comments I use the word atypical we certainly saw that throughout the fourth quarter. A continued weakening from October into December .
As we sit here right now just through 15 16 days in January .
I would say were consistent with what we saw in the December .
However, as Darren mentioned, we do expect.
Some time, maybe in second quarter going into third quarter with inventory resets, we would fully expect to see the freight market rebound, but I do feel like this is the area of our company that will most field the volatility.
We've long discussed and documented what happened in the spot market and that still fits about where it was.
And so until we see some of that freight demand rebound imports start flowing.
We will be in a comparable environment to what we saw in the fourth quarter in brokerage.
Our next question comes from Brian Austin back from JP Morgan Your line is open.
Hey, good morning, Thanks for taking the question.
So showing maybe you can elaborate a little bit more on some of the caution you.
Youre seeing on the demand side and I know, we've touched on it a little bit but it seems like the general view is that you expect a tough first quarter and then some improvements were sort of towards the middle part of the year. So.
Darin does that give you enough confidence from the demand side and also from the service side, both in the west and the east to really lean in and commit that capacity.
That you think your customers are going to be there and waiting for because it does seem like the timing of the recovery on the service side and demand is going to be a key factor here. So curious on your thoughts there. Thank you.
Good morning, Brian and we did use the word and we have the whole pandemic and that was being fluid.
With our customers and just helping them understand where they're at and where we're at from a transportation perspective, we also talked a lot about.
Being cautious in the last discussion and I think those are some of the demand trends we were starting to see if you look in the fourth quarter you saw before in activity continued to decline all the way into December .
And certainly we're feeling the impact from that as we have talked to the customers. They have shared with us that there is an inventory correction happening that you've heard both Brad and Dan talked about and Thats really we expect to continue to occur all through the first quarter. We have had good signals from our customers about Q2 starting up.
Back to a more normalized or having a more normal environment. We're not sure at what point that is in Q2, but.
But we do feel like the back half of the year.
We have confidence from what our customers are giving us and the data points that they have what they are going to be doing from an ordering perspective, the freight recession that we see right now is largely inventory driven we don't see anything else from our customers.
And then last thing I would say Brian .
If you think about bid season for our company and.
When way part of the business. So this should be olive intermodal and all of highway services.
Those really occur.
In the back half of the year fully loaded. So if you think about a July one if you will that's really when bid season is complete and we know the results of what's happening in bid season, and Thats, what really drives what we're going to do from a capital planning see her Darren say, we're going to be fluid in that part of the process we have flexibility.
How much equipment, we can onboard but I would say we feel confident in our bid season strategy, our ability to win highway share converted to intermodal.
And then continuing to grow inside.
Our highway services and you heard me talk about our confidence around dedicated and what our customers are saying, there and I would add I felt confident about what's happening in the final mile space as well.
I just wanted to jump in Brian you asked a little bit of you hinted at eastern Eastern rail providers in both eastern railroads, Norfolk, Southern and <unk> are also performing better than they have in 'twenty, two and and we are confident in their plans and continue to see.
Really significant opportunities in that part of our network to grow highway share conversion back to intermodal as this year goes on.
We now turn to Tom <unk> from UBS. Your line is open.
Yes, I wanted to.
Ask you a bit about just your view on supply chain.
If you think that theres going to be improvement in fluid here I mean, it sounds like youre seeing that.
Do you think that that happens fairly quickly and how does that impact the storage revenues is that something we should.
Storage revenues go down a lot in 'twenty three or do you think it's more kind of a gradual thing that there is.
A bit of stickiness and what happens with storage revenues and I'm thinking in particular storage container storage revenues in intermodal.
Thank you.
Sure I'll take that I mean, do I think that fluidity in the supply chain, we will get better with weaker demand and allow the system to kind of reset itself absolutely. We're experiencing that today, our customers are better set up for their supply chains and.
The port infrastructure is accommodating imports today and so our system is moving more fluidly as that relates to storage revenues.
The only way to answer that is it depends as long as our customers are unloading faster than there will be a decline in those revenue streams, but that frees up capacity to operate more shipments on that container every month and thats. Our focus today, that's why you'll continue to hear us talk about real.
Cost can come out of our system that can translate into savings for our customers, which just allows us to provide value faster and grow our intermodal business.
Yeah.
Our next question comes from Jordan <unk> from Goldman Sachs. Your line is open.
