After enjoying several quarters of pricing power due to tight capacity in its biggest market, trucking, third-party logistics (3PL) provider C.H. Robinson Worldwide (NASDAQ:CHRW) grappled with a leveling off of demand in the first quarter of 2019. Results released April 29 reveal, however, that the logistics, freight, and customs giant reacted by improving both net revenue and its bottom line. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter:
C.H. Robinson: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (Year Over Year)|
|Revenue||$3.75 billion||$3.93 billion||(4.6%)|
|Net income||$161.8 million||$142.3 million||13.7%|
|Diluted earnings per share||$1.16||$1.01||14.9%|
What happened with C.H. Robinson this quarter?
Revenue retraced during the quarter due to weaker net pricing and lower air freight volume.
The important metric of net revenue (i.e., reported revenue minus the costs of outsourced transportation and logistics) improved by 8.4% to roughly $679 million.
In the company's largest segment, North American surface transportation, or NAST, revenue dipped by 3.8% to $2.8 billion, while net revenue increased 11% to $486.6 million. After several quarters of high demand and crimped capacity, market dynamics in the trucking market reversed slightly last quarter. The company's average truckload rate per mile charged to customers slipped by 5.5%. However, average truckload cost per mile decreased by 8.5%, providing C.H. Robinson with a bit of profit leverage.
In the company's second major segment, global forwarding, revenue eased by 2.9% to $537.6 million. Net revenue advanced by 3.4% to $127.2 million. Lower net pricing in ocean and air freight services, as well as lower air volumes, were primarily responsible for the revenue decline and rather moderate net revenue expansion.
In both NAST and global forwarding, favorable logistics costs and controlled operating expenses provided a lift to the bottom line. NAST operating margin improved by 240 basis points to 43.4%, while global forwarding's operating margin jumped by 450 basis points to 11.2%. Total company operating margin went up nearly 1 percentage point to 6%.
The company changed its reporting for its perishables transport business, Robinson Fresh. Robinson Fresh's surface transportation revenue is now included in NAST's results (as of this quarter and going forward). The business' remaining revenue is included in a new segment, "all other and corporate results." In this new segment, net revenue increased less than 1 percent to $65 million.
- On Feb. 28, C.H. Robinson purchased Space Cargo, an international freight forwarding, customs brokerage, and logistics provider that primarily serves the markets of Spain and Columbia, for $48 million in cash. The acquisition is expected to be accretive (i.e., additive to earnings) this year.
- The company announced during the quarter that current CEO John Wiehoff will retire, while retaining the title of board chairman. Wiehoff will be succeeded by current COO Bob Biesterfeld, who will take the organization's reins on May 8. Separately, CFO Andy Clarke left the company at the end of March; corporate controller Scott Hagen is serving as interim CFO while the company searches for a replacement.
C.H. Robinson repurchased $76.7 million worth of its own shares during the quarter, roughly 9% more than its first-quarter repurchase total last year.
Over the previous four quarters, Robinson Fresh enjoyed ample pricing power and renewed contractual business at attractive rates while also finding pricing leverage in the spot (i.e., real-time) market. This scenario has shifted as the trucking market in particular reveals longer-term signs of slackening demand. CEO John Wiehoff updated investors on current conditions during the company's earnings conference call:
Demand has been softening and that has resulted in cost of hire declines and price declines. Although a growing percentage of our capacity is strategically planned and procured, we purchased the majority of our North American truckload capacity in the spot market. So our pricing is generally reflective of overall market conditions. We are also seeing a modest increase in truckload capacity.
With less than 3% market share in each of our transportation service lines, we do not lead the market lower, but with meaningful scale, we are typically a reflection of the market, both in terms of pricing and in our contractual versus transactional mix. When markets are balanced, customers typically engage us in more contractual volume, and when markets are tight, more of our volumes move to transactional freight.
One of our network's greatest strengths is adapting to changing market conditions. We view it as our primary job to help our customers and carrier partners understand current conditions and manage through cycles with high levels of execution, and we feel good about how we are positioned to continue to do that.
C.H. Robinson doesn't provide a set of quantitative guidance numbers for investors to follow each quarter. However, the company typically provides some early insight into current daily trends when it reports on the prior period.
So far in the second quarter (essentially the month of April), C.H. Robinson's daily net revenue has increased by 5% year over year, while truckload volume has decreased by 4%. In other words, trends look similar to those of the last three months, and C.H. Robinson will likely again attempt to squeeze higher profits from fewer revenue dollars in the current quarter.