Quarterly income up 1.5% at J.B. Hunt, with rising driver costs squeezing margins (Updated)

Editor’s note: Story updated with additional information on segment performance and earnings guidance.
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J.B. Hunt Transport Services posted second quarter net income of $105.011 million, up 1.53% compared to the same quarter in 2015. Company officials said income growth was partially held back by driver recruiting and retention costs and higher costs for rail services. The company also lowered revenue and earnings guidance for the remainder of 2016.

The net income of 92 cents per share missed the consensus estimate of 97 cents among the 25 analysts who cover the Lowell-based logistics company.

Total revenue in the quarter was $1.615 billion, up 4.93% compared to the $1.539 billion in the second quarter of 2015. The consensus estimate on revenue was $1.62 billion.

“The benefits of volume growth, increases in revenue producing truck counts and higher equipment utilization, were substantially offset by increases in rail purchased transportation costs, higher driver wages and recruiting costs and increased equipment ownership costs,” the company noted in its earnings report posted early Monday (July 18).

Salaries, wages and benefits for all employees in the quarter was $371.969 million, up almost 7% compared to the second quarter of 2015.

Net income for the first half of 2016 was $205.109 million, up 5% compared to $195.351 million for the same period of 2015. Total revenue in the first six months was $3.143 billion, better than the $2.96 billion in the same period of 2015.

SEGMENT PERFORMANCE
Revenue for the company’s intermodal operation – the company’s largest in terms of revenue – during the quarter was $933 million, up 3%. Operating income in the quarter was $105.6 million, down 11%.

In addition to higher costs for drivers and purchasing rail transportation, the company said it also spent $14.1 million on “corporate wide streamlining and technology redevelopment costs, across its various segments, with about $6.4 million of that going to the intermodal segment.

The company’s intermodal load volumes grew 9% over the same period in 2015. Eastern network realized load growth of 10% and Transcontinental loads grew 8% as west coast port volumes continued a more normal trend and rail service continued a year over year improvement trend.

Segment revenue increased 3% reflecting the 9% volume growth, offset by a 5% decrease in revenue per load, which is the combination of customer rate changes, fuel surcharges and freight mix. Revenue per load, excluding fuel surcharge revenue decreased 1% from second quarter 2015.

Logistics experts report that container volumes and port traffic has been softer than expected through June. While West Coast ports had volume growth of 1.5%, East and Gulf Coast ports down 1% and 2% respectively. As inventories remain high in the U.S. expectations for sluggish traffic growth remains a threat to intermodal carriers through the back half of the year, according to James Sands, industry expert.

Segment revenue for dedicated contract services was $383 million, up 4%. Quarterly operating income was $50.5 million, up 24% compared to the same quarter in 2015. More trucks helped boost revenue and operating income.

“A net additional 350 revenue producing trucks, 132 net additions compared to first quarter 2016, were in the fleet by the end of the quarter compared to prior year. Approximately 87% of these additions represent private fleet conversions versus traditional dedicated capacity fleets. Customer retention rates remain above 98%,” the company noted in the earnings report.

Quarterly segment revenue for integrated capacity solutions was $204 million, up 17%. Operating income in the segment was $10.9 million, up 122%.

In the company’s trucking segment, revenue reached $98 million, up 1%. Operating income was $8.9 million, down 9% compared to the same quarter in 2015. The company had 2,186 tractors at the end of the quarter, up from 2,073 in the 2015 quarter.

“Benefits of the larger fleet were more than offset by lower rates per loaded mile, increased driver hiring costs, higher independent contractor cost and increased tractor maintenance costs compared to the second quarter 2015,” noted the earnings report.

LOWERED GUIDANCE
J.B. Hunt Transport expects to see higher risks in the back half of 2016 related to rail cost increases and pressures on customer rates. The company lowered its earning guidance from previous levels noting that revenue per load in its intermodal division is trending 1% to 3% lower than expected.

The company also expects some margin erosion in its trucking division with revenue growth expected to range under 2%. The Dedicated Truck segment also is expected to see a 33% reduction in its revenue growth as expectations were reduced from 6-8% down to 4-6%, according to the revised guidance report. Productivity in this division is expected to flat, down from a 2% gain previously forecast by the company.

The company reaffirmed capital spending of $537 million in 2016, growing and replacing its overall fleet to the tune of $238 million and $230 million, respectively. Technology investments will cost $36 million, and $33 million is being spent on its facilities, namely the large expansion to the company’s corporate offices in Lowell.

For the full year, Hunt expects overall revenue will increase 7% to $6.621 billion. This is lower than the 9% revenue growth to $6.74 billion which was the low end of the guidance. At the top range, expected revenue predicted back in November 2015 was a 12% increase to $6.93 billion.

The company also guided down its operating income growth to $751 million, which would be a 5% increase over last year. The previous operating income guidance called for 13% growth year-over-year to $807.95 million.

The lower expectations aren’t a surprise to experts following the industry. Economists for the American Trucking Association warned earlier this year about pressures on rates for truckers given there is excess capacity relevant to demand. Average spot rates for truckloads fell 4% in the week ending July 15, sinking to a two-month low, according to Truckstop.com’s Market Demand Index.

Hunt’s diversified business model has helped it to fend off some of the troubles seen by smaller players but there is some concern among Wall Street regarding Hunt shares following Monday’s report.

J.B. Hunt shares (NASDAQ: JBHT) opened lower on Monday, losing $2.29 cents at the $82.98 opening price. Though the morning session share volume was heavy, the $83 per share price is down 2.67%. Year-to-date, Hunt shares are up 13%. During the past 52 weeks the share price has ranged from an $89.43 high to a $63.58 low.