Logistics And Frieght Forwarding

the Loadstar Contract logistics faces financial pressures

Worried about the financial state of your logistics provider? Well, you can probably relax a little according to a new report on the finances of the 3PL market from research firm Transport Intelligence.

Despite the economic woes circling the Eurozone, and uncertain macroeconomic figures coming out of the US and China, the major logistics companies recorded combined revenues last year that were 127% of those in pre-recession 2007.

In the aftermath of the Lehman collapse and the subsequent crash in world trade, there was a considerable chance that a major bankruptcy could be on the cards, but that prospect has receded, according to the report s author David Bagshaw.

Logistics companies customers shouldn t be too worried, or rather perhaps have mild concern, but a lot of these companies are large and well established with solid financial positions, he said.

The report found that while 2011 revenues had increased over the base level of 2007, margins had been slower to recover, and operating profit and ebitda levels industry-wide remained below the previous level.

That said, margins didn t generally fall in the way revenues did, consistently remaining 4.4% or above, demonstrating logistics companies resilience to economic ill winds.

Most of these companies seem to be giving attention to their margins, and they seemed to have held them despite the realities of the recession, he said.

Some firms have performed better than others, of course. US firm YRC, for which trucking is its core business, has seen revenues almost halve over the period and since the beginning of 2009 has posted a loss in every consecutive quarter.

YRC has been in decline for some years. It has labour costs of over 50% of its income and now has negative equity. By most standards it is a high risk company, the report said.

However, that assertion masks the fact that despite it continuing to make a loss, things aren t as bad as they were.

YRC is much more under control than it was, one source told The Loadstar. People were preparing for it to go under, but its performance has been improving.

Another company that has appeared vulnerable is CEVA, owned by private equity firm Apollo and created from its acquisitions of TNT s freight business and EGL Global Logistics. The purchase of these two units came at a high price and has left the company very highly geared and well into negative equity territory.

How this affects its IPO, pencilled in for this year, remains to be seen, but a debt for equity swap has given it some wriggle room .

However, one area of operations that has come under particular pressure is contract logistics, where average operating profit margins are below 5%, a level that Mr Bagshaw thought was unsustainble.

Contract logistics is a cutting edge business, with a lot of investment needed in things like infrastructure and IT, and the margins in contract logistics are lower than for freight forwarding activities.

There might be a concern that rates are too low or the contract logistics providers costs are too high, but the fact is that if the margins are less than 5% the returns probably aren t covering investment.

Similarly the report suggests there remains ample opportunity for further consolidation in the overall logistics sector and The Loadstar understands plenty of companies are willing to listen to offers.

But acquisition activity could also remain muted because the recovery in financial performance has left possible targets, especially in the small to medium class of companies, less desperate for cash injections.

Because the pressure has come off the financials, there is less pressure to sell, and as a result valuations of some companies have gone up to levels that may be unrealistic, one source said.



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