ch robinson © Piotr Trojanowski
© Piotr Trojanowski

23-May-2024 | 15:51 EDT

C.H. Robinson Worldwide Inc. Downgraded To ‘BBB’ From ‘BBB+’ On Weak Market Conditions; Outlook Stable

– Our view of the pace of the freight market recovery is expected to prolong the recovery of CHRW’s metrics, currently at 26% as of the first quarter of 2024, to levels sufficiently above 45% over the next 18 to 24 months.

– CHRW’s FFO to debt fell below our 45% downside threshold in the first quarter of 2023 and we don’t expect a recovery in metrics commensurate with what we consider a modest financial risk profile to occur until late 2025.

– Therefore, we lowered our issuer credit rating and issue-level ratings to ‘BBB’ from ‘BBB+’.

– The stable outlook reflects our view that market conditions are likely at a trough, and we expect a gradual improvement in operating performance with metrics improving to the low-40% area in 2024.

SAN FRANCISCO (S&P Global Ratings) May 23, 2024–S&P Global Ratings today took the rating actions listed above.

We believe CHRW’s FFO to debt metrics will not recover sufficiently above the 45% threshold until the end of 2025, around 2.5 years since the outlook change to negative in June 2023. We believe the freight market to have hit its trough in mid-2023 and has been relatively stable at those levels over the past several quarters. As such, we don’t believe the market will deteriorate much further, rather we are seeing slight signs of a recovery, albeit ever so gradual. Despite a slow recovery, which can regarded as a positive development for the market, we believe the pace at which the market recovers will not be sufficient for CHRW’s metrics to recover in the timeframe needed to maintain its ‘BBB+’ rating. Subsequent to the outlook change to negative, shortly after the company released its first quarter 2023 results (41% FFO to debt), CHRW’s FFO-to-debt metric declined in five successive quarters and is currently at 26% as of the first quarter of this year. The broader freight industry faced several headwinds in 2023 as inventory destocking, high inflation, and excess trucking capacity not correcting as it has in past cycles, all contributed to a weaker freight environment. In 2023, CHRW’s adjusted gross profit (AGP) declined 28% to $2.6 billion. The speed and magnitude of the decline, which has been lower for longer than previous cycles, left CHRW unable to adjust it debt levels accordingly (which had grown alongside its FFO during the 2021-2022 freight boom during the COVID pandemic) to preserve its metrics. CHRW’s short-term debt grew during the pandemic ($0 as of the second quarter of 2020 and $1.2 billion the second quarter of 2022) as rising rates led to negative working capital, as is typical for the industry. However, as working capital turned positive in the second half of 2022, and cash flow from operations materially improved ($1.4 billion), CHRW allocated its cash flows to a mix of share repurchases ($970 million) and debt repayment ($325 million) during the same timeframe. The record speed and severity of the freight market decline that emerged in late 2022, which to some extent was a normalization of the market from the recent record highs of 2022, created a disconnect of CHRW’s FFO and debt balances. The reduced scale of its cash flows limits the company’s ability to right size its short-term debt via debt repayment to offset FFO declines and avoid its FFO-to-debt metric from breaching the 45% downside trigger. CHRW suspended share repurchases after its second quarter of 2023 quarter, and is directing its cash flow to repaying debt. This allocation is helping, though we view FFO growth is more important to the recovery in metrics, which we believe will remain subdued for the next 12-24 months.

We expect AGP growth of 2% and increased productivity to grow absolute FFO in 2024. While signs are emerging that the overall market is improving, we believe the relative pace of improvement will likely preclude metrics from improving sufficiently above 45% within the next 24 months. On its first quarter earnings call earlier this year, CHRW indicated its monthly AGP per load improved sequentially each month during the quarter, and it remains disciplined on pricing. CHRW also continues to reduce its segment headcounts to match shipment levels and is reporting strong growth in its shipments per person per day in its North American Surface Transportation (NAST) and Global Forwarding (GF) segments (2023: NAST 17%, GF 20%; 2024: NAST 15%, GF 10%). The improved productivity stems from the better use of technology, lower headcount, and some volume recovery. We believe CHRW is controlling as much as they can operationally speaking. We expect its less-than-truckload and ocean AGP to grow around 4%-5%, and air AGP growth of 2%-3%. We expect AGP growth in truckload, its largest segment (about 40% of AGP), to be around 1%. Any significant improvement in the truckload segment will likely need much higher shipment levels than we current forecast. Additionally, capacity needs to exit the market for rates to materially rebound, which at this point continues to linger in the market.

We expect reported free operating cash flow (FOCF) of around $480 million in 2024 will help CHRW right size its short term debt to better align with FFO levels. We continue to believe that management will refrain from share repurchases for the duration of 2024 as work continues on recovering its FFO-to-debt metric back above 45%. The pause in repurchases, enacted after the second quarter of 2023, allowed CHRW to repay a $175 million maturing senior note (series A) in August 2023, though it had to draw $120 million on its revolving credit facility in the first quarter of 2024. The draw was attributed to the pricing environment in its ocean segment, as rates temporarily rose (but have since normalized) from the shipping disruption in the Red Sea contributing to working capital turning negative at around $160 million. We believe this working capital can reverse over the next quarter and for the draw to be repaid. We expect total net debt repayment for the year to be around $215 million. That being said, our current reported FOCF forecast assumes $0 for working capital. As earlier stated, we do believe signs are emerging of improving conditions, which includes pricing. While improving rates will help FFO this could very well create negative working capital conditions, with additional draws needed on its revolving credit facility that would preclude meaningful debt repayment and could limit the recovery of CHRW’s FFO-to-debt metric.

The stable outlook reflects our view that market conditions are likely at a trough, and that we expect a gradual improvement in operating performance with metrics improving to the low-40% area in 2024. However, the pace of the recovery and improving market conditions lead us to believe that metrics will not improve to a sufficient level to absorb future industry weakness within the next 18 to 24 months.

We could lower the rating within the next 24 months if market conditions deteriorate materially beyond our current expectations such that we believe its FFO to debt will be sustained below 30%, or if it opts to pursue significant debt-funded acquisitions or shareholder returns.

We could raise the rating within the next 24 months if CHRW continues to repay debt while growing its FFO, such that we believe the company can sustain its FFO to debt above 45% through future industry weakness.

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