Management from J.B. Hunt Transport Services (NASDAQ: JBHT) said the volume strength experienced in the first quarter has continued thus far through the second during a virtual appearance at BofA Securities’ transportation conference Wednesday. While “demand is there,” capacity constraints continue to present headwinds.
No near-term fix for intermodal service headwinds
Port congestion, slower rail service and containers stuck at customer facilities longer were some of the drivers of J.B. Hunt’s decision to raise capital expenditures by 40% in 2021 to $1.25 billion.
Box turns in the company’s intermodal segment declined 13% year-over-year during the first quarter to slightly higher than five loads per container. On the first-quarter call, management said that the new capex budget calls for delivery of 12,000 boxes in 2021, double the original plan.
Darren Field, EVP and president of intermodal, said, “The velocity of our equipment has never been more challenged than it is now.” He said minor improvements have been seen in rail service in recent weeks but its customers are still taking longer to unload equipment due to their own labor issues at warehouses, which impedes service on the rails as they wait on the equipment they need.
“The rail system needs our customer base to unload faster to help us all improve velocity,” Field stated.
He doesn’t believe the service headwinds will be fixed in the near term either. “It is a long runway. This is not going to be something that gets solved in May or June or July. We’ve got to make incremental improvements in all aspects,” Field said.
Field said limiting dwell time at destination terminals will help fluidity at rail terminals. Eliminating delays at customer facilities will also improve equipment throughput and improve turns in containers and railcars.
“It’s one giant network. All of the railroads’ ability to improve to some degree is reliant upon the whole system improving at once. I think a lot of it can start by getting the customer base to unload faster,” Field added.
Management said container purchasing plans in 2020 proved to be a little light as they were hoping for a material improvement in rail service last year. In hindsight, they wished they had added more equipment as customers continue to voice needs for incremental capacity.
Currently, the physical delivery of new containers is being hampered by extreme tightness in ocean vessel capacity. Field said there haven’t been any issues finding production slots and build schedules haven’t been pushed out by the manufacturers. The issue has been finding transportation to get the boxes delivered to the U.S. with the challenge getting “more and more difficult by the day.”
These headwinds could keep J.B. Hunt from taking delivery of all 12,000 boxes this year.
New equipment not likely to impact favorable supply-demand balance
When asked about the potential disruption the equipment additions could have on pricing as the company looks to add a double-digit percentage of new containers to its current fleet of almost 100,000, management noted it could increase the pace of container retirements, thus minimizing fleet growth, if demand were to cool.
The current intermodal environment is producing double-digit percentage contractual rate increases, ahead of the company’s original guide of high-single-digit to low-double-digit hikes. Also, customers have been compliant paying fees for equipment that is excessively detained at their facilities.
Field said the rate increases are not just a supply-demand function or due to record truckload rates. Higher costs are driving the increases as well. He said intermodal rates have increased significantly since 2017 but the increases are being largely offset by cost inflation. Field said the cost environment was the reason J.B. Hunt recently lowered its long-term intermodal operating margin guidance by 100 basis points on each end of the range, which is now 10-12%.
Brokerage will see a dip in Q2, longer-term guidance intact
After two consecutive quarters of profitability in the brokerage division, the segment is expected to post closer to breakeven results in the second quarter as procuring capacity in a very tight trucking market remains a headwind.
Every year, the second quarter contends with some seasonal capacity drags as well. The annual Roadcheck Week usually disrupts utilization for up to three weeks and produce season also draws down capacity. Given the current environment, the additional strain on supply is likely to pressure gross margins.
On the cost side, J.B. Hunt hires more brokerage staff during the second quarter as many freight contracts renew or begin during the period. The company has some planned tech investments that will hit the P&L in the quarter as well.
Management’s guidance calls for sustained profitability in the division to begin during the second half of 2021 with operating margins to reach a level of 4-6% longer-term.