Third-party logistics (3PL) provider C.H. Robinson Worldwide (NASDAQ:CHRW) followed a solid second-quarter performance with a similar slate of improved numbers over the last three months. Third-quarter results, released Tuesday after the close of trading, revealed double-digit year-over-year growth in both revenue and earnings.
The raw numbers
|Metric||Q3 2018||Q3 2017||Change (YOY)|
|Revenue||$4.29 billion||$3.78 billion||13.5%|
|Net income||$175.9 million||$119.2 million||47.5%|
|Diluted earnings per share||$1.25||$0.85||47.1%|
What happened with C.H. Robinson Worldwide this quarter?
While the company's total revenue is an important number to follow, net revenue -- that is, total revenue less outsourced logistics and transportation costs -- is equally vital to grasping company performance. C.H. Robinson's net revenue improved by 16.9% to $694 million against the prior-year quarter. This is roughly the same year-over-year percentage gain the company achieved in the second quarter of 2018.
The organization's net revenue expansion in 2018 has originated primarily from tight capacity in the freight trucking market. North American Surface Transportation, or NAST, the company's largest segment, reported a top-line increase of 18.7% over the prior year, to $2.9 billion. Yet net revenue jumped 23.3% to $465.5 million.
The current freight environment is rewarding 3PL companies, and with a shortage of trucks on the road, C.H. Robinson has been able to raise both spot (i.e., real-time) and contracted pricing throughout the year. Rate increases have covered climbing outsourcing costs while enhancing the organization's bottom line. Despite a 0.5% dip in NAST truckload volumes this quarter, pricing rates to customers per North American truckload mile (excluding fuel) rose 14%, which more than absorbed a 12% increase in average truckload transportation cost per mile.
NAST's healthy net revenue growth pushed segment operating income up by nearly 35% against the third quarter of 2017, to $204.2 million.
Global Forwarding, the company's second-largest segment, notched a top-line increase of 15.8% against the comparable quarter to $639.3 million, while net revenue inched up by 3.3% to $134.1 million. A decline in ocean net revenue due to higher purchased-transportation costs was offset by higher volumes and pricing power in the air and customs forwarding business lines.
Global Forwarding's operating income slipped by 23.4% to $23.8 million year over year. A 9% rise in average headcount and variable compensation expense were the primary factors which pushed total operating expense up nearly 12%. The company's prior-year acquisition of Milgram & Company, a Canadian customs broker and freight forwarder, accounted for roughly 5 percentage points of the headcount increase.
C.H. Robinson displayed progress in improving the results of its smallest segment, Robinson Fresh, which facilitates the global transport of perishables. Revenue declined 7.8% against the prior year to $565.6 million. However, net revenue expanded by 11.2% to $60.3 million, and segment operating income jumped dramatically, by nearly 85%, to $21.4 million.
Case volumes in the fresh segment dipped by 9.5% due to a "strategic customer" exiting the fresh foods business, lower promotional activity from customers, and declining restaurant traffic at the segment's food-service customers. But higher truckload pricing combined with reductions in both average headcount and overhead expenses to enhance profitability, despite the lower activity level.
Across all three segments, robust net revenue and cost discipline helped to boost C.H. Robinson's operating margin, which advanced by 2.7 percentage points versus the second quarter of 2017, to 35.4%.
In the company's earnings press release, C.H. Robinson CEO John Wiehoff emphasized the fruits of higher net revenue, namely, improved margins and cash flow:
Our strong third quarter financial performance reflects great execution by the employees across our global network. We delivered another quarter of double-digit increases in both net revenue and operating income and a 270 basis point increase in operating income margin. Truckload volume trends improved sequentially, and we delivered volume growth in many of our other service lines. ... Our strong operating income performance, combined with improved working capital and the benefits of U.S. tax reform, enabled us to generate significant increases in cash flow from operations and cash returns to shareholders in the quarter.
C.H. Robinson Worldwide generated $220.4 million in operating cash during the third quarter, which accounted for 42% of its year-to-date operating cash flow total.
As for the specific cash returns to shareholders Wiehoff mentions, through the first three quarters of 2018, the company has issued $195.2 million in dividend checks to shareholders and repurchased approximately $223 million worth of its own shares.
C.H. Robinson's executives typically don't provide quarterly earnings guidance. However, in the organization's third-quarter earnings slide presentation, management pointed to business conditions shareholders should note heading into the fourth quarter. These include the continuation of an environment of increased costs and higher pricing in comparison to last year, cautiousness around escalating tariff activity, and additional investment in areas which pressure near-term margin (e.g., increased headcount) while providing for longer-term value creation.