Yes, hi, good morning, I was wondering if it gives them a little more color on this casualty claim expense sort of the nature of it I mean, just like a onetime cleanup through the various business segments or is this how do we think about sort of a run rate on an ongoing basis. Thanks.
At this juncture.
Just that.
We've seen similar to others in the industry over the last 12 to 18 months a dramatic change in our settlement experience on our claims.
All of our claims, but most importantly, our more severe claims are settling out.
Much higher levels than we've been our historical experience.
Sometimes to five to 10 times, what they were five years ago and so.
Our insurance coverage consists of layers and there are certain layers in there that have caps and when we exceed those caps the claims expense reverts to us.
The $30 million that we recorded in the second quarter and the $64 million reported in the fourth quarter for a total of $94 million in the current year represents our reserve adjustments.
<unk> incurred claims. So these are all prior period claims that we have increased our reserves based on our experience.
With that I will tell you that the reason why we've done this is because our insurance claims costs.
The claims experienced.
Radically going up.
And it's a highly unpredictable environment, we are not planning in 2003 for another.
One time charge.
But as I said, it's highly unpredictable and we're continuing to watch our claims.
I will tell you that we have made some changes to our structure going into 'twenty three and so we are going to be taking on more coverage and to contemplate. This.
And I'll go even a little bit deeper than we normally do just because this is a significant area that we're focused on.
I think on a rate basis, our premiums are going to be up around 15% just under core premiums, but as I mentioned, we're adding in new layers of insurance and so our premium base will also increase.
We're expecting our incurred losses to increase as much as 30% to 35% in the next year because of what we're seeing on these.
Just the movement today on how these claims that we have settled so a little bit more insight than we would normally give but wanted to give you a little bit deeper information on what we're seeing in the insurance area.
Okay.
Now to answer your <unk>.
Sorry, no incentive front in the landscape from Barclays. Your line is open.
Hey, good morning, and thanks for the question.
Darren I think you spoke a couple of times about earnings growth in intermodal. This year can you just reconcile that with <unk>.
Tougher pricing in the truckload market and how that dynamic could impact your yield generation. This year not looking for specific items that are either.
Well I mean at the end of the day.
We understand pricing pressure out there customers want to save money, but again, there is real cost to come out of our system and there is real efficiency for us to gain with growth.
So as we grow our intermodal business there is the opportunity to continue to do more.
More loads with the assets that we have it may not translate into the same income per shipment, but if we're executing more shipments as we move forward and find a way to drive some cost out and we're going to we're going to.
Be able to grow our income really strongly as we as we grow volume and that that's the mission is to get out as this bid season goes and as we're out communicating and displaying to our customers that velocity has improved and the intermodal service product has really improved a ton and.
Can get closer in transit to what truck transit is we feel like we can really grow our business significantly which will turn into income growth.
As the year goes on.
Yeah.
Now turning to Allison <unk> from Wells Fargo. Your line is open.
Hi, Good morning, I just want to go back to dedicated we think this is probably a couple of other final mile as well.
The maintenance cost side, new equipment coming in maybe less consumer demand needs. How should we think about accelerating down pretty quickly. This year or is it the customer needs are going to keep some of that aging equipment as John .
Just any thoughts there.
Yes.
It kind of goes through all fleets intermodal dedicated and final mile.
Talking to our Oems they are still going to be constrained.
They think this year.
And so we've publicly announced that we're going to a third OEM.
That will help us alleviate some of those constraints, but based on our forecast we will still be in.
A few hundred trucks that are past due at the end of this year that could move forward if the OE films numbers come up.
But we will have some trades that we're gonna carry with us the most most part of the year.
Our next question comes from Tien Huckster from Bank of America. Your line is open.
Great. Good morning, Shelley just can we revisit some of the comments there on bid season. I think you noted that bid season was fully loaded by July one. So are we still looking at a march through may industry bid season for part of the business and if it is then coming up I guess, Brad and Darren you've talked about maybe fourth quarter demand weakness at <unk>.
Into the new year, maybe can you talk about.
How youre thinking about where contract stands versus spot levels.
Hey, good morning, Ken I would say our customers in general are going to be implementing between now and July one we still have.
A smaller portion of our business or implemented from July one all the way through the end of the year, but the bulk of the business. We tend to look at our business and that July one through.
