CEVA’s new CEO is ambitious despite a flat market

CEVA logistics may have had a flat quarter but this is unlikely to distract its CEO from what he sees as his task of building a new company.

For the third quarter 2014 CEVA saw both revenue and profits edge down year-on-year despite markedly higher volumes in air and sea freight forwarding. Even the stable business of contract logistics saw profits fall. Overall revenue fell by 1.4% year-on-year to US$1,992m whilst ‘adjusted EBITDA’ (Earnings Before Interest, Tax, Depreciation and Amortisation) fell from US$80m in Q3 2013 to US$64m. This continues a trend seen over the past three quarters.

Such a performance is surprising as demand appears to be strong, with its freight forwarding business seeing an 11% increase in tonnage volume at its sea freight business with a 5% increase at its air freight business. Yet in common with much of the rest of the sector CEVA has been unable to convert this up-turn into profit growth. Largely this is because customers seem to be alive to the weakness in the market and demand prices reflect the soft conditions.

Rubin McDougal, Chief Financial Officer at CEVA commented to Transport Intelligence that, “Measuring ourselves against the rest of the industry the performance was above average,” but weaker pricing amongst groups of customers such as technology OEMs squeezed margins.

Equally concerning is the fall in profits at the Contract Logistics business. Here EBITDA fell by 12%, from $65m in Q3 2013 to $52m in Q3 2014. McDougal attributed this to cyclicality in markets such as Italy and Thailand, despite the US, China and other markets being robust.

The dynamics at Contract Logistics in particular is concerning for CEVA’s fairly new CEO. Discussing the company with Ti earlier in the year Xavier Urbain emphasised that CEVA’s already strong margins in contract logistics would continue to strengthen, possibly approaching 6%. This quarter’s performance contradicts this, however over the past three quarters the number has edged-up so the jury is out here.

Urbain was more frank about the freight forwarding business which he admitted had productivity problems, although he asserted that CEVA had begun to attract back many of its key people who had left during the re-capitalization operation last year. Certainly CEVA has begun to restructure its management, with more emphasis on cross-selling between contract logistics and freight forwarding which ought to enable higher margin business in the latter.

Yet, as ever with CEVA, it is the financial situation which continues to be alarming. Debt levels are rising again with net debt up by 18.2% to US$1,891m. This raises the recurring question over the destination of CEVA. Its present condition is clearly unsustainable with continuing losses from debt servicing. The target of an IPO on the New York stock exchange appears to have receded for the moment but Xavier Urbain is assured, dismissing such questions, “I am not concerned about these things, what I am focussed on it building a ‘new story’ for CEVA and after that we will think about an IPO or perhaps something else.”

Urbain has a record of both building and selling logistics companies and he hints that he may be thinking about how to create new ownership options for CEVA. Such ideas would be useful as the company’s present level of profitability will not enable it to shed its debt load, despite its positive cash-flow.