6 minutes

Dennis Katsnelson

Quarterly results for C.H. Robinson were consistent with expectations for a third-party logistics provider operating in a weak freight market that has been particularly difficult on brokerages.

As a whole, revenues for the third quarter of the previous year fell by 27.8%. There was a reduction of nearly 29% in gross earnings. The decline in operating income was 60.5%. The adjusted operating margin experienced a decline of 1,450 basis points, reaching 17.9%. Nonetheless, the report contained sufficient data to embolden Wall Street investors. C.H. Robinson (NASDAQ: CHRW) experienced a post-market pricing surge of approximately 4% within the initial hour subsequent to the disclosure of its results. Recently, its price has been in proximity to a 52-week low.

One benefit: SeekingAlpha reports that the company's non-GAAP profits per share of 84 cents were 4 cents higher than average projections per share. Nevertheless, the total sales of $4.34 billion fell short by $20 million of what was anticipated. Dave Bozeman, the president and chief executive officer of C.H. Robinson, has previously noted the potential for streamlined transaction processes requiring fewer "touches." He reiterated these concepts:

"Worldwide freight demand remained weak in the third quarter, as numerous industry participants and observers have duly noted," Bozeman said “In the company's initial results report subsequent to a full quarter in which he served as CEO. We remain focused on what we can manage by providing tools that enable our customer and carrier-facing employees to allocate their time towards relationship building and exception management. Furthermore, we are actively implementing our strategies to optimize our operations through the elimination of superfluous steps and labor-intensive manual interventions.”

Bozeman expressed his challenge to the team to enhance the pace at which they make decisions and make progress toward development, despite his "satisfaction" with the team's endeavors. These cost-reduction initiatives were reflected in additional earnings data. The total amount spent on operations fell by 13.1%. Personnel expenses decreased by 21.5%, whereas the average headcount declined by 13.7%.

However, Amit Mehrotra of Deutsche Bank found little to be reassuring in the report. After analyzing the data, he concluded that cost reductions did not produce the expected results, as gross and net revenue declined by the same percentage. In pursuit of reducing expenses, the organization incurred restructuring costs, which Mehrotra characterized as "significant." However, he noted that adjusted profits were declining at a rate roughly double that of those revenue losses; if cost reductions were having a substantial impact on profitability, this would not be the case. This was further to the decline in net and gross sales, which were both equal.

North American Surface Transportation (NAST) statistics, the foundation of C.H. Robinson's brokerage business, revealed a 22.9% decline in aggregate sales to just over $3 billion, or nearly $915 million less. In contrast, the adjusted net profit declined by a more substantial 31.4%, falling from $563.8 million to $386.5 million. Even more drastically, operational income decreased by 47.1% to $112.1 million.

"Lower truckload pricing, reflecting an oversupply of truckload capacity relative to soft freight demand," was the primary cause of the revenue decline, according to a press release from C.H. Robinson. According to additional NAST data, the group's cargo shipments fell by 6%. Fuel not included, the average linehaul rate per mile decreased by nearly 16.5% in the previous quarter compared to 2022. The reduction in prices was 13.5%. The adjusted gross profit per mile in the haulage industry fell by 34% compared to the prior year.

The shipments transboundary (LTL) division of C.H. Robinson declined by 2%. An adjustment of 13.5% was made to the gross profit per order for LTL.

Bozeman did suggest that the turmoil among specific digital brokers could be beneficial for the firm, notwithstanding the brief discussion of digital brokerage Convoy's recent bankruptcy, which failed to disclose any substantial revenue growth for the company subsequent to its downfall. He added, "It's evident from my numerous conversations with customers over the last four months that they prefer partners who can invest through the cycles in the customer experience and have strong financial standing."

Given the improbable nature of improved freight markets providing immediate relief to C.H. Robinson or any other company, Bozeman has consistently underscored the criticality of productivity enhancements ever since his initial earnings call.

Additionally, he mentioned that the company will be receiving them on the results call for the third quarter. He provided several statistics, one of which was a daily increase of 18% in shipments per individual for the entire year. He asserts that C.H. Robinson is making progress toward achieving its annual target of 15%. In order to enhance productivity and adequately prepare for what Bozeman termed "the eventual freight market rebound," it will be critical to increase volume without compounding personnel costs. We are confident that we will succeed as a result of our team's ongoing endeavors to streamline processes and eliminate manual labor.

When queried about the patterns observed in October, CFO Mike Zechmeister responded that "the trends that have materialized have been relatively consistent," notwithstanding the consequences of the Convoy collapse. "At or near the breakeven cost for the carriers," according to Zechmeister, is what C.H. Robinson would have anticipated prices to be, considering that additional carrier capacity should have departed the market by now. As a result, departures have been marginally delayed.

When an analyst present at the conference inquired whether C.H. Robinson was poised to capitalize on a recovery following the significant downsizing of personnel, Bozeman responded that the company believed it possessed "adequate capacity for a typical recuperation." Nevertheless, he stated that capacity is something "We implement daily, and we are preparing for the eventual recovery of the market." Capacity must be maintained while the number of personnel is restricted.

At this time, the company is handling a mixture of 70% contract and 30% spot freight, which Zechmeister describes as "unusually skewed toward contract for where we are in the cycle." Comparatively, for the robust 2021 market, the proportion was 55% contract and 45% spot for three quarters.

C.H. Robinson has initiated the implementation of generative AI, as stated by COO Arun Rajan, for the purpose of "automatically completing gaps in unstructured and incomplete data." By doing so, the organization successfully decreased the time needed to generate a quotation for counterparties from approximately five minutes to under one minute. It has been utilized to the extent that Rajan stated a generative AI "agent" was used to generate over 10,000 "transactional quotes" during the final week of the third quarter.

With the eventual expansion of the products, according to Rajan, quotations will be able to be generated continuously.