Expeditors’ concerns turn from low volumes to Coronavirus after subdued 2019

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Expeditors International saw total revenue marginally grow in 2019, from $8.14bn in 2018 to $8.18bn in 2019, demonstrating a 0.5% increase year-on-year. Operating income, did, however, decrease by -3.75% to $767m from $797m in the previous year, meaning operating margin fell from 9.8% to 9.4% for 2019.

Like many forwarding companies, 2019 has posed a difficult year for volumes as Ti Market Sizing shows. The first half of 2019 the sea freight forwarding market saw weak growth at 1.9% and the air freight market shrank by 4.2% in real terms. This is reflected in Expeditors annual results.

Over the year, two of the four quarters witnessed declining operating income, which has been attributed to the lower volumes and lower average sell rates the company has faced in the wake of a weaker forwarding market. Jeffrey S. Musser, President and Chief Executive Officer believes, “The results do not reflect a business performance issue but instead are more closely tied to the business environment in which we are operating.”

In 2018, Musser called the market unpredictable, for 2019 he noted the slowing trade around the world was the main factor in the performance of the company. Airfreight kilograms were down across the board over 2019 and around 6% on average in Q4-19. Ocean freight FEUs fared slightly better for the first half of the year, but also faced year-on-year declines for the remainder of 2019 with around a 12.5% decrease on average in Q4-19.

The Airfreight segment of the business had an unsuccessful 2019 regarding revenue as it fell by -10.5% in 2019 to $2.9bn from $3.3bn the year before. Operating expenses for the segment amounted to $2.1bn, a decrease from 2018 of $2.4bn. Despite the slowdown in activity, the segment was profitable as operating margin was 26.8% for 2019.

Ocean freight and ocean services also saw revenues fall over the period ending December 31, 2019, though not as steeply as Airfreight. Revenue decreased by -1.5% to $2.2bn, again, as with the air forwarding segment, the reason for lower revenue being the market conditions. This has also been seen across other forwarding businesses in 2019. Operating expenses amounted to $1.6bn, down by $50m from 2018, the company was also more profitable than in 2018 as margin increased to 27.2% for 2019.

The Customs brokerage and import services had a positive year with revenues increasing by 15.8% year-on-year, reaching $3.0bn in 2019. It is Expeditors largest business segment contributing 37% to total revenue. Operating expenses have increased considerably by 23.4% to $1.8bn equating to a 4.1% margin which is down from 2018’s margin of 4.4%. There is little detail into the factors behind these figures, but higher brokerage volumes are a likely feature.

In terms of geography, the United States was the only segment that grew. Its revenue increased by 9.4% to $2.7bn from $2.5bn in 2018. The remaining five geographies saw declines in revenue. The most important being Asia Pacific (made up of North Asia and South Asia) with a revenue decline year-on-year of -11.6% or $400m to $3.2bn in 2019. Over the year, the US-China trade war played a significant part in affecting revenue, China imports and exports represent 26% of Expeditors total revenue and 27% of operating income. The largest decline in volumes and rates were experienced in the company’s Chinese operations, where revenues and operating income fell by -27% and -23%, respectively, in Q4-19.

Expeditors is now warning of a weak Q1-20 as Coronavirus has impacted and looks set to continue to impact volumes in 2020. Q1 is usually slow because of the holiday shutdown around Chinese New Year, however, 2020 has already seen a much more pronounced downturn due to the extended closures of factories in China in the aim of containing Coronavirus.

Musser commented, “Over our 40-year history, we have experienced many events that have disrupted supply chains. We have not, however, experienced a situation where manufacturing capability has been shut-down or severely hampered to such an extent, so it is difficult to predict how this will play out.”

The company has had a subdued 2019 in terms of performance. Lower volumes attributed to the trade war and general market conditions were offset by the significant revenue increase for Customs brokerage and import services. Margins have been retained as Expeditors continues to persevere through a difficult economic and trading period. The slowing of trade seems to be the least of its worries, as its business in China is under threat from the impact of the Coronavirus which has already started impinging on its wider business.

Source: Transport Intelligence, February 20, 2020

Author: Holly Stewart