Where's the US trucking market? Learning from C.H. Robinson's Q4

What can we learn about the state of the US trucking market from C.H. Robinson's Q4 reporting? It's tough to defend margins, and there are a few idiosyncratic surprises in the data.

C.H. Robinson just posted hugely disappointing Q4, 2019 results. Earnings fell 47% compared to the prior year’s quarter, driven by a 190 bps drop in the net margin and a stark 1,220 bps drop in the operating margin.

Top Line

Revenue

Top-line numbers are disappointing: Revenue is down 8% in addition to the decline of the net margin. The company reports that the revenue decline is mostly driven by pricing, where it observes a drop of 11% in its largest truckload unit while reporting flat volumes. LTL data is reportedly performing marginally better.

The data makes sense when compared to the Cass data, where the relevant indices indicate a drop of ca. 3-4%. Interestingly though, Cass data suggests that the decline is mostly driven by volume rather than pricing.

It is sometimes hard to reconcile industry-wide data to major brokerages, so Echo Global Logistics earnings Feb 5th will shine some more light on how C.H. Robinson’s position compares to the industry at large.

Net Margins

Net margins have been hit tremendously, with the company only being able to pass on a 7.5% average price decline in capacity procurement costs to their carrier base. This seems at first glance surprising in a soft trucking market. Echo’s data will undoubtedly provide another perspective on this.

Operating Margins

The big item in the results, though it is not on the revenue but the cost side. Sales, General, and Administration (SG&A) expenses are 20% higher than in the previous year’s quarter. As a result, the operating margin crashed from 36% to 24%.

Historically, C.H. Robinson has been quite disciplined in maintaining its operating margins through swings on the revenue side. They managed to do so again on the structurally more variable personnel expenses category that declined in line with revenue levels.

While SG&A is structurally less variable, and the revenue decline has been exceptionally substantial, the lack of a decrease in SG&A is astounding. Based on historical precedence, a level of $80-100m can be expected versus actual spending of $143m.

The company claims external technology spending of $10m in the quarter that is part of SG&A and an additional $10m of one-off expenses. This still leaves $30-40 of increased costs unaccounted for. Is this internal technology spending?

Technology Spending?

C.H. Robinson has publicly indicated an investment program of $1bn in technology spending, so spending $50m per quarter on technology should not come as a surprise. However, that $50m will not come in the form of just higher expenses.

First, as per the article above, the $1bn investment is a doubling of prior spending. Thus, the spending increase per quarter - if it were evenly distributed - is only $25m.

Second, presumably, much of the investment will be in developing internal software and in securing long-term deals with external vendors. Accounting of those can be tricky, but as a general rule, you would expect a solid proportion of such investments to satisfy the respective jurisdiction’s requirements for capitalization. The investment would then be as an asset on the balance sheet rather than as an expense.

So there is either something surprising going on in C.H. Robinson’s SG&A data, or there is a lot of spending on early stages of technology development that do not qualify for capitalization, and where at least the short term impact on top-line and the margin is less likely.

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