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THE TOP 40 3PLs 2009

Third-Party Logistics Recovers


By Richard Armstrong

While there continues to be a lot of economic gloom and doom reports, third-party logistics (3PL) revenues for 2010 have again grown much faster than the gross domestic product (GDP) for North America. For the first half of 2010, 3PL revenues were up 15 to 30 percent for key companies in domestic and international transportation management and dedicated contract carriage. J.B. Hunt’s dedicated contract carriage revenue was up 23 percent, C.H. Robinson’s net revenue was up 15 percent and Expeditors’ net revenue was up 30 percent. Revenue growth will soften for these companies in the second half of 2010 but the related 3PL segment of which they are part will grow three to four times the rate of GDP growth for the year.

Table 1 summarizes the trend giving 2009 net revenue results, compound annual growth rates (CAGR) and 2010 anticipated increases (E) for the United States and Canada’s 3PL activity combined.

Table 1. Net Revenue Estimated Trends


3PL Segment

2009
Net Revenue
(US$ Billions)

1995–2009
CAGR

% Change
2010E vs. 2009
Net Revenue

Domestic Transportation Management

5.7

11.9%

8.0%

International Transportation Management

16.1

15.7%

12.0%

Dedicated Contract Carriage

10.2

7.3%

6.0%

Value-added Warehousing and Distribution

24.2

14.9%

7.0%

Total

56.2

12.7%

8.3%



Overall, 2010 3PL revenues should increase by 8.3 percent. Growth since 1995 has been strongest in international transportation management (ITM), reflecting economic globalization. Domestic transportation management (DTM) has grown, in part, because of the shift to systematic non-asset solutions. Value-added warehousing and distribution (VAWD) offers an expanding value-added and non-investment solution for its customers’ non-core activities. Dedicated contract carriage (DCC) is a mature segment getting some additional emphasis as providers expand out of random fleet activities to more predictable contract business for their assets.

In response to improving business, 3PL merger and acquisition activity has picked up. This year’s big deal is GENCO’s purchase of ATC Technology Corp.

GENCO continues to grow fast organically but its purchase, which includes ATC Logistics & Electronics (ATCLE), moves it to a new level. GENCO has been a major innovator of new technologies and is the industry leader in reverse logistics operations. GENCO operates 115 distribution centers with 35 million square feet of space. It has 6,500 employees. Forward logistics accounts for 60 percent of warehousing revenues and reverse logistics accounts for 40 percent. In addition to its warehousing business, GENCO has a sizeable transportation management operation specializing in parcel carriers.

ATCLE is one of the best fulfillment operators and has its own top-notch repair/returns operations. It has 3,100 employees in seven distribution centers; three are in the Fort Worth, Texas area. It has 21 contractual customers including: AT&T’s wireless, mobility and DSL operations, LG Electronics, Sony Ericsson, TiVo and TomTom. To give you an idea of ATCLE’s scale, it fills about 70,000 orders a day for mobile phone and component customers. Its return operations include repairs for TomTom, the global positioning device maker, in Matamoros, Mexico. Case studies detailing ATCLE can be found at www.3PLogistics.com.

Herb Shear, CEO of GENCO, summarized the purchase in a recent letter: “Our packaging and handling capabilities will expand significantly through the addition of kitting, co-packing and fulfillment of high volume, high velocity serialized SKU devices. We will enhance our test, repair and refurbishment capabilities and add warranty program management for both high-tech and automotive OEM manufacturing customers. ATC will operate as a wholly owned subsidiary of GENCO with combined annual revenue of $1.5 billion. The addition of ATC’s 3,100 teammates will bring total employment to approximately 10,000 teammates.” ATCLE’s revenue was $345 million in 2009. Its EBITDA was an industry high $81.7 million (23.7 percent of revenue). GENCO’s purchase price was $512.6 million or 6.3 times EBITDA.

In contrast, YRC Logistics had net revenue of $412 million for 2009 with huge losses. It was sold for $38.7 million to Austin Ventures, a private equity firm. The new owners escaped large “impairment” charges by providing YRC Logistics’ parent with desperately needed cash.

Shortly after the sale, Joey Carnes became CEO of MIQ Logistics, the successor of YRC Logistics. Carnes is reunited with John Carr, president and COO. Carr had been the top guy at YRC Logistics for the last two years.

