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Through the first three quarters of the year, it certainly looks as though C.H. Robinson Worldwide (NASDAQ: CHRW) has been at the mercy of transportation industry trends. In the company's third-quarter 2016 earnings report released on Tuesday, Oct. 25, both total and net revenue were impacted by lower truckload pricing, even though volumes remained healthy. Below, let's first review the headline numbers, then take a more detailed walk-through of the quarter:
C.H. Robinson Worldwide: The raw numbers
|Metric||Q3 2016||Q3 2015||YOY Growth|
|Revenue||$3.36 billion||$3.42 billion||(1.8%)|
|Net income||$129.0 million||$139.4 million||(7.5%)|
|Diluted earnings per share||$0.90||$0.96||(6.3%)|
Data source: C.H. Robinson Worldwide 8K filing, Oct. 25, 2016. YOY = year over year.
What happened with C.H. Robinson Worldwide this quarter?
- Net revenue, or total revenue minus the cost of contracted shipment services, declined by 5.1%. C.H. Robinson's net revenue trend has deteriorated this year, although, in all fairness, the third quarter was up against a difficult comparison from Q3 2015, in which net revenue jumped 11.6%, bolstered in part by the acquisition of Freightquote.com.
- The company reported a 10.4% decline in truckload net revenue, to $309.0 million. Since truckload logistics is C.H. Robinson's largest segment, its roughly $36 million dip in net revenue was responsible for most of the organization's total net revenue slump during the quarter.
- Intermodal shipping declined nearly 25% to $7.7 million. In contrast to truckload, intermodal is C.H. Robinson's smallest segment. Nonetheless, it experienced a stark drop-off in comparison with other revenue streams. Management stated that intermodal was impacted adversely by the alternative lower-cost truck market.
- C.H. Robinson's remaining transportation segments experienced marginal change during the quarter. Less-Than-Truckload, or LTL, the organization's second-largest segment, saw a net revenue increase of 2.4%, to $96.5 million. Air transportation net revenue slipped 1.7% to $19.9 million. Ocean net revenue lost 3.1%, to $56.5 million, indicating that C.H. Robinson experienced limited impact from the much-publicized September bankruptcy of Hanjin Shipping Company.
- Net revenue margin (net revenue divided by total revenue), one of C.H. Robinson's most closely followed metrics, slipped slightly versus the prior-year quarter, from 18.4% to 17.6%.
- Despite revenue and earnings declines, management was able to point to a few bright spots in Tuesday's report. Truckload volumes improved by 7.5% in comparison to Q3 2015. In fact, they've been firming all year, potentially paving the way for a revenue rebound once pricing stabilizes.
- Other positives included a 31% jump in "other logistics services," to $26.8 million. Sourcing revenue also improved by roughly 5%, to $29.8 million. These services-based revenue lines provided some offset to the faltering transportation segments.
- Finally, the company completed its previously announced $229 million acquisition of freight forwarding and customs brokerage provider APC Logistics on Sept. 30. The purchase helps bulk up C.H. Robinson's Asia-Pacific Rim presence, as APC is based primarily in Australia and New Zealand.
What management had to say
In the company's earnings press release, management reiterated that it's been warning about a weak pricing environment all year, while also signaling its intention to stay focused on its business plan.
"We expected a challenging pricing environment in 2016 as shippers focus on reducing their transportation costs. Despite the decrease in some of our key financial metrics in the third quarter, we feel confident that we are making good progress on our long-term plans," said John Wiehoff, CEO and Chairman. "We are adapting to the market conditions by achieving profitable volume growth and continuing to focus on improving our customers' supply chain outcomes."
Relatively soft fuel prices, competition from other logistics providers, ample transportation supply, and the increased real-time information customers have into services pricing are a few factors underlying what management means when it refers to the current aggressive pricing environment.
The organization has worked to mitigate industry pressure by shifting to a higher number of contracted relationships. Currently, the company's North American truckload portfolio, an important barometer for the entire business, operates at 60% committed pricing (i.e., generally contracted or fixed pricing, often in one-year increments) and 40% spot market pricing. Structuring revenue in this manner allows the company to focus on, as stated above, "profitable volume growth." Management makes no secret that the top line is still somewhat vulnerable. Efforts to contractualize more pricing may help mitigate effects on the bottom line, should current conditions persist into next year.
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