C.H. Robinson Worldwide Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 13 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the C. H. Robinson First Quarter 2023 Conference Call. At this time, all participants are on a listen only mode. Following the company's prepared remarks, we will open the line for a live question and answer session.

Operator

As a reminder, the conference call is being recorded, Wednesday, April 26, 2023. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Speaker 1

Thank you, Donna, and good afternoon, everyone. On the call with me today is Scott Anderson, our Interim Chief Executive Officer Mike Zuckmeister, our Chief Financial Officer and Arun Rajan, our Chief Operating Officer. Scott and Mike will provide a summary of our 2023 Q1 results and our outlook for 2023. Arun will provide an update on our efforts to improve our efficiency and operating leverage, and then we will open the call up for questions. Our earnings presentation slides are supplemental to our earnings release and can be found in the Investors section of our website atinvestor.

Speaker 1

Chrobinson.com. Our prepared comments are not intended to follow the slides. If we do refer to specific information on the slides, we will let you know which slide we're referencing. I'd also like to remind you that our remarks today may contain forward looking statements. Slide 2 in today's presentation lists factors that could cause our actual results to differ from management's expectations.

Speaker 1

And with that, I'll turn the call over to Scott.

Speaker 2

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Our Q1 financial results reflect the softening market conditions that have transpired in the freight transportation market over the past 12 months. With shippers continuing to manage through elevated inventories and the slowing economic growth, the balance of supply and demand has shifted from a tight market a year ago to As spot rates approach the breakeven cost per mile to operate a truck, the market is likely at or near the bottom of the industry cycle, which typically results in capacity exiting the market. Contract rates are also declining as transportation providers adjust to the changing market.

Speaker 2

During this transition, we've continued to increase our focus on delivering an improved customer and carrier experience and a more efficient business model and we're taking steps to foster profitable growth through cycles. In his prepared remarks, Arun will provide an update on the progress we're making on increasing the digital execution within the lifecycle of a load By streamlining certain processes that are core to our operating model, Mike will give you an update on our continuing restructuring effort. We are executing on the plan that was initiated in November and we're lowering our 2023 personal expense by $100,000,000 At the midpoint of our guidance, reflecting actions that have already been taken and additional opportunities to further reduce our costs. As I've transitioned from my role of Board Chair to the Interim CEO, I've met with many of our employees who remain highly engaged and motivated to win as we strive to amplify their expertise with new tools. I've also met with several of our customers and I'm confident in the power of our commercial engine and our ability to deliver superior global services and capabilities and solve complex logistics challenges for our customers, while continuing to execute on our sustainable growth strategy.

Speaker 2

I'll wrap up my opening remarks by providing an update on the search For the new permanent CEO, Jody Kozlak, the Chair of the Board and former Chief HR Officer at Target is leading the search committee. With the assistance of Russell Reynolds, this role has attracted a strong pool of candidates. The committee is choosing a proven leader with broad operational experience who will Celebrate our strategic initiatives and execute on the opportunities ahead for the company. The process is moving along as expected and the Board anticipates naming the new CEO in the Q2. I, along with the senior leadership team, am actively preparing for a smooth transition to a new leader.

Speaker 2

Now let me turn it over to Mike for a review of our Q1 results.

Speaker 3

Thanks, Scott, and good afternoon, everyone. As Scott mentioned, our Q1 results were impacted by a soft freight market. Prices for surface transportation and global freight forwarding Have been declining with the weakening demand and excess capacity. With these macro forces as a backdrop, Our first quarter total revenues of $4,600,000,000 declined 32% compared to our record high of $6,800,000,000 in Q1 of last year. Our first quarter adjusted gross profit or AGP Was down $221,000,000 or 24.3% compared to Q1 of last year, driven by a 45% decline in Global Forwarding and a 16% decline in NAST.

Speaker 3

On a sequential basis, Total company AGP was down 11%, including a 15% decline in NAST and a 6% decline in Global Forwarding. On a monthly basis compared to Q1 of last year, our total company AGP per business day was down 23% in both January and February and down 27% in March as the typical seasonal acceleration in March did not materialize this year. So far in April, we've experienced similar freight market conditions to those we saw in March. In our NAST Truckload business, our Q1 volume declined 3.5% on a year over year basis. Within Q1, Average daily volume in March was weaker than January February, resulting in a 1% sequential decline in Q1 compared to Q4 of last year.

