Freight logistics and customs giant C.H. Robinson Worldwide (NASDAQ:CHRW) reported markedly higher net earnings over the last three months in its quarterly report issued on July 31. Freight transportation industry dynamics have created a favorable environment for third-party logistics (3PL) companies, and C.H. Robinson was able to convert market opportunity into impressive top- and bottom-line results in the second quarter of 2018.
The raw numbers
|Metric||Q2 2018||Q2 2017||Year-Over-Year Change|
|Revenue||$4.27 billion||$3.71 billion||15.1%|
|Net income||$159.2 million||$111.1 million||43.3%|
|Diluted earnings per share||$1.13||$0.78||44.9%|
What happened with C.H. Robinson Worldwide this quarter?
Net revenue (i.e., reported revenue after subtracting the costs of outsourced transportation services and logistics) jumped 17% over the prior-year quarter, to $671.5 million.
The phenomenon of net revenue growth of 17% outpacing total revenue growth of 15% results from tight capacity in the freight truck market. I discussed the numerous factors driving current benign conditions for 3PL organizations such as the trucking business last quarter.
C.H. Robinson's operating margin improved roughly one percentage point, to 32.6%, as higher variable compensation expense and an expanded headcount offset some of the operating leverage provided by robust net revenue expansion.
Net income benefited from a lower effective tax rate due to last year's U.S. tax legislation. The company's effective tax rate dropped 10 percentage points to 25.6%. Management cited this boost as well as improved operating cash flow as the source of a 30% jump in dividends paid and shares repurchased during the quarter ($268.9 million in total between the two).
For the third consecutive quarter, North American Surface Transport (NAST), the company's largest segment, achieved a trifecta of double-digit growth in total revenue, net revenue, and operating income. Revenue advanced by nearly 21% over the prior year to $2.9 billion, while net revenue increased by 21.4% to $436.8 million. Operating income improved to $184.6 million, a 31.6% leap over the second quarter of 2017.
Management attributed NAST's success primarily to higher pricing, as the company was able to prosper from the imbalance between supply and demand in the trucking market. C.H. Robinson derives a slight majority of its revenue from contractual business. Thus, its overall pricing power reflects the organization's success so far this year in renewing contracted business at higher rates, while also realizing higher rates in the spot (real-time) market for non-contracted business.
The relationship between revenue and net revenue this quarter is visible in NAST's basic economics: The company's average truckload rate per mile charged to customers (excluding fuel) increased by 20.5%, while truckload transportation costs increased 19.5%. As for volume, NAST's truckload volume dipped by 4.5%, while less-than-truckload (LTL) and intermodal volumes increased by 6% and 3.5%, respectively.
Global Forwarding, C.H. Robinson's second-largest segment (comprising ocean freight, air freight, and customs business lines), enjoyed similarly strong revenue growth. The segment's top line improved by 16.8% to $617.6 million, while net revenue advanced by 19% to $144.0 million. Operating income grew by 7.6% to $30 million.
Management cited volume growth across all three revenue streams as a key driver behind Global Forwarding's results. The prior-year acquisition of Canadian customs broker and freight forwarder Milgram & Company added 4.5 percentage points to net revenue growth, while higher compensation expense offset some of the operating leverage provided by a healthier top line.
Robinson Fresh, the organization's division that provides for the global transportation of perishables, continues to struggle. Revenue dipped 5.5% to $621.0 million, while net revenue dropped 8.7% to $55.5 million. Segment operating income tumbled to $9.2 million -- a 32% erosion from the prior-year quarter.
The company blamed weaker volumes from a key customer exiting the fresh produce business, as well as higher transportation costs, for the division's relatively weak numbers. Robinson Fresh has now underperformed for several consecutive quarters, and management has outlined some broad steps to improve profitability going forward, which include cost controls, a reduction in headcount, and the closing of a service center.
Management's perspective going forward
C.H. Robinson has certainly exhibited momentum in the first half of 2018; will the back half of the year prove as fruitful? During the company's earnings conference call, CEO John Wiehoff provided some insight related to the first month of the new quarter (third quarter of 2018):
We continue to see very high freight demand in the marketplace. Our results through July reflect that, and our customer interactions reflect expectations for continued high demand for the remainder of the year. Demand side of the equation is obviously driven by a healthy economy, and it's the more volatile part of the supply and demand relationship. On the supply side, we see high orders for new equipment, driver shortages, and significant logging device impacts on certain lanes and a lot of capacity owners realigning their networks and freight preferences to adjust to the market.
As for what this will mean for the company's ability to continue to profit from the current environment, Wiehoff stated:
While our cost and pricing charts show some leveling off of the significant year-over-year price increases, we do expect the market to remain tight for the remainder of the year. Pricing continues to escalate. We experienced another quarter of double-digit cost and price increases across most of our service lines this quarter. We now have pricing reflective of marketplace conditions across the significant portion of our business portfolio. This contributed to our sequential improvement in net revenues.
C.H. Robinson doesn't provide quantitative revenue or earnings guidance. Yet Wiehoff's observations on present industry conditions signal to investors that the company will enjoy its earnings tailwinds for at least the next two quarters. Maintaining the current earnings surge will likely boil down to business execution.