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Bid Season To Determine J.B. Hunt's Intermodal Margin Target

Bid Season To Determine J.B. Hunt's Intermodal Margin Target

Expectations around long-term intermodal margins were the main topic at J.B. Hunt Transport Services' (NASDAQ: JBHT) appearance at the Citi 2021 Global Industrials Virtual Conference on Tuesday.

The company's president and CEO, John Roberts, said management plans to evaluate this season's bid cycle before making a final determination. On the company's fourth-quarter call in January, management acknowledged the intermodal segment had been lagging the long-term goal of 11% to 13% in recent years and that future expectations were under review.

Roberts believes the key determinants will be the rate increases gained this cycle as well as bid compliance for those rates.

The company's intermodal division operated at a 91.1% operating ratio, inverse of operating margin, during the fourth quarter and at 90.8% for full-year 2020. Management expects to have a better handle on future expectations by the time the cycle ends in the fall.

Currently, Roberts indicated there was "a lot of pent-up demand" in the network, pointing to a large queue of ships sitting off the West Coast awaiting a berth to unload, a process he conceded might take until June to cure. However, he believes the near-term service issues on the railroads will not deter longer-term growth opportunities for the mode. He remains "optimistic" on the macro environment but noted several smaller businesses are feeling a pinch from COVID, which he described as "concerning."

While the intermodal segment was "within the boundaries" of management's plan to begin the year, recent inclement weather has led to a number of gate restrictions, which has Roberts "definitely feeling differently" than he did a couple of weeks ago.

Longer term, he believes the total addressable market to convert road freight to the rails remains in place but it's just a matter of getting the pricing right.

With headwinds from the pandemic, slow service on the rails and weaker intermodal pricing, J.B. Hunt didn't add containers to the fleet in 2020 for the first time in Roberts' recent memory. The company plans to add 6,000 units to its nearly 100,000-box fleet in 2021. Demand, box turns and rate are still the primary ingredients that dictate whether to add equipment.

Roberts believes that all of the precision scheduling railroading initiatives that the railroads have completed in recent years have allowed them to get to a margin level where they will begin to grow volumes more meaningfully. But he cautioned that reliable service is the key to intermodal conversion.

"Our customers who are inventory managers substantially just can't afford to have erratic service and they won't tolerate it," Roberts said. "I think that's something railroads may have to learn a little bit more about because of their history. They have long had so much control over what they do and what they don't do and the shippers have typically been captive."

"The people we deal with aren't captive and we got to take good care of them. We hope [the railroads] will hear that and address it," Roberts added.

Brad Delco, J.B. Hunt's VP of investor relations, also had an interesting take on the future of intermodal. He believes the historical price discount for intermodal when compared to truck may erode over time as companies continue to purchase carbon offsets. He noted that trucking's higher carbon output, plus the cost of the offset, should allow intermodal rates to rise and close the gap.

He also believes that environmental, social and corporate governance initiatives will drive demand higher for the more environmentally friendly mode. Overall, the company's goal for intermodal is to maintain market share as the addressable market expands.

Roberts noted that no one part of J.B. Hunt's freight offering — intermodal, dedicated, brokerage, final mile and truck — is more important than the others. It's more of a holistic view of the industry and making sure all of the offerings are "built to complement the supply chain needs of our customers."

He indicated that the brokerage division is on the right path and is expected to reach a level of sustained profitability by the back half of this year. He highlighted the continued efficiency improvements as its digital freight platform, Marketplace for J.B. Hunt 360, is doing more of the work. He said the headcount and productivity metrics are backing this up.

The number of carriers on the platform increased to more than 100,000 in the fourth quarter with revenue increasing more than 35% year-over-year to $1.14 billion. Roberts believes the platform is still in the first or second inning of the evolution as the company hasn't even started processing all of the data 360 collects.

Lastly, Roberts compared the company's dedicated unit to steering a battleship. The gestation period from pipeline to contract can last two years, but once a deal is inked the retention rate is north of 98%. He sees a bunch of convertible business already in J.B. Hunt's network and said the segment should be able to book between 800 and 1,000 new trucks during the year.

Click for more FreightWaves articles by Todd Maiden.


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