Q3 2024 Earnings Summary
- J.B. Hunt's two largest segments, Intermodal and Dedicated, have significant market opportunities and potential for high growth, allowing for continued operating income performance in these areas.
- The company is focusing on growing its Intermodal business and improving network efficiency, particularly through its strategic relationship with BNSF, which is expected to contribute to margin improvement.
- J.B. Hunt's Integrated Capacity Solutions (ICS) segment achieved a significantly high gross margin, attributed to strategic focus on quality freight, strong customer relationships, and leveraging technology through the J.B. Hunt 360 platform, highlighting operational excellence and potential for sustained profitability.
- Intermodal margins are under pressure, with management acknowledging they are not satisfied with current returns and the pathway to improvement is uncertain. Darren Field stated that "none of us are satisfied with where we're at in terms of the returns on our business" and they have been wrong before about when pricing would improve.
- Increased costs due to network imbalances, particularly the need to support capacity in Southern California, may persist if the imbalance continues. This leads to higher expenses to reposition equipment, affecting profitability.
- Brokerage segment margins may face future pressure, as the high gross margins achieved are considered unsustainable by management. Shelley Simpson noted they are not modeling for a 17%+ gross margin in ICS, indicating potential margin contraction ahead.
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Intermodal Margins and Bid Season Strategy
Q: How will you balance volume growth and pricing in bid season?
A: Management emphasized that while volume is important, pricing is crucial for margin improvement. They are not satisfied with current returns and believe carriers are operating at unsustainable rates below cost. Going into bid season, they aim to deliver value to customers, address cost challenges, and prepare to serve needs at the enterprise level, focusing on transparent conversations to improve returns. -
BNSF's Strategy and Impact on JBHT
Q: Is BNSF implementing PSR, and how does it affect you?
A: Management does not believe BNSF is implementing PSR (Precision Scheduled Railroading). BNSF is focused on growing their intermodal business, and they have assured J.B. Hunt that PSR is not part of their strategy. The strong partnership aims to drive efficiency and improve margins together. -
Revenue per Load and Pricing Outlook
Q: How did you manage sequential increase in revenue per load?
A: The increase was due to a longer length of haul in Q3 compared to Q2, despite sequential pricing pressure. Management is not satisfied with current returns and aims to recover margins through future pricing efforts by delivering value and quality service to customers. -
ICS Gross Margin Improvement and Insurance Accruals
Q: What's driving the improvement in ICS gross margins?
A: The gross margin improvement in Q3 is unique to J.B. Hunt, resulting from focusing on quality revenue, the right type of business, and leveraging technology through J.B. Hunt 360. Management does not expect margins above 17% to be sustained, with a more normal range being 14% to 15%. On insurance accruals, they feel in a good position after addressing past significant charges. -
Dedicated Business Competition and Private Fleets
Q: How is competition affecting your dedicated business?
A: Management is not seeing unusual competition and remains focused on private fleet replacement. They are disciplined in pricing and feel confident despite some large private fleets growing. The market opportunity is significant, estimated at $60 to $90 billion, allowing for continued success. -
Eastern Intermodal Growth and Costs
Q: What's driving Eastern intermodal growth and repositioning costs?
A: There's an uptick in eastbound volume from the West Coast without a corresponding increase westbound, leading to repositioning costs. In the East, customers are shifting small volumes to intermodal due to better service performance and sustainability efforts. Management is encouraged by this growth and aims to fill network gaps over the next bid seasons, which is positive for 2025. -
Long-Term Operating Income Growth Opportunities
Q: Where are the biggest opportunities to grow operating income long-term?
A: Management sees significant market opportunities across all five business units. They expect continued growth in intermodal and dedicated segments, leveraging their large market sizes. While highway services and Final Mile will grow, they don't expect the business mix to change significantly compared to the last 5 to 10 years. -
Intermodal Margin Repair and BNSF Relationship
Q: Can BNSF partnership improve intermodal margins?
A: Management focuses on driving efficiency and growth with BNSF to improve margins. They aim to grow the intermodal business, enhance network efficiency, and fill empties to benefit margins. Core pricing work is needed to reach margin goals, but no single project with BNSF will unlock margins. -
Definition of 'Normal' Peak Season
Q: What does 'normal' peak season mean for intermodal volumes?
A: 'Normal' refers to the sequential changes from Q2 to Q3 to Q4 and pre-pandemic forecasting accuracy. Customers are not indicating weaker demand, and volumes in Q4 are expected to remain strong, particularly from Southern California, aligning with normal peak season patterns. -
Impact of Pre-Shipping on Results
Q: How did pull-forward shipments affect results?
A: Some customers shifted business due to various reasons, including potential labor strikes and capacity preparedness, leading to some freight being pulled forward. However, many customers expect a normal peak season in Q4, and management anticipates continued demand but acknowledges uncertainty in the extent of pull-forward impact.
Research analysts covering HUNT J B TRANSPORT SERVICES.