C.H. Robinson earnings fall 45% on narrowest brokerage margins in a decade

North America’s largest third-party logistics provider held the line on trucking volumes but paid for it with profitability.

C.H. Robinson (NASDAQ: CHRW) reported its operating and financial results for the fourth quarter of 2019 after the close on Tuesday.

Robinson reported total revenues of $3.79 billion in the fourth quarter, down 8.3% year-over-year, and net income of $99.1 million, down 47% year-over-year. Earnings per share fell 45.5% year-over-year to $0.73, well below the Street’s consensus expectation of $0.96 per share.

CEO Bob Biesterfeld cited “a quarter of challenging operating results” but noted that Robinson’s brokers were able to adjust pricing and halt the truckload volume slide the company experienced in the third quarter. Less-than-truckload (LTL) volumes even grew 4.5% year-over-year, although volumes for the overall LTL sector were negative.

Biesterfeld called out how Robinson’s substantial investments in technology are beginning to drive operating efficiencies in the business, opening up a 330-bps favorable spread between truckload volume growth and headcount growth. If North American Surface Transportation’s (NAST) freight brokers can cover more loads per person per day, the company creates operating leverage such that a trucking recovery will generate asymmetric upside for Robinson.

In the fourth quarter of 2019, C.H. Robinson management was faced with a choice: Let volumes continue to deteriorate and see market share fall, or reprice contractual business aggressively to maintain share at the expense of profitability.

Robinson chose the latter. While gross revenue did not fall as much year-over-year in the fourth quarter compared to the third quarter (-8.3% versus -10.2%, respectively), net income dropped precipitously (-47% in the fourth quarter compared to -16.5% in the third quarter).

After a year of loose capacity and low contract rates in the trucking industry, retail volumes popped in the fourth quarter of 2019. That volume tightened capacity and drove spot rates up at a time when contract rates were still being ratcheted down, compressing freight brokers’ net revenue margins.

Compared to the fourth quarter of last year, NAST’s net revenue margins compressed by 270 basis points to 14% — what appears to be the brokerage’s narrowest margin in 10 years.

(Chart: C.H. Robinson investor presentation. Note that this chart appears to include air and ocean in ‘transportation net revenue margins.)

“While our fourth quarter financial results demonstrate that we are not immune to large cyclical swings in the freight environment,” Biesterfeld said in a statement, “we firmly believe that our continued investments through cycles will drive the alignment between net revenue growth and operating costs needed to drive operating margin expansion through freight cycles over the long term.”

Net revenues in Robinson’s Global Forwarding division, which includes Ocean, Air, Customs and Other, fell across the board, although net revenue margins expanded to 21.5% from 21.1% a year ago, due to higher margins in Air. Space Cargo, a Spanish freight forwarder acquired in 2018, has been well integrated and contributed 2% to Ocean net revenue, 6% to Air net revenue and 1% to Customs net revenue.

Net revenues from All Other and Corporate, which includes the legacy Robinson Fresh business, were down 5% year-over-year to $59.2 million.

Shares of CHRW were down 7.5% in after-hours trading.