Wednesday, September 20, 2017


Analysis: first signs of stress push CH Robinson toward a crossroads

In May 2015, I argued that it was hard to find cracks in the way CH Robinson was run, observing that the US-headquartered 3PL had historically demonstrated sound financial discipline – but, “nonetheless”, I also noted, “delving into its financials and its stock performance, it appears to have arrived at a crossroads”.
At the time, its stock traded in the mid-$60s, much the same as its level on 20 July this year, when it hit a 52-week low of $63.4 in the wake of its interim results. Two months later some of its financial hurdles have become hard to overlook, at least judging by its performance in the six months ended 30 June, and given underlying trends for asset-light businesses so far in the third quarter.
CHRW Net revenue and earnings (source CHRW)
CHRW Net revenue and earnings (source CHRW)
Turning point
In the past eight weeks, its shares have looked for direction, rallying well above $70 – where they currently trade – on two occasions. However, when they surge above that key level, they become more unpredictable and volatile.
Share price (source Yahoo Finance)
CHRW Share price (source Yahoo Finance)
Of course, in today’s world of advanced, cloud-based IT solutions, the very role of 3PLs and 4PLs is more openly questioned than in the past, which might have something to with its stock price volatility. However, in CH Robinson’s particular case, the chief culprit appears to be investors becoming increasingly wary of declining profitability and, more broadly, significantly less profitable volumes.
CH Robinson, of course, has a pedigree of experience that few can match, but “Silicon Valley will continue to drive prices down and as you know, forwarders and employee-heavy businesses such as CHRW need rising rates and oil prices to boost margins”, freight forwarding veteran Steve Walker, owner of SWGlobal, told me last week.
Moreover, he insisted that “current changes are beyond what the management systems of 3PLs can handle”.
While there are certainly indications that how IT affairs are managed is changing in the industry, that fact is that the threat of substitutes and the risk posed by potential entrants (see Porter’s Five Forces) comes at a time when financial risk is also alive and well, as proven by the latest results of CH Robinson and those of several of its global peers.
Additionally, stock prices trends need to be taken into account.
Technical analysts would likely argue that a much lower valuation, in the low $60s, is another key support level.
Charts are often reliable only in hindsight, but $61-63 is a trading range worth watching carefully because if CH Robinson’s stock drops 15% or so from its current level, it is key indication of deep structural problems, not only with a bellwether company in the North American logistics industry, but also with other transport intermediaries in Europe and Asia, where many players are coping with very unfavourable pricing/volume dynamics inherited from their shippers.
Sugar high
While it is true that, in February, CHRW reached a record high of about $80, the observation that the company appeared on a more solid footing ignored one basic element: share prices are seldom rational.
In fact, its shares – as with many other stocks in logistics – were boosted by the Trump effect for about six months, how weird that might seem, but it allowed CHRW investors to ignore the first symptoms of deteriorating fundamentals. And in the meantime, these have been offset by an attractive yield from dividends, although benchmark yields (US Treasury and others) continued to rise.
I labelled CH Robinson as a safe haven in February 2016, when its stock traded a tad below $70, but I am not so sure anymore, particularly because dividends could rise at lower clip over the medium term than in recent quarters.
CHRW dividends history and growth (source CHRW)
CHRW dividends history and growth (source CHRW)
I am also less optimistic than I was in July 2016, when again it traded around $69, with the first signs of stress becoming increasingly evident in the first quarter this year, although in my latest coverage, in March 2017, I acknowledged the company was changing.
In short, dividend growth could be a stumbling block.
While the projected payout ratio is safe, it will likely rise closer to 60% this year from 48% in 2016, based on consensus estimates from Thomson Reuters. It was well below 50% between 2014 and 2016.
One problem with CH Robinson is common to many other 3PLs: variable and fixed costs are rising at a faster pace than in the recent past as gauged against net revenue growth, inevitably biting into their bottom lines. Which, in turn, impacts cash flows, rendering dividend payments heavier.