The next year as to how we think about revenue quality our growth plans, although we budget for a full year at the calendar year, we actually review, what's happening from a bid season.
Midyear and I would say our customers are are largely in line. We do have a few customers that.
<unk> changed some of their bids start.
The most part they are in line with what we've historically seen and I'll, let Darren and Brad comment if there's anything else there well I'm going to ask Bryan to comment on the spot versus.
Ken I'll make a few comments here, we're still very early and bid season, but our strategy is clearly focused on winning contracted business.
The spot market and what we've seen in that over the last several months and we can't necessarily count on when or if that may return or if and when it does what it does it get back to what it used to be is it is it something less and so we are optimistic about early feedback and bits and what we're saying they're meeting our expectations.
In terms of volume growth of contracted business. So from a on the transactional side on highway.
Our predominant focus I think in years past.
Yes.
We will move around the percentages of whats published versus spot and I would anticipate us being on the highest end of that from a contract standpoint versus spots and highway intermodal is certainly a little differently I don't play the spot market nearly as much and so I'll, let maybe Darren comment what do you see it.
I think intermodal contract prices should continue to provide in most corridors.
<unk> saving against highway contract rates.
You will inclusive and thats been the case forever and there'll be no difference. This year certainly there is a handful of markets out there, where I think trucks spot prices, maybe applying some pressure at the customer level around.
Their mix of highway and intermodal and we'll we'll watch that and we will try to adapt and we will talk to our rail providers and look for ways to take cost out of our systems. So that we can be competitive but at the same time, we're going to be disciplined about our returns and our margin profiles and everything about our business.
Has been the case forever at J B Hunt.
Our next question comes from Todd Fowler from Keybanc capital markets. Your line is open.
Great. Thanks, and good morning, I think this has been touched on a couple of different ways throughout the call, but maybe just bringing it together how do we think about the shape of the quarters in earnings as we move through 'twenty three it seems like that the volume environment is going to start off weak in the first quarter, but there is an expectation for some inflection mid year.
But at the same time contract pricing when you come in so how do we think about seasonality and then if the demand environment doesn't inflect up what are some of the cost levers that you have that can offset weaker demand. Thanks.
Hey, Todd It's Brad Delco you hit the fortunate.
Pleasure of me responding to that question.
One we don't provide guidance, but I think.
Maybe one general statement I would say and we've talked about this before we haven't really seen seasonality over the better part of the last two years or three years, just based on elevated demand levels that we've seen clearly seasonality has come back in to play you saw that in the fourth quarter in fact, I think Brandon Hicks as <unk>.
<unk> parents comments suggested that we actually saw a typical seasonality where fourth quarter was was overall from a demand perspective weaker than Q3.
I'd also just say I think you heard there probably isn't a lot of expectations from the.
The demand environment changing much at least in terms of what visibility we have here in first quarter.
What happens after that we really we don't have any better crystal ball than anybody else. So I think giving you any more detail on guidance and how the year plays out.
Would would probably not be in our best interest.
Yeah.
We now turn to Ari Rosa from Credit Suisse. Your line is open.
Great Good morning.
I wanted to ask John Kuo mentioned.
That you guys might be willing to take up leverage for the right opportunities I just wanted to press a little bit more on that comment and understand if that was a reference to M&A or if it was a reference to something else and if it was a reference to M&A.
What are the types of opportunities that you would be thinking about that would justify that sort of taking up leverage.
Okay.
Yes, there wasn't any.
Anything specifically that I was referring to is just more commenting on the strength of our balance sheet, our liquidity position and the ability to take advantage of opportunities.
<unk> that exists we still continue to look at.
Buyback or excuse me at M&A as it comes available and we'll continue to do so.
Buybacks and dividends are also a core piece of our.
Capital allocation process, and we'll evaluate that as well.
Yeah.
Our next question comes from Bascom maintenance from Susquehanna. Your line is open.
As you went through the competitive bids with Schneider, leaving your rail partner and moving over to the <unk>.
Could you tell us what you learned about your customers' desire to perhaps stay with IBM versus great some competitive or maintain some competitive tension in the intermodal suppliers.
How thats, reflecting your strategy long term to grow the business. Thanks.
So.
I don't know that we have enough details yet to really have a strong position on that we universally here from our customers that they want to maintain a significant share on BNS set they are they have confidence in our ability to.
