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2 Things C.H. Robinson Worldwide's Management Wants Investors to Know

Asit Sharma, The Motley Fool

Buoyed by a positive fourth-quarter 2018 earnings report issued on Jan. 29, stock in third-party logistics (3PL) provider C.H. Robinson Worldwide (NASDAQ: CHRW) has appreciated 7.5% so far in 2019. Below, let's review two comments made by executives during the company's recent earnings conference call, the first relating to top-line strategy, and the second about margin improvement. Taken together, the comments shed light on management's outlook and business approach as we settle into the first quarter of 2019. 

1. It's working toward an optimal business mix

A strength of our business model is the ability to rebalance our portfolio between contractual and spot-market freight as market conditions change ... Over an extended freight cycle, we continue to believe that honoring our commitments on contractual freight while also securing spot-market capacity is the best way to serve our network of customers and carriers, grow our business, and create value for shareholders.

-- CEO John Wiehoff

C.H. Robinson tends to maintain a revenue mix of 60% contracted-rate business, and 40% spot business (i.e., quoted at real-time market pricing). When capacity in the truckload market began to tighten in 2017, C.H. Robinson initially saw dampened earnings: Costs were rising, yet the majority of its truckload logistics pricing was locked in at contractual rates. By the end of 2017, the company's contracted-to-spot-rate revenue relationship had reached a 50/50 split.

During 2018, the organization was able to adjust long-term pricing upon contract renewals, while quoting at spot rates for noncontractual business. This led to favorable spreads between transportation revenue and costs (excluding the effects of fuel).

For example, during the fourth quarter, in C.H. Robinson's largest segment, North American Surface Transportation (NAST), the average truckload rate per mile charged to customers rose 1.5%, while accompanying costs dipped by 1%. 

C.H. Robinson's business mix has normalized to a 65/35 ratio between contracted and spot business at present. As Wiehoff indicates above, the company believes that maintaining predominantly contracted business remains the best economic posture for the company over the longer term, despite cycles that may reward 3PL companies with a greater emphasis on spot pricing.

However, Wiehoff did mention during the call that increased volatility in the truckload market could push C.H. Robinson to shift to a spot-pricing bias. In other words, the company is prepared to react to rapid changes in demand (either higher or lower). C.H. Robinson tends to sign contractual commitments with customers over one-year periods, and thus has the flexibility to adjust pricing strategies -- if not overnight, then in a reasonably timely fashion.

A freight truck passes through an illuminated tunnel.

Image source: Getty Images.

2. It's wringing better performance from smaller business segments

Through a combination of pricing reflective of market conditions, operating expense controls, and investments to improve operational efficiency, our Robinson Fresh team generated improved results in the second half of 2018, and for the full year, delivered both growth in net revenues and operating income along with 190 basis points of operating margin expansion.

-- COO Robert Biesterfeld

Robinson Fresh, the company's smallest business segment, provides for food service delivery and the global transport of perishables. The "Fresh" segment had posted a string of disappointing quarters before its fortunes began improving over the last six months.

In the fourth quarter of 2018, Robinson Fresh improved year-over-year net revenue (i.e. reported revenue less the costs of outsourced logistics services) by 19% and boosted operating income by 54%. 

As Biesterfeld points out, the segment has enhanced its performance through a number of strategies. Perhaps the most effective initiative mentioned above is control over operational expense.

The logistics business is traditionally quite labor intensive; revenue expansion typically results in higher head count. Over the last few quarters, Robinson Fresh has created operational leverage by keeping head count steady even as net revenue has improved. This cost discipline, as I discussed in my fourth-quarter earnings recap, has turned the Fresh business into a viable contributor to the company's overall bottom line.

A similar strategy has been applied in the company's third segment, Global Forwarding. C.H. Robinson was able to realize operating margin expansion in Global Forwarding of 770 basis points during the fourth quarter, as net revenue increased in each of its business lines (ocean, air, and customs brokerage) while head count decreased by 0.4%.

C.H. Robinson intends to further improve profitability in its two smaller segments through an increased reliance on technology. During the call, Biesterfeld cited the example of intelligent process automation in Global Forwarding as a potential source of operating margin expansion.  

Indeed, there appears to be much earnings potential embedded in both Robinson Fresh and Global Forwarding. Despite contributing nearly 29% of C.H. Robinson's revenue in 2018, the two segments combined supplied only 17% of total company operating income. Further improving the segments' respective margin profiles could boost overall earnings per share considerably in the coming quarters.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends C.H. Robinson Worldwide. The Motley Fool has a disclosure policy.