Under these circumstances, companies need other sources of funding to support certain cash outlays such dividends and buybacks.
And here is how things look at CH Robinson: operating cash flow in the first half of 2017 fell a whopping 40% to $150m from $247m one year earlier.
CHRW operating cash flow 1H (source CHRW)
CHRW operating cash flow 1H (source CHRW)
By comparison, its annualised figures between 2014 and 2016 are shown in the table below.
CHRW operating cash flow 2014-2016 (source CHRW)
CHRW operating cash flow 2014-2016 (source CHRW)
Needless to say, perhaps, second-half results will have to be stellar to provide some relief, or even just to maintain the payout in the safe zone.
Funding mix on the radar
Unsurprisingly, CH Robinson decided to stick to a conservative approach to heavy investment (capex) in the first half, but given lowly capex requirements as a percentage of revenues and against core cash flows, even significantly higher cash outlays from investment would have been just a nuisance.
Notably, though, borrowing was a precious source of funding, shoring up its rising cash position at the end of the first half. However, without external debt, maintaining a rich dividends and buybacks policy would have been impossible, my calculations suggest.
Borrowings, buybacks, dividends (source CHRW)
Borrowings, buybacks, dividends (source CHRW)
A little detail – there is a $250m of cash inflow from a receivable securitisation facility, its cash flow from financing showed at the end of June. Clearly, such borrowings are just part of normal cash flow management activities, given a lowly net leverage of about 1x, but it is also legitimate to question whether we should expect more to see debt sitting on its books, say, in a year’s time.
For the time being, at least, I wouldn’t feel uncomfortable if my name was on the shareholder register, but new debt is one variable to watch – given steady outlays from cash from financing, either cash flows surge or the dividends and buybacks will have to fall.
It could be better – or worse…
Not only are costs rising…
P&L: gross revenues vs COGS (source CHRW)
P&L: gross revenues vs COGS (source CHRW)
…but the headcount is up…
headcount (source CHRW)
Headcount (source CHRW)
…which brings higher operating costs and SG&A expenses.
operating costs growth (source CHRW)
Operating costs growth (source CHRW)
Inevitably, too, its underlying projected profitability is expected to hover below trend in the near future.
income statement evolution (source
Income statement evolution (source
Tech component
The company recently acquired a tiny forwarder in Canada, which doesn’t move the needle in terms of earnings accretion, as CH Robinson accepted.
Meanwhile, if you are familiar with its corporate affairs, you’ll probably know that transformational deals are off the radar.
Quite frankly, I do not know what the solution for this is, and for other asset-light freight forwarders and truck brokers, but the tech component of its offering to shippers will surely be key value-driver.
Mr Walker pointed out that CH Robinson was no different from all other leading players in the field which offer services that are essential for supply chain management activities, but increasingly it appears that these can be easily replaced – over time – by cheaper, automated alternatives.
“It is all about business intelligence. If you asked 3PL executives what keeps them awake at night, the common thread would be IT solutions (…) in a marketplace where the freight forwarders, in particular, need to cut costs. Yes, to cut the headcount further, but not many can do that”, given the typical correlation between growth and staff investment in the industry.
Essentially it is about doing more with less, as well as paying more attention to internal processes and “compliance – and many players realise they have little control over it”.
“Their customers want more, so the middle man needs to change its model. It is no longer logistics, in a way, it’s about independent 4PL reporting, and feeds.”
Mr Walker kindly flagged me the latest product release of CH Robinson: last week it launched Navisphere® Vision, “a supply chain technology that provides real-time global visibility across all modes and regions in one platform”.
Navisphere® Vision
Navisphere® Vision
It is certainly encouraging, but there is also no hard evidence that its latest cash flows will buck the trend thanks to its contribution, making me wonder whether the possible reward is really worth the risk for shareholders at these levels.

