C.H. Robinson Earnings: Consistent Margins, Year-to-year Comps Get Tougher, Mixed ELD Impact

Highlights from the earnings report and conference call of C.H. Robinson Worldwide Inc. CHRW, a leading 3PL provider.

The rolling of the calendar came up on the C.H. Robinson call, but it has come up elsewhere during this earnings season. Several executives on conference calls and the analysts who pepper them with questions noted that year-on-year comparisons have been running extremely strong for four quarters now. The second quarter of 2018 was one of the strongest. But year-on-year comparisons going forward, starting with the third quarter, will be compared against the early days of the current freight bull market, which began to come to life last summer and really kicked into high gear with the relief efforts necessary to aid the Houston and Gulf Coast areas after Hurricane Harvey. As Merrill Lynch analyst Ken Hoexter wrote in his review of the call and the earnings, "The company expects current freight market fundamentals to continue. July to-date net revenue has increased 20 percent y-y (above our prior +11.0 percent estimate for 3Q18) but noted that it expects net revenue growth per business day to moderate given tougher comps, including the effects of hurricanes last August." That sentiment has been expressed by others during this earnings season. For the quarter, the company's net revenue was up 15 percent year-on-year in April, 14 percent in May and 23 percent in June.

The impact of ELDs got several different perspectives on the call. CEO John Weifoff, in his opening remarks, mentioned ELDs as a factor weighing on truck capacity. "While an increase in new equipment orders may suggest an increase in capacity, we believe the aging truck driver demographics and declining number of new truck drivers combined with the impact of the April 1 hard enforcement of ELDs will continue to constrain capacity," he said. "So, we expect the market to remain tight through 2018." But later, in response to a question, while not dismissing the impact, Wiehoff did appear to downplay it. "Prior to the ELD implementation, a lot of projection and speculation around what impact it would have was thinking about what, if any, percentage of trucks might exit the market or not renew their registration and whether 2, 3, 5 percent of capacity would leave the marketplace as a result of the requirement," Wiehoff said, according to a transcript the earnings call supplied by SeekingAlpha. "As we've shared, we haven't really seen any of that." But Robert Biesterfeld, the COO and president of the North America Surface Transportation (NAST) segment of C.H. Robinson, said the Robinson Fresh division has definitely seen an impact from ELDs. Robinson Fresh is not just a segment of refrigerated vans; it is more of a full-service transportation and logistics provider to the produce industry, right down to the retail level. "The hard enforcement of the ELD mandate has had a greater impact on the temperature-controlled and multi-stop, multi-fit loads that are common in the fresh produce business," Biesterfeld said about ELDs.

ELDs did not appear to impact the size of the C.H. Robinson network, which contracts with independent owner/operators to become part of the company's capacity, according to Biesterfeld. Robinson added about 4,400 new carriers in the second quarter, which is 19 percent more than a year earlier and 5 percent over the first quarter of this year, before the tight ELD enforcement of April 1 launched. Separately in the call, Biesterfeld stressed that the number should not be taken as any sign of growing capacity in the market. The average size of the fleets joining the Robinson network in the quarter was 1.5 trucks. "These are truly owner-operators that are either new to the industry, new to Robinson, or both," he said. "So, given the driver shortage that all the mid-sized and larger trucking companies that I talk to, and the challenges of recruiting and retaining drivers in an environment of nearly full employment, I don't see a meaningful increase in overall capacity entering the market." Biesterfeld discussed an internal Robinson metric, the average routing guide depth, which measured how deep into the lineup of carriers a shipper had to go before closing the deal. For the quarter, the average was 1.8, compared to what he said is an average balanced market number of 1.4. But there were times in certain parts of the country during the quarter where it got up to five, "indicating periods of localized displacement between both supply and demand," Biesterfeld said.

Margins were improved, but not by much. The net revenue margin of 16.2 percent was up 80 basis points…from five years ago. What Biesterfield showed in the presentation was a chart without specific numbers (see below) that showed the spread between transportation prices and costs over the last several years. The second quarter was the fifth in a row where both went up. "We've generally maintained a consistent gap between price and cost, even in periods of high inflation," he said. "Despite significant levels of freight market volatility, both customer pricing and carrier costs have increased at a rough 3 percent annual average rate over this time period."

Source: C.H. Robinson

With the exception of the struggles in the Robinson Fresh division, other numbers were strong. Total revenue was up 15.3 percent from a year earlier, and net revenues were up 17 percent. While personnel expenses rose almost 20 percent, SG&A was up only 3.8 percent, and it led to an operating margin of 32.6 percent up from 31.7 percent a year earlier. Net income was up 43.3 percent.

Want more content like this? Click here to Subscribe