Q&A: CEVA executives discuss Q1 results and global 3PL market
May 10, 2012
Earlier this week, global third-party logistics (3PL) services provider CEVA Logistics reported first quarter earnings of $1.7 billion Euro or about $2.2 billion, which represented a 2 percent annual gain and down about 1 percent in constant exchange rates.
Pacing the quarterly growth was a strong performance by its Contract Logistics segment, which includes warehousing and dedicated transport, and saw revenues up 3 percent due to a strong showing from its North America- and Asia-based automotive group. The company’s Freight Management business, which is comprised of air, ocean and customs brokerage, had flat revenues in the first quarter, while ocean and airfreight results were mixed.
Logistics Management Group News Editor Jeff Berman spoke with CEVA CEO John Pattullo and CFO Reuben McDougall about the company’s quarterly results and industry market trends in the global 3PL sector. A transcript of the conversation is below.
LM: What is your take on CEVA’s first quarter performance?
Pattullo: Overall, I would describe the quarter as challenging both for the industry and for CEVA. However, in our view, it was more good than bad regarding CEVA’s quarterly results. Our revenue and our profit performance were relatively strong compared to our peers. That has to do with the structural changes we made in 2011, with our Project Uno for global standard processes in freight management, back office outsourcing in the finance area, and leveraging our scale in global operations. These changes have helped to make the company more robust. We have a well-crafted and very specific game plan for 2012, too. In this big and complex logistics market we live in, it is really easy to be a “busy fool” and chase all sorts of false possibilities. It is our job to be focused and deliver for our customers.
LM: Your Contract Logistics group had a strong quarter in North America and Asia, especially when comparing it to Europe, which is having a hard time with its economy.
McDougall: Northern Europe has been performing well for us and it is not a drag on our performance level. Southern Europe, including Spain and Italy as the biggest pieces, have been weak because of its local economies, while some other markets like Asia and Turkey have been strong.
LM: What is your take on the ocean cargo business?
Pattullo: We are seeing a market that is still growing globally by 4-5 percent, which is good, and we have seen some fairly significant rate increases from carriers in the March and April timeframe. Those have not had any material impact on CEVA, because we had secured longer-term pricing with our customers and have not been affected by those recent rate hikes. In the industry, there is a debate as to whether these recent rate hikes will take hold. The reason is that there is a lot of new capacity coming into the industry, and March was the biggest addition of container ship capacity in a very long time. More capacity is entering the market at a faster rate than which the industry is growing.
LM: How are things on the air cargo side?
Pattullo: Unlike things on the ocean side, industry air cargo growth is still negative. The global air market is down roughly 2 percent annually. The industry view is that there might be some sort of upturn in the second half of the year, with volumes up by maybe 2 percent which would make things flat for the year. It is a doldrums type of market, and because since 2009 there has been more moves by shippers to trade down modes and use alternatives to air, too.
LM: As the mid-year point approaches, how do things in the global 3PL market compare to things a year ago at this time?
Pattullo: Our view of the industry is that overall it’s a pretty flat global market. Air is down, and ocean is up. There is more buoyancy in the U.S., which is good news, but on the other hand things in China have slowed down somewhat in the last year. If you aggregate the global situation—and we are operating in markets that are essentially flat—our game plan is that we need to grow share in those markets. As part of our shared growth campaign, we are focused on growing our share of airfreight and winning more big [accounts].
LM: How is the current pricing environment as it compares to growing market share?
Pattullo: Customers these days are much more interested in the value proposition of their end-to-end supply chain than they are with the pure pricing of any competitor within the supply chain. Our modus operandi is to look at the end-to-end supply chain and find value for our customers. There is plenty to go after, which allows us to give customers value while getting a reasonable margin. Historically, buyers have been more siloed and commoditized in their thinking, and in our case 54 percent of our total business comes from our 100 biggest accounts, which are comprised of sophisticated multinationals looking at a true end-to-end proposition. That said, there are still opportunities for pricing.
LM: Looking ahead, what in your opinion are the prospects for Peak Season in 2012? It has not occurred in a traditional sense in a while.
Pattullo: CEVA has correctly predicted the Peak Season forecast the last two years. In terms of the market, the general sentiment is that there could be some sort of Peak Season this year.
LM: CEVA recently submitted documents to the SEC to be floated on the New York Stock Exchange regarding its desire to raise share capital. Is there anything you can comment on regarding that?
McDougall: All we can say on that is very little. Basically, what I can say is that this is a step that opens the possibility of an IPO down the line. It is an administrative step required to have an option to do a listing. It is not a commitment to do a listing, nor is it s comment on the size of the listing or the timing. It is just an administrative step. There is no timeframe for it.
LM: Even with the recent decline in U.S. diesel prices, prices are still high overall. That said, sustainability is becoming a hot topic again. What is your opinion on sustainability in the global 3PL market?
Pattullo: In our opinion, it is very important. Our philosophy at CEVA is that we want to be driven by good science, because there can often be less than rigorous claims and data floating around at times. We believe there should be a business case for most environmentally-driven projects, because the environmental benefit will in turn present a business benefit. We have a good environmental program. Some of the key elements include having invested heavily in southern Europe in environmentally neutral or positive warehousing, where we are generating electricity from photovoltaic panels and recycling everything we can. It is a very positive warehouse project. We also offer a carbon footprint monitoring service for our [top 100] accounts, where we help them calculate their footprint. And we also are collaborating with a diesel engine manufacturer to test and develop fuel efficient modes of operation.
LM: What are you hearing from shippers when it comes to collaboration?
Pattullo: Customers increasingly expect us to be able to offer the same system, the same service, and the same KPIs across the globe. They want a 3PL that can give them a consistent global product, and due to compliance, control, or cost reasons they want to have that level of consistency. That has been a key message. At the time of the Thailand floods last year, we tracked what was happening in the affected markets in great detail for our customers and provided that information quickly for our customers and worked with them to find solutions to problems caused by about 14,000 factories being impacted. What customers liked in that situation was that we were able to provide them with data and knowledge. They don’t just want to hear we have delivered a shipment; they want information through the supply chain. They also want historic data and KPI performance, with an increasing expectation of data from global 3PLs.
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