CEVA 3Q earnings are mixed, company set to roll out new operating model

Third quarter earnings for global third-party logistics (3PL) services provider CEVA Logistics announced earlier this week were mixed. Along with its earnings release, the company also rolled out its new global operating model, which is focused on increasing, velocity, efficiency, and responsiveness.

Revenue was up 0.7 percent compared to the first quarter at $1.992 billion and down 0.1 percent annually, and adjusted EBITDA was up 6.7 percent compared to the first quarter at $64 million, and was down 20 percent annually.

“This quarter we continued to make important strides in executing our strategy,” said Xavier Urbain, CEO of CEVA.  “Our focus over the course of 2014 has been very deliberate:  we have rebuilt the management team with executive leaders who know the industry which has had an immediate impact, and have organized our go-to-market plan based upon our major business lines – Airfreight, Oceanfreight and Contract Logistics – to enhance customer value.  Now, we are announcing the transformation of our operating model to increase the velocity of our business by adopting a local, rather than region-based, operating model.  For our customers, local ownership of execution is very good news, enabling faster decision-making and greater responsiveness to their needs.”

CEVA said the revenue gains were due to positive volume trends in the company’s Freight Management group, while its Contract Logistics group saw what it called above market EBITDA margin due to a strong performance in the United States, which was offset by soft automotive volumes in the Asia Pacific region, as well as certain new contract short-term implementation challenges and tightening aircraft capacity on its TransPacific trade lanes also led to margin pressure, and, in turn, offset volume gains.

And the company’s Airfreight and Oceanfreight groups both outpaced the market, with airfreight volume up 5 percent annually and Oceanfreight up 11 percent.

CEVA also saw positive momentum for new business wins, with a 20 percent annual increase, as Contract Logistics wins saw a 19 percent gain and Freight Management wins were up 20 percent annually.

“This reflects a broad cross-section of wins,” said CEVA CFO Rubin McDougal in an interview. “We had significant volumes with some of our tech and auto customers, as well as industrial customers.”

Despite the solid customer wins output, he said that CEVA saw pressure on rates in terms of the rates they pay for purchased transportation, in certain lanes out of China in its airfreight business, while passing some of those increases on in the form of Peak Season surcharges to customers.

The gains on the Oceanfreight side reflect the price per TEU, which McDougal said is down annually even though they have seen sequential gains throughout 2014. And he said the ocean volume gains are due largely to success on the new business side through new tenders, adding new lanes to existing customers, and a group of customers that has had steady volume increases.

“In the third quarter, we had a substantial impact from ocean carriers putting Peak Season surcharges in place, and that had a bit of an impact on our margin,” he said. “With volumes starting to improve, we are feeling pretty good about our ocean and air businesses.”

New operating model: The new CEVA operating model, the company said, will do away with its existing region-based global structure and will instead be comprised of an operating model with 17 local geographic clusters of countries with standardized governance and business rules across all clusters, which CEVA said could be made up on one large country like China or several countries in close proximity. This new model will take effect January 1, 2015.

CEVA said the new model will drive increased network efficiency and productivity through the elimination of redundant processes, coupled with augmented communication across its business lines.

McDougal said this model was driven by CEO Urbain taking a fresh look at how CEVA was running its business and leading to the question of if there was a better way to do things.

“One of the things that he was convinced of was that having a retail layer between headquarters and primarily the business lines-air ocean, and contract logistics-and having an intermediary between the business line leadership and the counties or regions in which you execute, was actually slowing down the progress and in some cases confusing the message,” he said. “It was also clear we needed to increase the network cohesiveness at CEVA, meaning if we have freight moving from Shanghai to Dallas-Fort Worth, they need to be talking to each other and not having Dallas talking to our regional U.S. headquarters and Shanghai talking to Asia-Pacific headquarters in Singapore, which makes things cumbersome.”

Another area CEVA is actively looking to change is trade lanes, according to McDougal, as CEVA felt regions were more of an impediment than an enable in terms of trade lane focus.