Speaker 3

Our AGP per truckload shipment decreased 19% versus Q1 last year, primarily due to a decrease in our transactional or spot market truckload AGP per shipment. During Q1, we had an approximate mix of 70% contractual volume and 30% transactional volume. Routing guide depth of tender in our managed services business, which is a proxy for overall market declined from 1.7 in the Q1 of last to 1.2 for the Q1 of this year, which is the lowest level we've seen since the pandemic impacted Q2 of 2020. The sequential declines in truckload line haul cost and price per mile that we experienced in Q2 through Q4 of last year Continued in Q1. However, the declines in Q1 were the largest that we've seen in over 10 years on a percentage basis.

Speaker 3

In Q1, we saw a 28.5% year over year decline in our average truckload line haul cost Per mile paid to carriers excluding fuel surcharges. Our average line haul rate or price billed to our customers excluding fuel surcharges decreased year over year by approximately 27.5%. With the price decline coming off a higher base than cost, These changes resulted in a 20.5% year over year decrease in our NAST truckload AGP per mile. Market conditions in our Global Forwarding business were also soft behind weakened demand and plenty of capacity combined with the extended shutdowns around the Lunar New Year holiday. This contributed to significantly reduced import volumes and prices across the trade lanes for ocean and air freight.

Speaker 3

In Q1, Global Forwarding generated AGP of $177,900,000 representing a year over year decrease of 45% versus the record high for our Q1 last year, which was up 50%. Within these results, our Ocean Forwarding AGP by $111,000,000 or 50% year over year compared to 63.5% growth in Q1 of last year. The Q1 results were driven by a 41.5% decrease in AGP per shipment and a 14.5% decrease in shipments. Despite the soft market, our forwarding business continues to have success adding new customers and strengthening It's geographic diversity behind many of the investments made in technology and talent over the past several years. In addition to our strength in the Trans Pacific trade lanes, our forwarding team generated over 50% of new business AGP from customers outside of the U.

Speaker 3

S. In Q1. Turning to expenses. Q1 personnel expenses were $383,100,000 down $30,000,000 or 7.3% Compared to Q1 of last year, primarily due to our cost optimization efforts and lower variable compensation. Our Q1 average headcount declined 2% versus Q1 of last year and 4% compared to our Q4 average.

Speaker 3

As another point of reference, our Q1 ending headcount declined approximately 6% compared to the end of Q4. Our cost optimization and restructuring efforts that began in Q4 of last year continued into Q1 as we found As we indicated on our Q4 earnings call, We continue to expect our headcount to decline throughout 2023 as we streamline processes and leverage technology to allow our industry leading talent to focus on more important work like growing the business. As a result of the progress on these Cost optimization efforts, we are now lowering our personnel expense guidance for 2023 by an additional $100,000,000 at the midpoint. We now expect our 2023 personnel expenses to be in the range of $1,450,000,000 to $1,550,000,000 Compared to our previous guidance of $1,550,000,000 to $1,650,000,000 This updated guidance Excludes the Q1 restructuring expense and additional restructuring costs that we expect to incur during the year. Excluding the restructuring charges in 20222023, the midpoint of our updated 2023 guidance for personnel expenses Structural cost reductions with our lesser amount attributable to softer market conditions that we referred to earlier.

Speaker 3

Moving on to SG and A. Q1 expenses of $141,500,000 were down $5,900,000 We continue to expect our 2023 SG and A expenses to be about $575,000,000 to $625,000,000 2023 SG and A expenses are expected to include approximately $90,000,000 to $100,000,000 of depreciation and amortization expense. As you recall from our Q4 earnings call, we committed to $150,000,000 of net cost savings by Q4 of this year compared to the annualized run rate of Q3 last year. Our updated total operating expense guidance for 2023 now Approximately $300,000,000 of net cost savings compared to the annualized run rate in Q3 last year. As mentioned earlier, the majority of the expense reductions are expected to be long term structural changes to our cost base.

Speaker 3

Q1 interest and other expense totaled $28,300,000 up $14,100,000 versus Q1 last year. Q1 of 2023 included $23,500,000 of interest expense, up $9,000,000 versus the prior year due to higher variable interest rates. Q1 results also included a $9,600,000 loss on foreign currency revaluation and realized foreign currency gains and losses, up $8,100,000 compared to Q1 last year, driven by the translation impact of the various foreign currency denominated intercompany exposures that we had in Q1. As a reminder, our FX impacts are predominantly non cash gains and losses, which is why we're not actively hedging them to reduce volatility. Our Q1 tax rate came in at 13.5% compared to 18.4% in Q1 of 2022.

