The head of C.H. Robinson Worldwide Inc., (NASDAQ:CHRW) the nation’s biggest freight broker and a large 3rd party logistics provider, said today he expects a more settled truckload market in 2019, with demand remaining solid and supply increases returning the sector to some level of equilibrium after a year or so of turbulence.
Speaking to analysts as Eden Prairie, Minn.-based Robinson 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 2017-18 increases were a snapback from a subpar pricing cycle in 2014 and 2015, Wiehoff said.
The rapid pace of rate hikes were amplified by the implementation of the federal government’s Electronic Logging Device mandate, which curbed fleet productivity and which Wiehoff acknowledged caused significant dislocations across the supply chain as players transitioned to a different operating environment.
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’s strong exposure to the truckload contract segment could be a tailwind especially as spot rates, which typically lead contract pricing by about six months, eased considerably as the third quarter went on. According to investment firm Susquehanna Financial Group,Industrywide year-on-year contract rates in August rose 14.7 percent versus 10.4 percent for spot, and in September contract rates rose 12.8 percent while spot prices fell 3.2 percent. That is the first time contract rates exceeded spot rates in more than two years. (All figures include fuel surcharges). Bascome Majors, transport analyst for Susquehanna, said in a note today that contract pricing gains should drive Robinson’s upside gross margin potential, which combined with productivity growth positions the company for upside earnings next year. Majors has a $114 per share price target for the company.
For the quarter, total revenues rose 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. 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 year-over-year 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 latecomer to Robinson’s portfolio, is becoming an increasingly important part of its business, according to company executives.
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.
Robinson shares were trading higher by 74 cents a share to $89.03 at the close of trading today, off its best levels of the session.