Tuesday, September 19, 2017


Is finance one of the reasons that retailers and manufacturers have not transformed their supply chains to deliver the e-commerce customer expectation?


Retail world is littered with those who did not and do not get e-commerce and the supply chain it requires. Will manufacturers make the same mistake?


Stir things up.  Does FBA offer 2 benefits for CPGs--sales and ability to abdicate own e-commerce supply chain cost and operations responsibility?

Sunday, September 17, 2017


Replenishment for e-commerce supply chains differs from the usual for manufacturers and retailers.


Does meeting e-commerce customer expectations require outsourcing to multiple 3PLs to have needed network alignment?

Saturday, September 16, 2017


3PL e-commerce outsourcing requires different metrics, governance, and technology.


3PLs, retailers, and manufacturers struggle with the e-commerce world of eaches, not cases and pallets.

Friday, September 15, 2017


Some catalog retailers make you wonder is they have heard of Amazon and Customer Expectations? Outdated technology and Supply Chain,


Analysis: Hapag-Lloyd – a hungry Maersk may be waiting to pounce

The behaviour of the Hapag-Lloyd share price since late 2016 proves the bulls in container shipping circles may be right in largely ignoring the risks surrounding the sector’s leading players, which continue to show optimism after a solid start to the year.
Hapag share price (source Yahoo Finance)
Hapag share price (source Yahoo Finance)
The fundamentals of the German carrier, however, suggest that if a best-case scenario doesn’t play out, and rate levels become more difficult to maintain, the recently drafted optimistic scenarios could become a nightmare as soon as 2019 for its worldwide network, making it one of the most obvious takeover targets in the industry.
Hapag network (source Hapag)
Hapag network (source Hapag)
Down, up, and down
At the end of June 2016, when its shares still traded below the IPO price of €20, the German carrier announced its merger agreement with United Arab Shipping Company and took the lead in a consolidation game that has since seen a slew of M&A deals concluding with Cosco striking the most expensive acquisition in liner history via its OOCL acquisition.
Before tie-up rumours emerged in April 2016, the stock of Hapag traded around €16. It now changes hands at €37, mainly thanks to that deal.
The demise of Hanjin and tighter capacity came to the rescue on the back of a fast-consolidating market, transforming what was a dreadful investment for over a year – as I expected when Hapag was about to price its IPO in late 2015 – into a spectacularly high-yielding investment since the turn of 2016.
With hindsight, Hapag management embraced the only strategy it could entertain at the time, doing all they could to prevent a painfully slow death. Thanks should also go to its bankers, who have little choice but to help the company stay afloat, given the billions they are owed. But where does all this leave Hapag now? And who will end up being the ultimate winner?
Hapag itself could well be answer, I reckon.
Freight rates per trade arguably played in favour of the Hapag/UASC tie-up in the first half, as the chart below shows.
Freight rates per trade (source Hapag)
Freight rates per trade (source Hapag)
The same applies to the development of global container fleet capacity…
Global container fleet capacity (source Hapag)
Global container fleet capacity (source Hapag)
…as well as volume trends, which boosted Hapag’s top-line even before the consolidation of UASC was taken into account.
Transport volume per trade (source Hapag)
Transport volume per trade (source Hapag)
Revenue per trade (source Hapag)
Revenue per trade (source Hapag)
Based on all these elements, it is unsurprising that its shares trade at record levels of €38, which suggests financial investors continue to be happy to buy into a positive outlook for shipping lines – a view that is also shared by several sources in the liner industry I talked to recently.
Meanwhile, new orders for ultra-large container vessels are also encouraging, right?
Hapag has emerged in a more dominant position thanks to rising freight rates and a lack of alternatives on the routes it serves – however, their contribution to its interim P&L figures was more of a marginal embellishment than substantial gain.
And the balance asset, where assets and liabilities are booked, doesn’t look great either, although analysts at Moody’s and sell-side brokers think otherwise, given their projections.
While Hapag management talks of “qualitatively enhanced growth”, its earnings quality has deteriorated, in my view; and surely how that growth is financed is equally important.
Sustainable growth (Source: Hapag)