Speaker 3

The lower tax rate was driven primarily by the incremental tax benefits that we typically see from stock based compensation deliveries in Q1 as well as additional U. S. Tax credits and incentives in proportion to the lower pretax income. We continue to expect our 2023 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal, state or international tax policy. Q1 net income Was $114,900,000 and diluted earnings per share was $0.96 Adjusted or non GAAP earnings Per share excluding the $3,700,000 of restructuring charges was $0.98 down 52% compared to Q1 of 2022, which was up 60% versus the prior year.

Speaker 3

Turning to cash flow. Q1 cash flow generated by operations was $254,500,000 compared To $13,900,000 of cash used in Q1 of 2022. The $268,500,000 year over year improvement was driven by a $235,000,000 sequential decrease in net operating working capital in Q1 driven by the declining cost and price of ocean and truckload in our model. Conversely, Q1 of last year included a $289,000,000 sequential increase in net operating working capital as costs and prices were rising. Over the past three quarters, as the cost and price of purchased transportation has come down, We have realized a benefit to working capital and operating cash flow of more than $1,200,000,000 That benefit highlights some of the inherent resilience In Q1, our capital expenditures were $27,000,000 compared to $26,200,000 in Q1 of last year, and we continue to expect our 2023 capital expenditures to be in the range of $90,000,000 to $100,000,000 We returned $125,000,000 of cash to shareholders in Q1 through $73,400,000 of Cash dividends and $51,200,000 of share repurchases.

Speaker 3

The cash returned to shareholders exceeded net income, but was down 50% versus Q1 last year driven by the $101,000,000 of cash used to reduce our debt. Now on to the balance sheet highlights. As we have demonstrated through the ups and downs of the highly cyclical freight market, The strength of our balance sheet and business model makes us a reliable partner for our customers and allows us to invest through the cycle. Our customers value the stability and reliability that we provide as they work to optimize their transportation needs. We ended Q1 with approximately $1,500,000,000 of liquidity comprised of $1,220,000,000 of committed funding Under our credit facilities and a cash balance of $239,000,000 Our debt balance at the end of Q1 With $1,870,000,000 down $293,000,000 versus Q1 last year.

Speaker 3

Our net debt to EBITDA leverage at the end of Q1 was 1.39 times, up from 1.29 times at the end of Q4. Our capital allocation strategy Includes maintaining an investment grade credit rating to allow us to optimize our weighted average cost of capital. With the anticipated earnings reduction in 2023, we have reduced our debt to deliver our leverage targets. As you would expect, the cash that we used To reduce debt generally reduces the amount of cash available for share repurchases. Over the long term, we remain committed to growing our cash Dividend in alignment with our long term EBITDA growth.

Speaker 3

Our dividends and share repurchase program are important levers to enhance shareholder value as is delivering quality customer service more efficiently than anyone in the marketplace. With that, I'll turn the call over to Arun to walk through our efforts to strengthen our customer and carrier experience and improve our efficiency and operating leverage.

Speaker 4

Thanks, Mike, and good afternoon, everyone. As I mentioned on our last earnings call, we've increased our focus on opportunities to streamline processes that are core to scaling our operating model. Streamlining these processes will enable us to decouple volume and headcount growth and drive increased productivity, while simultaneously improving the customer experience and service levels. Shipments per person per day is a key metric that we use to measure our productivity improvements, And we achieved a 4% sequential improvement in Q1 as we progress towards our goal of 15% year over year improvement by the end of Q4 of 2023. In order to reach our 2023 goal, we have accelerated the digital execution of critical touch points In the lifecycle of a load.

Speaker 4

In Q1, the progress we made was primarily driven by increasing the automation of in transit tracking and appointment related tasks. Increased digitization and automation are key elements of delivering a superior customer experience as well as operating leverage. These efforts include operationalizing our information advantage at scale by giving customers insights around price and coverage and providing features to carriers that improve their utilization Streamlining processes and improving productivity creates operating leverage. Operating leverage Gives us the pricing flexibility to unlock and accelerate market share growth, while delivering on our long term operating margin targets. With that, I'll turn the call back over to Scott now for his final comments.

