C.H. Robinson (NASDAQ: CHRW) the largest North American third-party logistics provider (3PL), reported its second quarter financial results today, July 30, after markets closed. Robinson posted diluted earnings per share of $1.22, up 8 percent, but just above Wall Street’s $1.21 consensus estimate.
The 3PL, whose largest business unit is in truckload brokerage, scraped out a beat on 8.6 percent lower gross revenues, “driven by lower pricing across most transportation service lines.” But Robinson’s freight brokers were able to chase falling contract and spot rates down and managed to widen the brokerage’s – the North American Surface Transportation (NAST) division – gross margins and grow net revenues by 3.5 percent to $692.5 million.
“In the second quarter, we achieved 3.5 percent net revenue growth, solid performance versus the year-ago period where net revenues increased 17 percent. We delivered our fifth consecutive quarter of operating margin expansion and an 8 percent increase in earnings per share,” said Bob Biesterfeld, Chief Executive Officer of C.H. Robinson in a statement. “We continued to make improvements in working capital, which combined with increased earnings, allowed us to generate nearly $200 million in cash flow from operations and increase cash returns to our shareholders. We are pleased with our second quarter results in this soft freight environment.”
Income from operations increased 3.9 percent to $227.5 million on the back of strength in NAST that was partially offset by declines in Global Forwarding, Robinson’s international freight forwarding business that handles ocean and air freight, and All Other and Corporate, which includes legacy produce-sourcing business Robinson Fresh.
Net income totaled $169.2 million, up 6.3 percent from the same quarter of 2018.
In NAST, overall gross revenues declined by 9.2 percent year-over-year to $2.9 billion. Both truckload and less-than-truckload (LTL) posted net revenue gains of 8.6 percent and 2.8 percent, respectively, but intermodal fell apart, with net revenue down significantly by 33.8 percent.
True to its counter-cyclical business model, NAST was able to widen its gross margins by 240 basis points year-over-year to 16.9 percent in a softening freight market.
“For those investors concerned about the potential for GDP deceleration and tonnage declines, CH is often an effective hedge during times of economic duress, in our view. History has shown that as a non-asset based transport provider, the company holds up very well versus asset-based peers during periods of declining economic growth,” wrote Goldman Sachs analyst Jordan Alliger in a July 10 investor note.
In a July 12 investor note, Susquehanna analyst Bascome Majors explained why 3PLs tend to show superior counter-cyclical performance.
“Generally, rising spot rates (which brokers are “short”) are a nearterm negative for gross margins for brokers with committed contract business (as they’re “long” stable/lagged contract rates),” Majors wrote.
“Excluding the impact of the change in fuel prices, average North America truckload rate per mile charged to customers decreased approximately 11.5 percent in the quarter, while truckload transportation cost per mile decreased approximately 14.5 percent,” Robinson reported.
After the release, Morgan Stanley analyst Ravi Shanker warned that C.H. Robinson may be whipsawed in the second half of the year by rising spot rates and lagging, falling contract rates, which would have the effect of compressing margins.
“The gap between spot (buy) and contract (sell) rates is likely to close with spot rates looking like they are stabilizing (if not increasing) and contract rates for brokers coming in at [high single digit] if not [low double digit] declines. The numeric impact of this dynamic will only start to show up in net revenues in 3Q,” Shanker wrote in an investor note the evening of July 30.
In terms of volumes, truckload volumes were down 2.5 percent, LTL volumes were up 3.5 percent, but intermodal volumes were down 30.5 percent compared to the year prior.
Total revenues for Global Forwarding fell 4.1 percent to $592.5 million on lower pricing in ocean and air freight and lower volumes in air freight. Despite the acquisition of The Space Cargo Group, which contributed 3 percentage points to net revenue growth, net revenues were down 1.6 percent compared to the prior year.
Buying back stock played a role in CHRW’s modest EPS beat. In the second quarter, $179.8 million was returned to shareholders – $69.3 million in dividends and $110.5 million in buybacks, an overall increase of 32.0 percent over the prior year.
The press release did not give specific revenue or earnings guidance other than to say that Robinson expects the soft freight market to continue through 2019; the company maintained guidance for $80 million to $90 million in capital expenditures for the full year.