Sustainable growth (Source: Hapag)
Of course, Hapag minimises certain risks, saying that global GDP growth will accelerate above trends in the next 15 months or so, with volumes comfortably outpacing global economic growth…
Economic Outlook (Source: Hapag)
Economic outlook (Source: Hapag)
The message here is clear: the economy will be the silver bullet the container shipping industry needs at a time when the main players consolidate at the fastest pace in history, determining different pricing dynamics along the value chain that, ultimately, will favour the top five carriers.
Currently, Hapag remains the smallest, and the most vulnerable, based on its current financial situation.
Top five market share (Source: Alphaliner)
Top five market share (Source: Alphaliner)
(A quick digression on the economy: you may not have noticed, but earlier this month the 10-year US Treasury yield hit its lowest level of 2.05% for 2017, down almost 60 basis points from its highest point – induced by the Trump rally – which says a lot about subdued growth prospects for the world’s largest economy, and hence for the rest of the world. Additionally, it is convenient to ignore that the bull market is almost nine years old, while benchmark indices continue to record new highs on a daily basis – however, as latent recessionary forces persist globally, a double-dip in the container shipping industry cannot be ruled out given that the worst year on record for the ocean carriers was little more than nine months ago.)
I have recently warned you that debt trends were not good, either for Hapag nor the broader industry.
The fact that credit rating agency Moody’s recently placed the rating of Maersk under scrutiny is only a minor event, though – the market leader, even following a possible downgrade, will remain in investment grade territory. Based on its current credit rating, it currently ranks two notches above junk.
Hapag credit rating chart (source: Hapag)
Hapag credit rating chart (source: Hapag)
The stock of the Danish behemoth shrugged off the news, but Hapag is an entirely different story, because its balance sheet is significantly more stretched and its credit rating deep in junk territory.
Credit rating grid (source:
Credit rating grid (source:
It is possible that Moody’s is right and, if so, in less than two years the German carrier will have materially improved its financial status.
Moody's forward view for Hapag/UASC (source Moody's)
Moody’s forward view for Hapag/UASC (source Moody’s)
After all, its free cash flow profile received a fillip at the end of the first half…
Hapag free cash flow (source Hapag)
Hapag free cash flow (source Hapag)
… and capex requirements will inevitably fall based on historic standards following the UASC integration (although, inevitably, its vessels will be older than rivals reportedly looking to place new orders).
Furthermore, some key returns figures were better than previously, as the chart below shows.
Snapshot financials (source Hapag)
Snapshot financials (source Hapag)
But the same table above also includes its total financial indebtedness – and that should raise eyebrows, having risen 78% to €7.3bn following the consolidation of UASC, while borrowed capital, which includes other liabilities, is even higher.
Hapag also consolidated additional cash and earnings of UASC when it acquired it – but it’s too early to know whether the deal was actually worth it. Little improvement in first-half ROIC (return on invested capital) metrics – which gauge how efficiently capital is deployed and is a key yardstick for Maersk’s management – prove my point.
Hapag ROIC
Hapag return on invested capital (source : Hapag)
Meanwhile, a tiny free float makes it all riskier for shareholders who are invested, one could argue. Although if a bear-case scenario plays out and the bulls are wrong, that might only be a minor concern.
Hapag Shareholder structure, including free float (source: Hapag)
Hapag shareholder structure, including free float (source: Hapag)
Because then, Hapag – which for so many years was tipped to merge with Hamburg Süd before Maersk swooped – could easily become a target for Maersk once that line’s restructuring is complete, say, in 2019. It wouldn’t come cheap, and could well spark a bidding war.
When asked about the likelihood of Hapag being acquired by Maersk eventually, several executives, who I am grateful to for sharing their views on shipping market trends in recent weeks, agreed: “Such a combination would make a lot sense.”


Over the years and presently, how much of rate slashing in container line industry is predatory pricing?

Thursday, September 14, 2017


Inventory Visibility throughout the Supply Chain has been a problem for retailers and manufacturers, even more so with omnichannel.