Speaker 2

Thanks, Arun. As inflationary pressures continue to weigh on global economic Growth in freight markets present cyclical challenges, the competitive landscape has changed. With lower available demand, the competition for volume is intense and shippers are looking for stable and innovative logistics partners. We've shown the strength of our model through cycles, Our balance sheet continues to be strong and we plan to continue investing in initiatives that we expect to provide innovative solutions and generate long term profitable growth. At the same time, we're continuing to evolve our organization to bring greater focus We expect this initiative will continue to drive improvements in our customer and carrier experience and amplify the expertise of our people, all of which we expect to drive market share gains and growth and lead to improved returns for our shareholders.

Speaker 2

After my first 100 days in this role, I'm even more excited about C. H. Robinson's opportunities in future. We have some of the best people in the logistics industry and they're dedicated to solving challenges for our customers. As a result of the exceptional service that our people provide to customers during the period Of extended market disruption, our customer experience scores are very high and we're having more strategic customer discussions about our ability to provide An integrated service solution.

Speaker 2

So while the near term freight environment presents some challenges, our differentiated value proposition and strength of our people, Processes and technology provide many opportunities. This concludes our prepared comments. And with that, I'll turn it back to Donna for the Q and A portion of the call.

Operator

Thank you. The floor is now open for questions. Today's first question is coming from Jack Atkins of Stephens. Please go ahead.

Speaker 5

Okay, great. Good evening and thank you for taking my question. So I guess Arun, maybe this one's for you, but Scott or Mike, if you want to chime in, please do. But I guess, I'd be curious to get your take How you're looking at the market for the balance of the year? It sounds like April is trending kind of in the same Ballpark is March, if I understood your comment correctly.

Speaker 5

But if I think back to the last time you guys updated, the thought was maybe The market would be troughing sometime in the second quarter and then beginning to see some improvement in the back half of the year. Any sort of update to that view, any update to what your customers are telling you about sort of their business plans, I think that'd be really helpful. I'll stop there and hand it back. Thank

Speaker 2

you. Yes. Thanks, Jack. This is Scott. Why don't we have Mike Kick that off and then I'll give a little color on customer sentiment.

Speaker 3

Okay. Yes. Thanks for the question, Jack. And Obviously, the market here that we're experiencing is a pretty soft market. We're Seeing pretty good competitiveness, particularly on the truckload side, on the bids that we're involved with, We've been able to maintain our win percentage.

Speaker 3

It's actually up this year. In Q1 over last year, it was up in Q4 over last year. So I think we're competing effectively. But What we're seeing inside those bids are reduced total demand. So the customers are just not seeing the volumes That they've had in the past and that's reflective of this soft freight market environment.

Speaker 3

There's still a lot of customers still working through inventories. They're not running the plants as aggressively as they have in the past. So we're seeing a pretty soft market overall. When we look at our NASS business In Q1, I think there are a few themes that I'd point to there. I think we feel like we grew share Despite being down 3.5% on truckload, and that's really with respect to the brokers, the 3PLs out there.

Speaker 3

I We also got improved productivity and we talked about that 4% improved productivity against That 15% shipments per person per day target for the year, and we did that in a soft market. It's generally a little bit easier To get productivity enhancements when the volume is really roaring, but we're able to do that in a soft market. And the last thing We talked about was our customer service and we really felt like we had best in class customer service there. So The themes are overall soft market. You talked about how we described April relative to the quarter, when we look at enterprise AGP per shipment or enterprise AGP per day, we certainly had A better January February than we did in March.

Speaker 3

But again, if you kind of translate that over to the truckload business, we are Our volume was down 3.5% in the quarter, and April kind of has played out similar to where we were In March, so probably market share gaining within the brokerage universe, but certainly down versus our original expectations, Driven primarily by the soft market that we're experiencing. And inside, I'll talk a little bit, I guess, too about The contract environment, one of the, I think, changes that we've seen in the contract business versus Q4 was, If you go back and look at Q4, customers were about half bids at 12 months and about half bids that were less than 12 months. As we got into Q1, those RFPs were really more leaning into 12 months. And so we've gone all the way up to about 3 quarters of 12 months in those. And you could say that that might be the customers Seeing bottom here trying to lock in rates that are lower, but that is That's another kind of data point indication of where we're seeing the market.

Speaker 3

So with that, I don't know, Scott, if you have anything more you want to say.

Speaker 2

Yes, Jack, maybe just a little customer feedback. I've been lucky to be in probably about 20 meetings in the last Month and a half with our top customers. I would say sentiment is pretty consistent with what you're hearing, with retailers and Higher levels of inventory, but it's really dependent by vertical. There are areas of strength, automotive, healthcare Or some, I would say a common theme of these meetings too is just sort of the longer term partnership aspect of working with Robinson and Us helping them solve their logistics challenges going forward with our full portfolio. So, the one thing we're doing in a softer market As we're really leaning into customer engagement and face to face meetings.

