As its earnings release after the close of trading Tuesday revealed, logistics provider C.H. Robinson Worldwide (NASDAQ:CHRW) closed its 2018 books with solid fourth-quarter earnings due to strength across all major segments. Continued tight capacity in the road freight market resulted in firm truckload pricing over the last three months. Moreover, the company's air, ocean, freight, customs, and perishables transport business lines all generated profit improvement to supplement the quarter's earnings. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter (the fourth quarter of 2017):
The raw numbers
|Metric||Q4 2018||Q4 2017||Change (Year Over Year)|
|Revenue||$4.13 billion||$3.96 billion||4.3%|
|Net income||$187.2 million||$152.6 million||22.7%|
|Diluted earnings per share||$1.34||$1.08||47.1%|
What happened with C.H. Robinson Worldwide this quarter?
- While revenue improved just 4.3%, net revenue -- i.e., total revenue less outsourced transportation and logistics costs -- advanced by 13%, to $713.8 million.
- Revenue in C.H. Robinson's largest segment, North American Surface Transportation (NAST), increased 6%, to $2.8 billion, while net revenue rose 13.5%, to $471.4 million.
- NAST net revenue benefited from a widening spread of higher rates and lower costs. Excluding fuel, the segment saw a 1.5% increase in the average truckload rate per mile charged to customers, while average truckload costs per mile decreased by roughly 1%.
- This net revenue dynamic absorbed generally lower volumes: Truckload volumes dipped 1.5%, while less-than-truckload (LTL) volumes expanded 2%. Intermodal (freight carried over multiple modes of transport) volumes declined 13%.
- NAST's operating income jumped nearly 17%, to $211 million, due primarily to the net revenue expansion.
- C.H. Robinson's second-largest segment, Global Forwarding, achieved revenue growth of 14.5%, to $677.1 million, and net revenue growth of 11.6%, to $142.7 million. The segment reported higher net revenue across all three major lines of business (ocean, air, and customs brokerage).
- Global Forwarding derives more than half its revenue from ocean logistics. Ocean net revenue advanced by 12.4% as tighter demand created a favorable market pricing environment during the quarter.
- In my earnings preview, I discussed the recent stabilization of Global Forwarding's headcount, which has positive implications for future segment earnings. As expected, a recent curb on hiring produced tangible improvement in the segment's bottom line in the fourth quarter. Global Forwarding's net income leaped 76.9%, to $29.8 million. Top-line leverage was accompanied by discipline in other categories besides employee expense: Total operating expenses increased just 1.7% during the quarter.
- Robinson Fresh, the company's smallest division, provides for the domestic and global transport of perishables. Revenue declined 10.6%, to $531.2 million, during the quarter, but higher truckload pricing pushed net revenue higher by 19%, to $64.3 million.
- Management has also devoted attention to improving margins in Robinson Fresh. During the quarter, a reduction in headcount of 5.5% partially offset increases in variable compensation expense. Thus, similar to the narrative in Global Forwarding, higher net revenue and a tight lid on expenses caused Robinson Fresh's operating income to surge 53.5%, to $19.8 million.
- Total company operating margin notched nearly 1 percentage point of improvement, to 6.2%.
- The company repurchased $98.4 million of its own shares during the quarter, bringing its 2018 repurchase total to $322.2 million, an increase of 55.6% over the prior year.
CEO John Wiehoff observed in the company's press release that the organization was able to capitalize on benign market conditions over the last year to drive bottom-line results while generating ample cash flow:
We are pleased with our financial results in 2018. We achieved record levels of net revenues and operating income and a 100 basis point increase in operating income margin. Led by our strong operating performance, we more than doubled our cash flow from operations and returned nearly $600 million to shareholders in 2018. Our strong 2018 financial results reflect the strength and hard work of our global network.
The approximate $600 million in shareholder returns Wiehoff describes includes $265 million in dividends, in addition to the share repurchases discussed above. Shareholder-friendly actions consumed roughly four-fifths of C.H. Robinson's free cash flow of $720 million during 2018.
C.H. Robinson doesn't provide investors with numerical guidance for upcoming quarters. In the company's earnings release, CEO Wiehoff signaled that 2019's priorities will look very similar to those of 2018: operating margin expansion due in part to investments in technology, "strong returns to shareholders," and investments that aim to add value for customers while smoothing out the cyclicality in the third-party logistics (3PL) market.