THE DRONE DELIVERY REPORT: Opportunities and challenges in automating logistics with drones

walmart drone delivery BI Intelligence
This is a preview of a research report from BI Intelligence, Business Insider's premium research service. To learn more about BI Intelligence, click here.
Among the many ways that drones can transform business operations, few have received as much attention as delivering packages to consumers’ homes. Drones could allow companies to bypass the many challenges involved with the "last mile" of delivery — the last leg of the journey when a package arrives at the customer’s doorstep.
This last mile is the most expensive and inefficient part of parcel delivery, and a wide range of companies are exploring how drones can speed up the last mile and cut costs. E-commerce companies want to cut delivery times and costs to improve their customer satisfaction and loyalty, while legacy retailers seek the same advantages to grow their online sales.
Meanwhile, logistics providers are experimenting with drone delivery to cut costs and ward off new competition from startups and technology companies, which have latched on to drone delivery as a potential path to disrupt (or partner with) legacy logistics firms. 
However, delivering packages by drones to consumers’ doorsteps is still years away from becoming a common occurrence. Important obstacles still need to be overcome relating to drone regulations, the development of autonomous flight and traffic control systems for drones, and consumer acceptance.

In a new report, BI Intelligence examines the benefits drone delivery can provide as an e-commerce fulfillment method, and explains the different approaches companies are taking as they experiment with the nascent technology. In addition, we detail the key players working in the space and discuss the challenges drone delivery faces in reaching mainstream adoption. 
Here are some key takeaways from the report:
  • Drone delivery offers tremendous benefits in the form of cheaper, faster shipping. This could accelerate the growth of online retail sales as free and fast shipping are the most enticing factors drawing consumers to shop online more often.
  • There are two main types of drone delivery companies are exploring: home drone delivery and supply chain delivery. Although home drone delivery receives the bulk of public attention, using drones to make deliveries within the supply chain can smooth out the fulfillment process and increase efficiencies.
  • Mainstream adoption of drone delivery will take place in stages over the next few years as regulations are put in place and drone technology improves. Right now, most tests are extremely limited in scope, take place in rural areas, and do not actually deliver packages to customers’ front doors. These tests will gradually progress, eventually bringing drone delivery to more customers in populated areas.
In full, the report: 
  • Provides an overview of how drones can transform parcel delivery by automating logistics, particularly for last-mile deliveries.
  • Examines the efforts of several companies across industries that are experimenting with drone delivery.
  • Highlights the major obstacles that remain in making drone delivery mainstream.
  • Provides a timeline for the adoption and scaling of drone delivery services in the US.
Interested in getting the full report? Here are two ways to access it:
  1. Subscribe to an  All-Access  pass to BI Intelligence and gain immediate access to this report and over 100 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now
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New paradigm for trade, logistics, supply chain management, and investing.

New 'Silk Road' Fund Hopes China's Eurasia Strategy Is A Money Maker

Kenneth Rapoza, Contributor

old nomadic tribes are along China’s new Silk Road: a massive means to export capital, labor and products to new markets, many of which are not even considered frontier markets yet by the MSCI.
China’s new Silk Road has put a whole host of backwater nations in Eurasia on the map. Uzbekistan. Kazakhstan. Even tiny Georgia and Albania are getting in on the act, welcoming Chinese money for building out China’s so-called One Belt One Road project, an ambitious government initiative designed to connect high value added manufacturers in China with new markets across the Eurasian landmass and into Europe. And now there’s an ETF for that.

New York based investment company KraneShares launched their One Belt One Road (OBOR) fund on Sept. 8. It tracks the MSCI China Infrastructure Exposure Index. The fund is down 0.32% since its launch, but was still in a full cash position as of Sept. 11.