Talk them through the service improvements and our ability to provide the capacity that Schneider is taken with them. So I think there is there is no doubt out of our customer base that we have the capacity to backfill anything Schneider was operating on BNS SaaS. It's also not the top of mind.
I think when we're talking to our customers. The first subject has not hey can you take on Schneider's business. Our process is to go into a customer and talk about their network and look for solutions with intermodal, where it's the right solution, regardless of who the competitor might be handling that business. So we're we're just.
I'm trying to solve for our customers and we think they have.
A real confidence in us I think that the Schneider exit.
Means a ton in the way we talk to BNS SaaS, how we collaborate together how we're talking about operations in the terminals, how we're going to market together so.
The Schneider exit from BNS.
To me is significantly valuable and the way, we're communicating with BNS SaaS and I'd like to believe our customers will get a benefit out of that.
Okay.
Our next question comes from Jason Seidl from Cowen Your line is open.
Thank you operator, and good morning, everyone. One quick one for me.
You talked a little bit about expectations for growing intermodal. This year I guess, how do you think about.
Contract rates on the truckload side, and where they might put some pressure on that they've held up largely but we're starting to hear from some private carriers that expectations are anywhere between let's call. It three 8% down.
Sorry, Jason.
You're asking about what we might see on the truckload side and then how we think about that impacting in any way shape or form intermodal contract rates. If I understood. The question correctly, we certainly have seen and expect to see downward rate pressure on the highway side.
Good news.
From where we sit in the <unk>.
Evolution of our truck line and now with the combination of Ics of JBT.
Most of our variable on our power and so we're able to ebb and flow with that fluctuation in a much more favorable light than perhaps we were when we were an asset provider, but we do fully expect.
I'm not going to give guidance on what we anticipate or what we're planning for on the overall rate movement, but we certainly expect it to be down.
Sublet substantially just as we saw it go up somewhat substantially or abnormally.
Three years ago, we are seeing that kind of correction back downward.
I think on the intermodal front the only thing I would say is historically I don't think it will be any different today intermodal will outperform a downturn in truckload rates I'm not going to ignore that.
Certainly that comes a dialog and a talking point for our customers, but the savings intermodal offers against a truckload price continues to be significant and whatever is happening in the truckload contract pricing intermodal will continue to be advantageous for our customers.
For now and for the long term, particularly when you add the cost of fuel in there.
Yeah.
Our next question comes from Bruce Chan from Stifel. Your line is open.
Yeah.
Hey, good morning, everyone I appreciate the time.
Maybe another one for you Brad Hicks on Ics.
You talked a bit in the.
In the release about a pickup of tech costs in 'twenty, two and I just wanted to get maybe a little bit more color on whether that was tied directly to volumes in that business.
Whether that was a structural investment in the platform or whether that was more inflationary and then as you think about some of your comments around volumes. This year, how much of an opportunity do you have to get more leverage on those costs. Thank you.
Thank you Bruce.
Part of that was by design. It was just making the point that it was a step up from prior year as we look to continue to finish out some of the tech investments that we've made both at Ics and for JBT and highway really focused on our ability to get productivity gains both from our people and also.
Better.
Transparency and visibility of our platform for both our carriers and our shippers.
So do we feel like theirs.
Side as we continue to move forward absolutely.
We've started to realize the benefit of those tech investments as we've talked about for the last few quarters, but there's still work to be done even inside of 'twenty. Three we expect further build out of that test those technologies that will help us on productivity.
Overall execution of the business all focused on really if you think about the platform.
It has enabled us to really think about how we would blend what has historically been our our life business, which is Ics versus our drop rate business in JBT.
And through that blending we're able to make better decisions that drive efficiencies help improve service.
Ultimately can be a benefit to our customers through a low cost. So that's what our focus is going into 'twenty three.
And we expect to make continuous improvements throughout.
Our final question today comes from Jeff Kauffman from vertical research your line is open.
Thank you very much thanks for squeezing me in.
Shelly I wanted to go back to a comment you were talking about.
The weakness is mostly related to a big inventory correction by customers likely to get better.
Starting with <unk>.
I guess really how do we know that something more nefarious going on beneath these these weak inventory driven numbers in terms of the economy weakening consumer weakening again.
In terms of the inventory reductions I know a lot of customers have built inventory buffers.