Carnes and Carr previously worked together at BAX Global and Fritz. Carnes and his team turned BAX moderately profitable in five years. BAX Global was sold to DB Schenker in 2004. Carnes had worked as an advisor to DB Schenker until recently.

Carnes plans to grow MIQ organically to the billion-dollar level as a first step. Aggressive domestic and international growth is planned up to $3 billion to $6 billion in gross revenue within a few years thereafter. MIQ’s current business involves ITM, DTM and VAWD. It handled 51,000 TEUs and 25,000 airfreight tonnes last year. It has 17 licensed customs brokers and 30 distribution centers with 1.6 million square feet of space. YRC sold off its DCC operations to Greatwide late last year. Carnes and Carr have their work cut out for them.

In addition to the major deals mentioned above, many smaller deals can be expected. Of particular interest, are those in DTM and VAWD. For domestic transportation management/freight brokerage, the major attraction is that they are non-asset businesses. As non-asset businesses, they have higher financial attraction because of inherently higher returns on investments. For the United States, net revenues (gross margins) run 18 percent of gross revenues. EBITs ran 23 percent of net revenues for 2009. The major limitation is the size of potential sellers. There are only six freight brokers with net revenues exceeding $100 million and 30 with revenues over $11 million.

Value-added warehousing and distribution companies are part of the most rapidly expanding market segment since 1995. The challenge, with regard to VAWD companies, is to find the few with good profitability. ATCLE is a very profitable exception for the VAWD segment. Overall, VAWD generated net profits of only 2.1 percent in 2009. GENCO, one of the best operators, had $812 million in net revenue with an EBIT of $85 million (10.5 percent) and net income of $54 million (6.7 percent).

GENCO and ATCLE are leaders in North American warehousing. There are about 40,000 for-hire commercial grade warehouses in the United States. For 2010, we expect VAWD revenues to total $30 billion. Public warehousing should add $20 billion. The combined for-hire commercial warehousing segment should be $50 billion. Private warehousing costs will run $61 billion, making our estimate for total warehousing $111 billion. We estimate that Canada’s warehousing costs for 2010 will be $11.3 billion. Contract warehousing continues to grow in North America at the expense of public warehousing. This growth includes an expansion of open-book contract relationships which normally produce lower profit margins for 3PL providers. Not surprisingly, most 3PL providers report ongoing pressure to reduce margins to maintain business.

Slightly less than a quarter of contract relationships exceed operating margins of 15 percent. Ten percent have EBITDA margins of 15 percent or better. The challenge for 3PL providers is to find the verticals and customers that will provide results in these high ranges. Most follow the traditional rule — the higher the value of the product, the higher the probability of profit.

What’s Next

Third-party logistics transportation management requires size and scale to be most efficient. Companies need to be able to maintain sophisticated IT solutions and geographical density to make the increasing service offerings demanded by customers. Domestic transportation management solutions now account for 11 to 15 percent of total loads handled. In 1980, they accounted for less than one percent. C.H. Robinson will end 2010 with $9.5 billion in gross revenue and $1.5 billion in net revenue. C.H. Robinson’s counterpart for international transportation management, Expeditors, has remained agile and will end the year at $5.6 billion in gross revenue and $1.6 billion in net revenue. Is there a point at which the top transportation managers lose some agility because of their size?

Domestic transportation managers and their smaller kin, freight brokers, have experienced strong gross margin pressure in 2010. After years of 16 percent or greater gross margins C.H. Robinson will be at or near 15 percent. Smaller freight brokers have been hit harder as the availability of trucks has tightened and have been very limited at times in spot markets. While capacity will become more available as the North American economy recovers, it will be more expensive.

At the same time, continued regionalization will occur in truckload transportation. Long haul truckload will continue its incremental conversion to intermodal. Dedicated contract carriage will get an increase as regionalizing and fleet rationalizing truckload carriers give up on unprofitable transactional business. Regionalization of truckload traffic brings with it less revenue and fewer short haul profit dollars, requiring more diligence on the part of carriers to preserve profitability per load.

International transportation management should experience a strong 2010. Airfreight volumes have been especially strong. Container volumes are ending the year at record levels, especially from Asia. Some consolidation should occur as small freight forwarders, who generally get much smaller gross margins, give up.

Warehousing construction will lag but 3PLs will expand VAWD as long-term demand trends again assist the VAWD segment. While demand for value-added solutions continues to expand, margins don’t get better.

 




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