C.H. Robinson Earnings: Freight Correction Challenging; Margins Disappoint Again

C.H. Robinson’s CHRW second-quarter gross revenue fell 35% year over year; below our forecast, on greater-than-expected volume declines in the truck brokerage division, or Nast. The theme these past several quarters is that retail-sector destocking (high inventories), sluggish industrial end markets, and loose transportation-industry capacity are driving down freight demand and customer pricing for Nast and global forwarding, especially relative to unusually robust levels a year ago.

Nast gross revenue fell 26% on lower volumes (truckload shipments fell 6.5%) and 23% lower truckload pricing to shippers (excluding fuel) driven by the major correction in spot rates, and now-normalizing contract rates. Global forwarding gross revenue plummeted 63% as air and ocean demand has been regressing to the mean (off of red-hot levels), albeit declines appear to be stabilizing.

Total net revenue (adjusted gross profit) fell 36%. Nast net revenue deteriorated 36%, slightly more than the segment’s gross revenue decline, due to 210 basis points of gross margin percentage (net revenue/gross revenue) deterioration. That is, pricing to shippers fell more than spot rates paid to truckers to haul TL freight due to the lag contract pricing declines.

Adjusted net operating margin (EBIT/net revenue) deteriorated meaningfully for both Nast and global forwarding, due in large part to lost leverage from plunging net revenue and lagging cost reduction. Margins came in below our expected run rate, particularly for Nast. Nast’s adjusted margin contracted to 29.5% from an exceptional 44.3% a year ago, while global forwarding’s clean margin fell to 16.9%, from 51.6%. Nast margins also fell sequentially, though global forwarding margins held mostly steady.

We will be tempering or 2023 forecasts, but we do not expect to materially alter our $95 fair value estimate. The shares are trading in fairly valued territory relative to our long-term free cash flow forecasts.