Last year because of the supply chain issues as we went from kind of a JIT to just in case is your sense that the customers are bringing inventories back to where they used to be or is there still going to be a buffer when this inventory adjustment.
And I apologize for two prongs on this but it's all related.
Yes.
Thank you Jack.
Just start with what.
<unk> said, which is our crystal ball is not very good and really not like anybody else does it's hard and difficult, but we do talk to our customers.
And and what they're telling US is it's largely an inventory.
Correction happening I will say I think they are evaluating part of the flip that Brad had talked about last quarter was really around.
The capacity side, but also the flips occurring from an inventory side as we're coming on the back end of Covid, what consumers were buying and what they're purchasing moving into the into the future. That's part of what's happening from an inventory correction perspective, but I would say.
I don't know that we have a great crystal ball, but this is what our customers are telling us we feel confident that we're going to be fluid and making sure that we have a good conversation around that.
Apologize, Jeff Jeff Jack.
Yeah.
This concludes our Q&A I'll now hand over to Shelley Simpson President for any final remarks.
Great. Thank you so much and I will also hand, it back to John here at the end, but I think you heard us open and talk a lot about the challenges that are being presented but also the opportunities that we think exist for our customers and also for J B Hunt, we're going to continue to be fluid and we are cautious.
Based on what we're seeing on the demand side, but we're very confident in our ability to really thrive in this environment and in any environment.
I talked about our three priorities and those really don't change whether that's this year. The next year or years. After we're going to stay disciplined with our long term investment around our people our technology and capacity being fluid end that is decisions and making sure. We stay close with our customers we will be very focused.
On creating more customer value and this year, we are helping our customers with cost savings. He heard Darren talk about we're going to do that through efficiency. We are talking to them about node conversion to the most efficiently and transportation available into intermodal, we're going to continue to build great fleets for them and create a more efficient.
Great.
To differentiate our customers' experience and the final mile segment, and we're also going to leverage J B Hunt 360 to bring a flexible cost and capacity solution.
Finally, we are going to continue to have long term compounding returns for our shareholders. Those are our three priorities, but before I turn it over to John I want to make sure that I'd say, we are so proud.
Of that over 37000 employees that have delivered really over the last three years, but even in the fourth quarter, a little bit of noise, there, but I will tell you the effort that our people have made through 2022, our customers notice our customers Trust us and everyday we worked very hard to be there.
<unk> provider, we want to continue to accelerate with our customers, but without our people technology and capacity really would be irrelevant and so I just can't emphasize enough. The great work. Our teams have done we're proud of the team and we're looking forward to 2023, John It's Joe.
Hey, Thank you great great comment there I want to go.
Go back to the noisy fourth and just say that this claims event has gotten all of our attention.
A little bit like opposed sandwich.
We wanted to understand our current position and lean into 'twenty three I'm confident in John's approach here with the changes that he is making and plan to continue to stay very close to that and keep an eye on it to be sure. We're we're tracking and adjust maybe more.
Fluidly, if that's a good way to think about even to this part of the business because we none of us like that that kind of thing.
No surprise or no worries I want to mention that.
The OEM position that we're in right now I'm Super confident in I have worked with Nick and the Oems to help better position the company as a very strategic buyer. We are a very different type of class eight and plastics buyer and <unk>.
Our upper management at our providers are really understanding that I think that's got a really good long term.
<unk> value for US I would also say that very very closely aligned with our rail providers like I've never seen and I have either in this job of my prior job have been.
<unk> been able to really see how those those relationships work.
Close to them I'm very confident questions about our equipment additions in those.
As in the near term are appropriate but.
What Darren said this is a long March and we are positioned.
And it's as good as I've ever seen us and so we will be taking advantage of that.
Those corrections.
And I think we're going to just kind of coined the term leaning forward into 'twenty three 'twenty four 'twenty five my closing ward is the same as Shelly.
Really really proud of all of our people, but I'm also particularly proud of our leadership.
It has not been easy.
One thinks it has and no. One has claimed that in any part of the industry, but I am, particularly proud of what happened in 2020, what happened in 2041, and what has happened so far and as we close out 2022 that gives me great confidence.
When we look forward as to our ability to go capitalize on the opportunities here. So we appreciate you being on the call and we'll talk to you next quarter.
Today's call is now concluded one last thank you for your participation you may now disconnect your lines.
Yeah.
Yeah.
Sure.
Okay.