C.H. Robinson’s (NASDAQ: CHRW) third-quarter 2020 earnings per share of $1 beat Wall Street’s consensus estimate by a penny, according to operating and financial results that the third-party logistics provider giant released Tuesday after markets closed. C.H. Robinson grew gross revenue by 9.6% to $4.2 billion but saw net revenues fall 7% $589.3 million. Earnings were 6.5% lower than the third quarter of 2019.
“We were able to deliver solid performance across our diversified business portfolio and improve our results as the quarter progressed due to the efforts of our C.H. Robinson team members around the world,” said Bob Biesterfeld, chief executive officer of C.H. Robinson, in a statement. “We also continued to make progress on our strategic, long-term initiatives around profitable market share gains, productivity improvements and technology advancements.”
Robinson breaks its financial reporting out into two main business segments: North American Surface Transportation (NAST), which includes its intermodal, truckload and less-than-truckload (LTL) brokerage businesses; and Global Forwarding, which is Robinson’s international ocean and air freight forwarding business.
NAST is nearly four times larger than Global Forwarding on a gross revenue basis, contributing $2.9 billion revenue in the quarter compared to $831 million from Global Forwarding. But it was Global Forwarding that outperformed and saved the quarter on the back of very strong ocean and air pricing and wider margins.
Robinson’s freight brokerage was plagued by the trucking market conditions that were a boon to asset-based truckload carriers, namely tight trucking capacity and high spot rates. C.H. Robinson sources, aggregates, matches and tracks trucking capacity for its shipper customers, and trucking spot rates represent a substantial portion of Robinson’s costs (although spot freight is also a significant contributor to revenue). In the initial stage of a trucking market rally, spot rates accelerate faster than contract rates and compress 3PL margins — and that is exactly what happened to NAST in the third quarter.
NAST reported revenues 3.5% higher year-over-year but net revenues fell to $367 million, down 15.2% compared to the third quarter of 2019. Income from operations in turn dropped 30.5% year-over-year to $122 million. Those figures imply an across-the-board NAST gross margin of 12.58%, blended across a business that includes multiple modes. Typically, intermodal generates narrow margins, truckload is in the middle, and less-than-truckload has wider margins. That blended NAST gross margin was down 277 basis points year-over-year and down 275 basis points compared to Q2 2019, when the bottom fell out of the spot market in April and May.
That margin compression occurred despite Robinson pulling several levers. First, Robinson largely shunned truckload volume growth (up just 0.5% year-over-year) in order to take double-digit price increases from its customers (truckload rates charged to customers were up 10.5% year-over-year). It sold into less-than-truckload more aggressively, growing volumes 13.5%, and grew intermodal volumes by 2.5%.
At the same time, NAST workers were far more productive, because Robinson cut NAST full-time-equivalents by 13.5% compared to a year ago. Robinson’s massive investments in its technology platform Navisphere appear to be paying off, and analysts may address NAST productivity in the call on Wednesday morning.
Global Forwarding results were stellar, based on high air and ocean freight rates and wider margins. Forwarding grew gross revenues by 39.2% year-over-year to $831 million, net revenues by 16.1% to $157 million, and income from operations by 87.6% to $46.2 million. Ocean net revenues were up 14.3% year-over-year, on a 1.5% increase in volumes, but air cargo net revenues soared 29.2% higher compared to the year-ago period, even though air volumes plummeted by 19%. Global Forwarding as a business unit posted a blended gross margin of 18.9% across modes.
In its earnings release, Biesterfeld offered bullish guidance for the fourth quarter and 2021, anticipating continuing strengthening in freight markets.
“We believe we are still in the midst of a strengthening freight cycle that we anticipate will continue into 2021,” Biesterfeld said. “Freight markets are continuing to tighten in the fourth quarter due to higher demand as we enter the holiday season and lower availability of carrier capacity.”