Speaker 5

Okay, guys. Thank you so much for the color.

Speaker 2

Thanks, Jack.

Operator

Thank you. The next question is coming from Stephanie Moore of Jefferies. Please go ahead.

Speaker 6

Hi, good afternoon. Thank Scott, I wanted to maybe get a little bit more color around the ongoing CEO search. I do think that the in general, the market would to see some certainty here. Now that it's been, call it, several months of this evaluation process, if you could just provide any update of what Expertise you, the Board, are looking for in the new CEO, in the evaluation of candidates, maybe some that might have Brokerage experience or just transportation experience as well as the view of someone who might have experience outside of transportation entirely, Just maybe how the Board is thinking about these factors? Thanks.

Speaker 2

Sure, Stephanie. As I mentioned in my prepared comments, The process is moving as expected and we expect to name the new CEO here in this quarter. The pool of candidates is diverse and strong. Board is looking for a proven leader, seasoned executive, really with an operational expertise and someone who can drive positive change Inside Robinson, I would say the search committee and the Board is also committed to finding the right leader. And we believe we're Coming to the conclusion of that process and part of what I'm doing with the senior leadership team is really making Decisions and not pausing on anything.

Speaker 2

So we set this up for success for the new leader and that leader can move quickly once announced.

Speaker 6

Great. Thank you. And then lastly, I appreciate the additional color that you gave in response to Jack's question about what's going on in the NAST business, but maybe you could give us some color about what's going on in the Global Forwarding cycle. I think it started to deteriorated a bit earlier. Is there an opportunity for that to also rebound a bit faster too?

Speaker 6

Any color there would be helpful. Thank you.

Speaker 3

Yes. I think there has been softness certainly in both ocean and air that we've seen. Most recently over the past few weeks, there are some green shoots of more positive news and demand volume and shipments And the whatnot, but I think it's too early to call that a trend. I think the market has really Then softening, you've seen the pricing come down as a result of that softness pretty much across the board.

Speaker 2

I would add Stephanie, we've been very active in the RFQ process with customers back to sort of that strategy of leaning in And obviously peak season coming, we'll be prepared for that. And if it is soft, We'll also be in a position to adjust costs in that business, as we see fit.

Speaker 6

Great. Thank you so much.

Operator

Thank you. The next question is coming from Jason Seidl of TD Cowen. Please go ahead.

Speaker 7

Thank you, operator. Afternoon, gentlemen. I wanted to talk a little bit about the cycle. You mentioned that you think we're sort of getting close to it In terms of the North American truckload bottom, if we will, what do you guys need to do to prepare for that in terms of your mix of business? And then if you can comment On where you think we're at with the cycle at Air and Ocean?

Speaker 3

Yes. I One of the things that we do is we forecast pricing in the marketplace. If you go to our website, we give you A look at what we think the market is going to be. And right now, from a pricing standpoint, we kind of feel like We're probably at the bottom or very near the bottom of the spot market. When you think about the contract market, The contract pricing will follow the spot market.

Speaker 3

So there's still some downward pressure on pricing within the contract market as those contracts that We're a year old come to reprice and so there's still a little bit of that going I think on the Oceanair side, we're just getting to the end or nearing the end of The annual rebidding cycle on pricing in that market, I think our team has been Pretty encouraged. In that business, we've been able to grow share here over the past few years And that market is one that we participated pretty effectively in both ocean and air. We brought on some talent. We've had some Technology advances and we've had some geographic expansions And some verticals that we've gone into too. So I think we feel pretty good about the customer engagement there.

Speaker 3

We feel pretty good about the bid process and Coming out of this last round, I think we feel optimistic that we'll be able to continue to grow share in the market on both ocean and air.

Speaker 7

That's good color. Just a quick follow-up. And so you mentioned if I were a customer to go online, if I'm looking at sort of Base pricing for truckload in

Speaker 2

the back half of the year,

Speaker 7

you guys will be forecasting that up from current levels then?

Speaker 3

Yes, down we're kind of feeling like we're at the low now. We feel like that will come up as we go through the year and probably end the year Higher than where we're at. Fair enough. Appreciate it. Obviously on that, I'm talking to them.

