A familiar theme characterized C.H. Robinson Worldwide's (NASDAQ: CHRW) second-quarter 2017 results, released Wednesday after the closing bell. Revenue rose appreciably, but other key metrics declined. We'll discuss why after taking a bird's-eye view of the logistics and shipping dynamo's earnings:
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The raw numbers
|Metric||Q2 2017||Q2 2016||Year-Over-Year Change|
|Revenue||$3.71 billion||$3.30 billion||12.4%|
|Net income||$111.1 million||$143.1 million||(22.4%)|
|Diluted earnings per share||$0.78||$1.00||(22.0%)|
What happened with C.H. Robinson Worldwide this quarter?
- Conforming with a recent trend, a robust top-line exhibiting double-digit growth was accompanied by lower net revenue. Net revenue, defined as total revenue after subtracting the cost of shipment services, fell 3.4% to $573.8 million.
- Total performance was hampered by weak results in the company's largest segment, North American Surface Transport (NAST). Though revenue jumped 10.3% to $2.4 billion, net revenue slipped by nearly 10% to $359.9 million, pushing segment income down 23% to $140.3 million.
- Truckload margin compression continues to act as the culprit behind NAST's disappointing quarterly and year-to-date performance. Though truckload volumes increased 8%, transportation costs, excluding fuel, rose 4%. Much of C.H. Robinson's trucking volume occurs under long-term contracts, so the company has limited real-time ability to adjust pricing when costs rise; thus, net revenue suffers.
- Conversely, the company's international logistics segment, Global Forwarding, enjoyed an excellent quarter. Total revenue climbed 48.2% to $528.8 million, and net revenue increased 24.5% to $121.0 million. While management attributed about half of net revenue growth to the fall 2016 acquisition of Melbourne, Australia-based APC Logistics, the segment still generated significant organic net revenue growth, bucking the overall company trend. Segment income improved almost 24% to $27.7 million.
- Robinson Fresh, the organization's perishable-foods logistics and shipping arm, recorded lighter sourcing revenue per case. On the transportation side, the segment experienced weaker truckload revenue. Total segment revenue of $657 million declined by 0.5%, while net revenue of $60.8 million dropped by 10.3%. Higher operating expenses also hit the segment's P&L, leading to a 48% slump in revenue to $14.2 million.
- While C.H. Robinson's 22% drop in overall net income was primarily driven by weaker net revenue, management cited other factors behind the quarter's slighter profits. These included higher costs associated with the APC acquisition, higher interest expense, greater personnel headcount, and rising warehousing costs.
What management had to say
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In the company's press release announcing second-quarter earnings, CEO John Wiehoff discussed the issues underlying the rather tepid results:
We were able to continue to achieve market share gains during the second quarter; however, our income and EPS results were disappointing and finished below our expectations. Our results were significantly impacted by truckload margin compression. Purchased transportation costs increased significantly during the quarter, while much of our customer pricing is committed at relatively flat prices. We have a strong history of honoring our customer contracts while adjusting to the market conditions, and I'm confident we will adapt and execute those changes in the months to come.
Reading between the lines, Wiehoff is signaling that the company is waiting for various contract renewals to adjust pricing, which should help absorb transportation cost increases, and in the best case, decompress truckload margins a bit.
C.H. Robinson can take comfort in a couple of positive trends: Trucking volumes have continued to increase in 2017, and total revenue is still expanding. While the market-share gains are welcome, management's task in the coming quarters is to renegotiate contracts on renewals to increase the company's average truckload rate per mile. Simultaneously, the organization must remain competitive in the spot market (i.e., real-time-pricing market) as regards the non-contracted portion of its business. As we head into the last two quarters, 2017 is still very much a work in progress for the global shipper.
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