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Management from J.B. Hunt Transport Services (NASDAQ: JBHT) said a high-demand environment is likely to continue through at least the first quarter of 2021.
In a virtual presentation at Baird's 2020 Global Industrial Conference on Tuesday, Shelley Simpson, chief commercial officer and president of highway services, described the current freight market as "tight" and "more chaotic" than expected, noting ongoing dislocation in volumes and capacity. The influx of containers to the West Coast has caused service bottlenecks on the railroads and the lack of available warehouse labor has resulted in delays unloading containers and trailers at customer facilities.
On a recent call with 70% to 80% of the company's customers, Simpson said routing guide failures throughout the industry were the chief complaint. The lack of capacity due to increased freight demand, equipment taking longer to unload and carriers opting for higher rates outside of their contractual commitments are driving the disruption.
As supply chains play catch-up from the inventory shock caused by COVID, the demand for physical goods in need of transportation remains high. Consumers are substituting spending on services for hard goods to improve their stay-at-home lifestyles. Further, the potential for a winter wave of the virus has many retailers taking on additional inventory to avoid potential stock-outs.
Simpson said the bulk of J.B. Hunt's client inventories are low and that the replenishment cycle appears to have several months of runway.
So far in the fourth quarter, weekly intermodal traffic on the U.S. Class I railroads is up nearly 10% on average compared to 2019, according to the Association of American Railroads. J.B. Hunt's rail partners Norfolk Southern (NYSE: NSC) and BNSF Railway (Berkshire Hathaway, NYSE: BRK.B) have seen volumes increase 4% and 9% respectively quarter-to-date.
Dedicated rolling along, final mile is ‘booming'
Nick Hobbs, J.B. Hunt's president of dedicated and final mile, said the dedicated division just saw a record month for inquiries into engineering designs as demand for guaranteed truck capacity remains high. The division converts private trucking fleets into J.B. Hunt's dedicated operation, managing and operating the equipment on clients' behalf.
J.B. Hunt reported the addition of 890 trucks to the dedicated fleet through the end of the third quarter, surpassing the 2020 goal for additions of 600 to 800 units. Hobbs believes the dedicated operation will add 800 to 1,000 trucks annually over the next few years.
He said driver turnover is the lowest J.B. Hunt has ever had but noted that sign-on bonuses and pay increases will be a cost headwind given challenges recruiting new drivers. Drivers are in short supply as demand has surged. The decline in available drivers is largely due to fears surrounding COVID-19, the impact of the Drug & Alcohol Clearinghouse and low driver school enrollment.
The final-mile segment was hit hard by COVID but Hobbs said it's "back up and booming." He said the industry is still highly fragmented and most providers aren't being price disciplined in their attempts to win freight, creating a "wild, wild West" environment. He believes J.B. Hunt will be able to solve industry pricing through superior service. Meeting time delivery windows, strong execution of in-home installations and providing qualified and safe drivers are part of the value proposition. A quality service model is expected to drive pricing higher, improving the division's margins.
Year three of J.B. Hunt 360
The company is in year three of its $500 million investment in J.B. Hunt 360, a digital platform connecting shippers and carriers to find the most efficient and cost-effective shipping solution for both. The multimodal platform wasn't around for most of the company's growth to $10 billion in revenue but is expected to be the key driver as it reaches for the next $10 billion.
During the third quarter, brokerage revenue processed through 360 increased 42% year-over-year to $291 million and the number of tractors available from contracted carriers on the platform increased 16% to 777,000. The intermodal division executed $41 million of third-party drayage expense on the site with the truck segment seeing $26 million in independent contractor costs recorded.
Results will continue to improve as the offering is further scaled. Carrier engagement has been high and shippers continue to come online. A bulk of the heavy investment has been incurred. Management believes returns will improve as more revenue is added over a relatively subdued cost structure.
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