CEVA’s contract logistics healthy but outlook still troubled

A quarter of two contrasting businesses, CEVA’s quarterly results showed divergent performances from its contract logistics and freight forwarding businesses over the three months to March 31.

Just looking at the operational results from the underlying business divisions, the company saw a fall in sales but an increase in profit. Revenue fell by 8.9% year-on-year to US$1,865m but ‘adjusted’ EBITDA grew by 7.5% year-on-year to US$43m.

The freight forwarding business had a tough three months. Revenue fell and Earnings Before Interest Depreciation and Amortisation (EBITDA) sunk into the red by $8m from a $3m profit in same period of 2013. The real area of pain is in air freight forwarding rather than sea freight. CEVA, with its heavy exposure to trans-pacific traffic in areas such as electronics continues to suffer from the structural shift towards sea freight although it was noticeable that in the early months of the year export demand out of China was soft. The key is that CEVA has too high fixed costs in its ‘freight management’ business meaning that it is being punished when volumes fall. Speaking to Ti, CEVA’s CFO Rubin McDougal said that in contrast volumes in sea freight were quite good and that over March the situation in air freight had improved which would show in the next few quarter’s results. Not only are sea freight margins hardening but also customers who had been deterred by the company’s problems in the middle of last year were returning.

In contrast the performance of Contract Logistics was robust. Although revenue fell by 7.2% profits rose strongly from $37m in first quarter 2013 to $51m this quarter. In part the fall in revenue reflected an attempt to improve the quality of the business with lower margins contracts being exited from. Rubin McDougal observed that both volumes and contract wins were strong across many sectors but automotive stood-out in terms of volume increases.

CEVA’s senior management were optimistic about the improving trend in underlying profitability with the problems of the freight management business well on the way to be solved. Yet once again the bottom line numbers at CEVA were ugly with the cost finance taking a huge chunk out the final result and driving the company into US$155m loss for the period. Even in terms of operating income after depreciation, amortization and impairment the company was in the red by $14m. The dramas around last year’s recapitalisation are touched on in the notes to the accounts but it is notable that financial costs are still heavy. To make things worse there is the uncertainty of further fines associated with anti-competitive behaviour out of Singapore amongst others.