Speaker 3

What we've got on the website is Our spot market and like I said, price and contract follows the spot market. So as those contracts reprice,

Speaker 2

those will come along with it.

Speaker 3

Got you. Appreciate it, guys.

Operator

Thank you. The next question is coming from David Zasula of Barclays. Please go ahead.

Speaker 8

Thanks for taking my question. Could you comment on the LTL market a little bit? I noticed you had Outperformed at least some of the indices we tracked on volumes. What you're doing to drive share in that space and where you think the LTL market will go heading forward?

Speaker 3

Yes. On the LTL side, we've reported Q1 volumes down 5%. That was Lower than our expectations going in, but that market also faces a similar softness that we're seeing across the board. What we've talked about on our LTL business has been the impact of a couple of large customers that we Lost during the pandemic that we've had to lap, but we feel good about the automation that we've been able to bring to that business Our effectiveness at getting out there and competing from a margin standpoint, that business kind of runs a little bit With fuel prices, so that's the one part of our business where margins are improved when fuel is up and Come down a little when fuel comes down and so as we comp last year from a fuel perspective, I think in Q1, we were down about 3 Dollars on impact on fuel and so there's a little bit of that margin going on there. But overall, we feel like we've been able to compete there despite the results coming in softer than we originally expected.

Speaker 8

And then, real quick, you had mentioned some automation initiatives. I guess, could you talk to the extent you have on any feedback you've gotten from customers that are resistant and what you're doing to maybe help customers along with the initiatives you're implementing?

Speaker 4

Yes. Good question. So most of the automation that we're doing actually should have Extreme customer benefit. Much of what we're doing is automation on the carrier side or internally As it relates to appointment related tasks and where customers have so on the customer side, where customers have systems or scheduling systems that we Integrate with to do appointments, that's great. And or they allow us to reach in to their systems Via automation and book and schedule appointments.

Speaker 4

Ultimately, it's a cost savings for them as well, so they don't really push back at all. As it relates to in transit tracking and track and trace, most of that, the heavy lifting is about it's not really heavy lifting, it's about like self So for carriers ultimately, right? Carriers now have the ability with better and hardened technology to self serve as it relates to giving us visibility to their locations, which then gives us greater confidence that we can relay back to customers, around service performance. So ultimately, on both sides Of the marketplace, we haven't really found significant pushback on the activities that we're currently working on.

Speaker 8

Thanks very much. I appreciate it.

Operator

Thank you. The next question is coming from Chris Wetherbee of Citigroup. Please go ahead.

Speaker 9

Hey, thanks. Good afternoon. Wanted to maybe talk a little bit about some of the cost initiatives that you guys are working on. I know you upsized your cost out goals For the year, I'm wondering maybe particularly on the personnel side, we could maybe break that down between heads, and then maybe incentive comp, if that is part of it or if Centa comp is excluded from the numbers, just maybe you want to start there.

Speaker 3

Yes, sure, Chris. So we talk about The $300,000,000 cost savings relative to the commitment that we have put out there on our last call. Just to recap that, we had originally said we're going to do $150,000,000 in net annualized cost savings and we use the base On that as the Q3 expenses from last year were about $600,000,000 So if you annualize that $600,000,000 $2,400,000,000 midpoint of our new guidance is $2,100,000,000 That's how you get the $300,000,000 of overall savings. And then what you saw in the guidance that we put out there was $100,000,000 reduction in 2023 on the midpoint of our personnel expense. When you get into the composition of that, we do have some tailwind from Normalized incentive for our folks and then we also going forward our annual Salary increases go into effect in March.

Speaker 3

And so they didn't impact Q1 fully, just the end of it. And so that Will be a little bit of a headwind going forward for us on the expense side, but the primary Force behind the personnel expense guidance change was our staffing. And We've made really nice progress on our staffing in Q4 and in Q1. We ended if you look at ending headcount In Q1, we're about 16,400, which is down about 1,000 from where we were at the end of Q4. And if you went back to Q3, we're down about 1500 from where we were in Q3.

Speaker 3

And We talked about the fact that we needed to get out there and kind of fix our cost structure from a long term Perspective and I think we've done a pretty decent job of both rightsizing for some of the Expense escalation that we had when the market was hot and the volumes required more service, frankly, because Times are tenuous and so we had to correct for that a little bit. And then just looking at the long term cost structure that we need to be competitive Going forward, we really felt like we needed to do some things there and we did. And all along, we've had Really good work on streamlining our processes and putting automation in to really allow our people to do more value added tasks, Things that they want to do more, getting rid of some of the work that is less desirable and building that toolbox for them so that they can focus on Growing our business profitably with the great toolbox to support them.

