C.H. Robinson Sees Settled Market In 2019
The head of C.H. Robinson Worldwide Inc (NASDAQ: CHRW), the nation's biggest freight broker and a large third-party logistics provider, said he expects a more settled truckload market in 2019, with demand remaining solid and supply increases returning the sector to some equilibrium after more than a year of turbulence.
Speaking to analysts on Wednesday after the company released its third-quarter results, John Wiehoff said the company projects a low to mid-single digit rise in contract rates in 2019. The more modest gains come in the wake of rate spikes spawned in late 2017 and that have continued for most of 2018. The 2017-2018 increases were a snapback from a subpar cycle in 2014 and 2015, Wiehoff said.
The pace of rate increases has been amplified by the December 18 implementation of the federal government's Electronic Logging Device mandate requiring virtually all trucks built after the year 2000 to be equipped with digital log systems affixed to the engine. The implementation was expected to curb fleet productivity by forcing drivers to obey Hours-of-Service regulations and abandon the practice of driving excess hours and fudging the record-of-duty on paper logbooks. Wiehoff acknowledged that the transition to ELD compliance caused significant dislocations across the supply chain.
Wiehoff said he expects a strong fourth quarter to end Robinson's 2018 reporting year. He added the caveat, though, that demand can be difficult to predict.
Robinson reported solid Q3 results, with total revenues up 13.4 percent to $4.3 billion, net revenues — gross revenues minus purchased transportation costs — up 16 percent to $694 million, and operating income up 26.5 percent to $246 million. Net income rose 47 percent to $175 million. Operating expenses rose 12.2 percent due largely to a 14.4 percent increase in personnel costs. The company received a $16.9 million tax benefit from the late 2017 tax law, reducing its effective tax rate to 26.5 percent from 35.2 percent last year.
The company's North American Surface Transportation unit, by far its largest, had a stellar quarter as it capitalized on higher spot market rates and contract repricing to firmer levels. Net revenues increased 23.3 percent in the quarter to $465.5 million, driven by a 25.5 percent gain in truckload, a 19.6 percent gain in less-than-truckload, and a 10.8 percent increase in intermodal.
The LTL operation was the only one of the three to show annual volume growth for the quarter, a reflection of a slowing in truckload volumes late in the quarter compared with breakneck growth pace in October 2017, and of the continued strength of the LTL sector in general. LTL, a relative newcomer to Robinson's portfolio, is becoming an increasingly important part of its business, according to company executives.
Spot pricing, which typically leads contract rate moves by about six months, loosened up in August and September, according to data from investment firm Susquehanna Financial Group. By contrast, contract rate growth outpaced spot growth in August and September, the first time that's happened in two years, according to the firm's data. Industrywide, contract rates rose 14.7 percent year-over-year in August compared with 10.4 percent, SFG said. The gap widened considerably in September as contract rates climbed 12.8 percent while spot rates declined 3.2 percent, the firm said. Contract rates have climbed as shellshocked truck users look for long-term capacity assurance.
Bascome Majors, SFG's transport analyst, characterized yesterday's results as an "excellent quarter." Robinson's exposure to the contract market should lead to expanded margins through 2019, Majors said in a note. A company spokeswoman didn't respond to a query about the company's mix of spot versus contract traffic. Majors has a $114 price target on Robinson shares.
Net revenue margins rose to 16.2 percent from 15.7 percent in the 2017 quarter. Interest expense rose as a result of higher debt levels and a rise in variable interest rates. That was offset by a $7 million favorable impact from currency revaluation, the company said.
Net revenues for Robinson's ocean services fell nearly 8 percent due to higher carrier pricing. Wiehoff said the pricing pressure should ease as early as the fourth quarter. Robinson Fresh, the company's produce transport business, was hit by higher transport costs that could not be quickly offset by contract repricing, Wiehoff said. Much of Robinson's produce traffic moves under contract.
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