J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) provided constructive commentary on intermodal and truckload (TL) fundamentals during a presentation at the Cowen and Company 12th Annual Global Transportation Conference.
The outlook from the surface transportation services giant at the intra-third quarter event was notably better than the concern around the lack of an uptick in seasonal demand that many carriers expressed at multiple investor conferences in May and June.
Executive Vice President of Intermodal Services Darren Field and Vice President of Finance and Investor Relations Brad Delco were on hand to answer questions about the company and the industry.
Field said that freight volumes are not great but that the negative trendline seen at the beginning of the year has stabilized. The company had some concerns around lower demand in the first quarter and into the second quarter, but said that seasonality in demand has returned. Freight demand improved sequentially in May and June. Further, the company said that July and August were as expected and that their customers’ expectations are that there will be a normal peak season in 2019.
However, Field said that the “economy is not great” and that none of JBHT’s customers have indicated capacity concerns regarding special projects. These inquiries are fairly common in a tighter truck capacity environment. Field went on to say that the [economy] “has bumped up on the bottom and now things will sort of feel maybe more normal as we move forward.”
On concerns of tariff increases and trade tensions, Field said that JBHT hasn’t had any of its customers change capacity needs with respect to trade concerns. None of JBHT’s customers have approached the carrier with the intention of reducing capacity needs due to the threat of tariffs. Further, no shipper has told them that they plan to pull forward inventory, similar to the practice many shippers employed ahead of 2018’s tariff announcements, requiring additional equipment. Field said that they haven’t seen any material changes to customer supply chains in response to trade talks, but noted that they would be foolish to think that this isn’t occurring somewhat.
When asked about the negative impact TL spot pricing was having on intermodal demand, Field said that JBHT does not have much spot intermodal exposure (only 2 percent to 5 percent). He said that in tighter TL markets demand often overflows to intermodal service, especially with some of its clients that have container pools already at their location. Usually this incremental freight would move via intermodal. That type of intermodal demand isn’t there this year, especially in the East, where low-cost spot TL capacity is readily available. Additionally, he believes that lower TL spot market prices are creating the expectation that intermodal pricing could be lower next year.
Field said that precision scheduled railroading (PSR) has been “a little bit of a mixed bag” on intermodal demand. At times, communication from the railroads hasn’t kept pace with the rate of change seen in some lanes of service. This has caused headaches with shippers using intermodal service. Both of JBHT’s eastern railroad partners, CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC), have notably improved service recently, but Field questioned whether this was due to PSR-related efforts or lower carloads. He said the real test will come when demand improves, TL capacity tightens and rail carloads move higher. Field believes that a consistent rail service product is required to capture incremental intermodal demand.
Brad Delco provided an update regarding J.B. Hunt 360, a digital marketplace for carriers and shippers to match loads. Delco said that the offering was initially created in response to demands from its customers. The load-matching service provides greater visibility to the market and JBHT has seen improved execution through this automation. The company has focused on the carrier side of the offering thus far, but has plans to improve the shipper side of the service moving forward. JBHT’s brokerage business has been in existence for a decade with roughly 30,000 carriers. Since the 2017 launch of the service, another 30,000 carriers have been added.
Management said that they have a strong dedicated pipeline, 70 percent of which comes from potential private fleet conversions. A private fleet is not for-hire and is typically operated by a company to deliver its core goods or services. JBHT converts many of these fleets to its dedicated contract carriage service wherein it owns and operates the equipment under the converted fleets’ brand. Delco said that the pipeline to sales process for private fleet conversions is closer to 24 months currently, up from 18 months historically. Delco said nothing specifically is driving the increase, but there isn’t as much urgency to convert currently because truck capacity is looser and the driver market is less challenging.
JBHT continues to look for final-mile opportunities even though some of its competitors have dropped this offering. Delco said that they believe the total addressable market for final-mile is $12 billion to $15 billion. JBHT sees approximately $550 million from its final-mile offering and will begin to report the financials from this business separately beginning in the first quarter of 2020. Going forward, JBHT is seeking asset-light acquisition opportunities in the space. They like the asset-light or pool distribution approach versus adding more trucks like they have in the past.
JBHT isn’t ready to make a call on the 2020 TL market yet. The company saw seasonality return in the second quarter, but senior management is not ready to call it a “full-on freight recovery.” “Not as bad as it was” is the way Delco described the recent rate of change in the TL market.
Lastly, the Field said that they don’t really have a comment regarding reports that the company implemented peak-season surcharges to recoup the cost of moving empty intermodal containers back to the West Coast. They said that each customer’s contract is individually negotiated and that they don’t have a “blanket accessorial program with customers.”