Speaker 2

Hey, Chris, this is Scott. I'll just add on to that. One of the things we've really worked with the senior leadership team on the last 90 days is taking complexity out of the organization And simplifying things and as we all know an important part of strategy is also deciding what you say no to and concentrating And part of this is the right thing to do for the business for the decade of head, but also as I talked about before To really give the new CEO a platform to move quickly, and I'm really proud of the work the senior team has done And they're tough decisions, but I think we're going to see a benefit for all of our stakeholders going forward.

Speaker 9

Okay. That's extremely helpful color. So I appreciate you guys running me through that. And then maybe a quick follow-up, just sort of transitioning a bit to the Global Forwarding business. There has been some signs of life off of a very low bottom in terms of spot rates on the ocean side over the course of the last couple of weeks.

Speaker 9

I think some other players have had maybe Better success with contracting relative to the beginnings of the contracting season for this year relative to what the spot market might suggest. I don't know if those are That's sort of how you guys are thinking about that market as you move into the spring season as we're going through that annual shipping contracting season. Is that something that you've seen? Or is it Continuing to sort of follow the path of the spot market?

Speaker 3

Yes. We're getting to the end of that process to reestablish contracts for the year and I think the team feels pretty good about it for a variety of reasons. And the Upgrading technology that we've had in Global Forwarding has really helped our connection with customers and helped us In terms of success, we rolled out Navisphere 2.0 in that space. That rollout was completed in January And the customers are reacting positively to that. We're exceeding our expectations on monthly average users, track and trace usage, Data quality, feature usage by customers.

Speaker 3

So what they're getting is they're more getting more customized reporting and capabilities, Data insights, analytics to support decisions. And I think those are the kind of things that have helped us get closer to customers and They get the attention of some new customers. And so that's despite the soft market, and like you say, there is some reason here In the last few weeks to think maybe there's some positive news there, but like I said, not enough to call it a trend, but I think our team is more excited about the engagement they have with the customers and the attention that they're getting in some of the new verticals and geographies as well To feel good about their continuation of the share gains that they've seen over the past few years.

Speaker 9

Okay, great. Well, thanks very much for the color. I appreciate it.

Operator

Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.

Speaker 10

Yes. Thanks, everyone, and good afternoon. Maybe if I could just follow-up here on the commentary around This year 2.0, I mean, I know it's still very early in the deployment, but when you think about it, is this a tool that we need to start seeing EBIT conversion or Profit per head start to close the gap with some of your best in class peers. What's sort of the timeline for that process, if you don't mind sharing some color there?

Speaker 3

Yes. Let me take a cut at that and Arun might have a couple of comments as well. So Navisphere 2.0, while it helps with sufficiency, it's really more to help us engage with the customers in a more constructive way to help solve Some of the problems that they have, make sure they're getting data the way they want it. We've had some other technology enhancements on the GF side Around being able to quote more efficiently, which is important in the bidding process. And so while that Some of that tech is rolling out.

Speaker 3

The game plan on the Global Forwarding side is not unlike the game plan on the NAS side. Just a little further behind, I would say, in Global Forwarding with a lot more upside due to the complexities associated with that market when you think about Languages, currencies, customs and rules and laws as you get goods transported around the world. So I think really good upside there, but that technology investment has been going on And we'll continue to go on in the feature enhancements and benefits that we're talking about with Navisphere 2.0 are really growth more than efficiency,

Speaker 4

Yes. So to kind of elaborate, when we referenced Navisphere 2.0 or Online 2.0, That's really more about customer self-service capabilities. And so it's more about customer engagement, customer retention and growth to Mike's point. As it relates to productivity, there are a whole set of activities similar to how we're doing in transit tracking, automation and self serve, And we're doing appointment related task automation and NASS to drive up productivity. Global Forwarding has similar activities as it relates to how a given file, we call it The metric we track internally is something along the lines of shipments per person per day, it's files per person per day and we have various Activities or underlying initiatives similar to NAST to unlock productivity there.