Europe. China’s new Silk Road cuts through the Eurasian landmass into Europe. Investors hope Chinese companies will be able to develop new markets there for its goods. Think Lenovos in Kazakhstan and Uzbekistan instead of Dells and Macbooks. (Shutterstock)

“We believe the OBOR initiative is creating a new paradigm in global investing,” Jonathan Krane, KraneShares CEO said in a statement. “The OBOR initiative will receive trillions of dollars of investment over the next decade and should increase the economies and trade of both China and the participating nations.”
The 85 positions they hold at the outset are mostly Chinese, but a few countries along the Silk Road are on the list. Russian oil company Rosneft is the fund’s second largest holding. Kazakhstan Gas is also on the list, along with companies from Turkey, Malaysia, Poland and Singapore to name a few.

See: Kazakhstan Bets Big On China’s Silk Road — Forbes
The One Thing The U.S. Has Over China — Forbes

China-Like Wages Now Part Of Employment Boom — Forbes
The One Belt One Road initiative, as it is officially called, was established by President Xi Jinping two years ago. It mainly takes the old Silk Road trading routes by land and by sea and will try to modernize them and the economies along its route in an effort to better place Chinese labor, capital and products into new markets. It’s an ambitious endeavor, and one in which China specialists at Krane think they can capitalize on with this new fund.
Because of this new project, China has signed cooperation agreements with 68 countries and international organizations representing 62.3% of the global population and 30.0% of global GDP. Some estimate needs of around $6 trillion in investment needed to develop these countries, nearly all of them frontier markets, with a few emerging market players in Southeast Asia and Russia.

All together the OBOR initiative will connect 69 countries (including China), representing an aggregate population of 4.5 billion and a nominal GDP of $23 trillion.
KraneShares will host an OBOR summit in New York in January.


New freight rail service launched connecting Europe to China

Tigers has launched a new rail freight service, called Tiger Rail, offering customers a 16-day transit time both east and westbound, between Duisburg, Germany, and Hefei, Chongqing, and Chengdu, China.
Left to right: Paul Huang, Managing Director, Mabel Shi, Product Manager – Railway, and Eric Ou, General Manager – Shenzhen and Xiamen, All Tigers China celebrate the inaugural shipment of Tiger Rail
Tigers (a supply chain specialist based in Hong Kong) is also planning to offer e-commerce customers shipping parcels from Europe to China a cost-effective service along the new Silk Road.
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We have seized the opportunity to provide integrated logistics for our customers, who increasingly require shorter transit times”
“We have seized the opportunity to provide integrated logistics for our customers, who increasingly require shorter transit times than ocean freight, and lower costs than airfreight, making Tiger Rail the perfect solution,” said Paul Huang, Managing Director, Tigers China. “Our customers benefit from lower shipping costs by empty container return in Switzerland for westbound services, and Shipper’s Own Container (SOC) for eastbound services, for both FCL and LCL.
“Tigers has already supported customers to transport over 500 TEUs as FCL, and 1500 cubic meters (CBMs) as LCL along the new Silk Road.”
With Tiger Rail, customers can charter a train, or book Full Container Load (FCL) or Less than Container Load (LCL) shipments on weekly scheduled services to and from over 15 origin stations in China. They can also track and trace their freight shipments using the Tiger Trax platform.
“We are currently preparing test shipments for European Union (EU) Business to Consumer (B2C) parcels importing to China with Tiger Rail, and look forward to expanding our rail freight capabilities even further,” added Andrew Jillings, Chief Executive Officer and Group Managing Director, Tigers.
Tiger Rail’s inaugural shipment took place over the summer, on behalf of one of one of the largest manufacturers of exhaust and suspension systems, which chartered a train to transport construction materials, auto parts, and electronics.

Wednesday, September 13, 2017


Omnichannel and the Amazon Effect have elevated Supply Chain Management.


Poor upstream supply chain performance causes mid-stream and downstream warehouse space, utilization, order picking, and cost issues.


Not enough manufacturers and retailers have aligned their supply chain with development, growth, growth, and strategy, especially for omnichannel.

Monday, September 11, 2017


Push of stores vs pull of e-commerce. Bricks and clicks need different supply chains.


Are most supply chains capable of exploiting AI?  Vote here for "no".