Robinson's third-quarter results pressured by hard-nosed shippers

In the latest example of the power that truck shippers have wielded all year over the direction of freight rates, C.H. Robinson Worldwide Inc., a major third-party logistics (3PL) provider and the nation's largest freight broker, said late yesterday that its third-quarter profits were pressured by shippers extracting deeper rate concessions than the company was able to pull from its carriers.

Eden Prairie, Minn.-based Robinson reported that third-quarter truckload "net revenues," defined as revenues after the costs of transportation services, declined 10.4 percent year over year. Though Robinson has in recent years broadened its logistics and supply chain management offerings, truckload brokerage remains by far its largest segment. Robinson is a "non-asset-based" provider, meaning it owns no transportation assets, but instead pays a large network of carriers to move its customers' freight.

The company's margin compression came because so-called sell rates to customers fell faster than the prices at which Robinson could buy space. Excluding the impact of diesel-fuel expenses, Robinson reported, on average, a 5.5-percent drop in rates charged to customers, compared with a 3.5-percent reduction in its costs.

The company's third-quarter truckload volumes rose 7.5 percent year over year as it pursued additional share of what has been a flat-to-down overall market. The new truckload business is believed to be profitable, though less so than last year due to 2016's more difficult rate climate.

"We expected a challenging pricing environment in 2016 as shippers focus on reducing their transportation costs," John Wiehoff, Robinson's chairman and CEO, said in the statement accompanying the results. Wiehoff said the company is "making good progress on our long-term plans," part of which includes achieving profitable volume growth.

Robinson's results, especially in its core truckload business, is the latest example of shippers successfully bargaining down their providers on "spot," or non-contract, rates, and in contract pricing, which is still how the bulk of truckload freight moves. Spot rates have been under pressure all year, and contract rates, which historically lag the spot market, have followed suit.

Consensus is building, however, that the third quarter may have been a cyclical trough, at least as far as truck pricing is concerned. A monthly index of trucking conditions published by consultancy FTR increased in August over July, FTR said today, hinting at firmer rates through 2017. However, the improvements are mostly coming from the supply side, with capacity being curtailed in response to sluggish freight demand, FTR said. The economy and freight markets are in a "slow growth phase with unclear direction," characteristics typical of an economy nearing the end of a prolonged recovery cycle, it said.

Robinson posted a 2.4-percent net revenue gain in less-than-truckload (LTL) services, its second-largest business. It posted a 31-percent net revenue increase in what it classifies as "other" services, which include managed services, warehousing, and parcel. Net revenue from customs brokerage services rose slightly, while intermodal, the smallest service, in revenue terms, of Robinson's portfolio, fell more than 24 percent year over year due in part to the impact of lower truckload rates that made those services more price-competitive relative to slower intermodal operations, it said.

Part of Robinson's profit shrinkage is the company's ongoing willingness to sacrifice pricing in a bid to gain truckload share at a time when overall demand has been stagnant, according to analysts. "We suspect margin pressure would have been less painful" had Robinson not pursued this strategy, said John G. Larkin, analyst for Stifel Financial Corp., an investment firm. Larkin said Robinson believes that "now is the time to capture share when others may be hiding under their desk."

A continued sluggish macro environment, combined with Robinson's ongoing share-taking efforts, is likely to keep its truckload margins under pressure into 2017, according to Benjamin J. Hartford, analyst for Robert W. Baird and Co. Inc., an investment firm.