Truckload shippers, it seems, will not agree to contract rate increases even if there are only two trucks left on the road.
C.H. Robinson Worldwide Inc., the nation's largest freight broker and a major third-party logistics provider (3PL), felt the wrath of shipper stubbornness during its second quarter, the results of which were disclosed after the markets closed late yesterday. In Robinson's core truckload business, net revenues—revenues after backing out the costs of purchased transportation—fell 14.3 percent year over year. Net revenues in its intermodal business fell 7.9 percent year over year. Less-than-truckload net revenue climbed 2.4 percent year over year.
The company reported strong net revenue gains in air, ocean, and customs brokerage. Gross revenues—total revenue before transport costs—rose 12.4 percent.
As a non-asset based provider, Robinson owns no rolling stock and buys a portion of its capacity through the spot, or non-contract, market. Spot rates in June hit their highest level in nearly two years, according to consultancy DAT Solutions LLC, which tracks spot pricing.
Robinson's cost of purchased transportation in the quarter rose by $450 million over 2016 levels. At the same time, though, contract shippers, which account for anywhere from one-half to two-thirds of its base, were locked into agreements that wouldn't renew until mid-year at the earliest. John G. Larkin, transport analyst for investment firm Stifel, said Robinson did not anticipate such a profound capacity crunch in the May-June time period. The result, Larkin said, was a classic margin squeeze, where Robinson paid relatively high rates for spot-market capacity while honoring flattish contract rates for shippers that were unwilling to make up the differential.
Robinson Chairman and CEO John Wiehoff didn't sugarcoat the issue in the company's statement. "Our results were significantly impacted by truckload margin compression," Wiehoff said. "Purchased transportation costs increased significantly during the quarter, while much of our customer pricing is committed at relatively flat prices."
Wiehoff said the company has a "strong history" of sticking to customer contracts as it adjusts to changing market conditions. In a research note late yesterday, Benjamin J. Hartford, analyst for investment firm Robert W. Baird & Co. Inc., said Robinson's overall net revenue for the first three weeks of July was up 2 percent year over year. That was below Baird's third-quarter estimates of a 5-percent gain, but better than the 3-percent decline reported in the second quarter, he said.
As might have been expected, shares in Eden Prairie, Minn.-based Robinson were under pressure all day. Shares closed at $65.01, down $3.68 a share. Shares traded as low as $63.41 during the course of the day.
Spot prices have been significantly higher than 2016 levels for the entire year, according to Ben Cubitt, senior vice president of supply chain and transportation for Frisco, Texas-based 3PL Transplace. They peaked in the last week of June and first week of July, but have since dropped back, Cubitt said. Spot prices aren't through spiking in 2017, he added.
Tommy Hodges, a veteran trucking and warehousing executive, and chairman of Shelbyville, Tenn.-based truckload carrier Titan Transfer Inc., said in a phone interview today that truckload capacity tightness has reached "bubble-like" levels, and that a relatively incremental increase in nationwide loads could trigger a run by users on power units and trailers.
Historically, spot pricing trends to lag contract rates by 3 to 6 months. Cubitt expects that scenario to play out again, although he doesn't know when.