Speaker 4

So I'd say that's a little bit Decoupled from the reference to Navisphere 2.0. Okay. That's fair commentary. And if I could just Push a

Speaker 10

little bit more on that. When I think back to, call it, 2016, 2017 after APC and a spate of other acquisitions that you did in Global Forwarding, I think the commentary there was that it was still a new and growing organization. There were still A lot of efficiency and productivity that was left to extract. And here we are in 2023 and we're kind of back to the same sort of EBIT conversion ratios. So what makes you confident that this time around you've got the right

Speaker 3

Yes, let me start and again I'll let Varun make some comments as well. The team has been growing share. We've been happy with India to the U. S, U. S.

Speaker 3

Oceania, they've made progress in the Europe to U. S. Trade lanes, achieved a number 4 ranking there in Q1, Just expanded geographically into the Middle East, opened an office there in Dubai in mid February And picked up customers really all around the world, not just Trans Pacific, but Europe, Southeast Asia, Oceania, Latin America, India, Etcetera. So the team has been doing a pretty good job and the journey To optimization there is a it's a there's a lot of runway there. It's a complex marketplace and there's a lot of ability To streamline processes and automate and get ourselves to an efficiency level That we want to.

Speaker 3

So I think the performance has been good. I think the runway is pretty solid there too.

Speaker 4

Yes. To add to what Mike said, I think there are probably a couple of other factors that are relevant. There was probably a lot of work around foundational technology investments that had happen over time, onboarding some of the acquisitions onto our platform. I will say that over The recent past call, the past 12 to 24 months, there's been a heightened scrutiny around connecting technology investments To actual unlock of either productivity or revenue leakage or whatever else. And so I'd say The discipline or the data driven discipline around investment priorities and linking it back to outcomes has probably gained heightened focus over the last You are too.

Speaker 10

Okay, very good. Thank you.

Operator

Thank you. The next question is coming from Jordan Olliger of Goldman Sachs, please go ahead.

Speaker 10

Yes. Hi. You referenced, I think, the bottom of the cycle a few different ways. And one of the things I think you talked about was as Spot prices approach operating breakeven costs, it will start taking out capacity. I'm just curious your thoughts on how Quicker processes could be, especially given demand.

Speaker 10

And then maybe what's been your experience from your carrier partners? Have you seen anything in that regard? Thanks.

Speaker 3

Yes. Thanks, Jordan. A couple of comments there. We do think that the pricing It's getting to the point where capacity, you would think would start coming out of the market. When we look at new carrier sign ups, They're down pretty significantly, down about 50% year over year in the quarter and sequentially, Down by a third as well.

Speaker 3

So that's usually an indication of things slowing down. But The cost for carriers with labor rates, insurance rates and fuel has become More expensive and if they purchased a truck here in the last few years that was probably more expensive too. So I think It's probably fair to say that we're on the verge of some capacity coming out truckload for sure. I'll give you some interesting maybe information around the cycle too. There are no guarantees in terms of forecasting when the cycle is up, when they will come and go from peak to trough.

Speaker 3

But if you look at the last 3 cycles in the U. S. And you're looking at AGP per shipment. We've seen some similarity In the duration of those cycles. So if you looked at the time between the last three peak quarters, it was 3 to 3.5 years.

Speaker 3

And if you looked at the time between the troughs, it was also 3 to 3.5 years. And so you're talking about 6 to 7 quarters Between the peak and trough or vice versa, no way to know if this freight cycle is going to follow suit. But our last peak In truckload AGP per shipment was 7 quarters from Q4 of 2018 to Q3 of 2020. And so again, history repeated itself 6 to 7 quarters from our last peak, which was Q2 of 2022. And then we'd be talking about Q4 this year or Q1 and next year, as the trough on an AGP per shipment kind of basis.

Speaker 11

Thank you.

Operator

Thank you. The next question is coming from David Vernon of Bernstein. Please go ahead.

Speaker 12

Hey, good afternoon, guys. Thanks for fitting me in here. The rate per mile on your truckload Slide 6 there, maybe about 28%, that's Kind of well ahead of some of the benchmark indices that we follow from CAF and some of the other third party stuff. Can you give us a sense for how much of the book is repriced at this level right now. And what does that mean kind of from a go forward perspective?

Speaker 12

Are we going to be stabilizing at these levels? Or Is there still some more, maybe pain to take as this truck cycle reaches its trough?

Speaker 3

Yes. We reprice our contracts all throughout the year, tend to be a little bit heavier in Q4 and Q1. So call it 60% gets

Speaker 2

repriced in Q4

Speaker 3

and Q1 and the percent gets repriced in Q4 and Q1 and the other 40% in Q3 In Q2 and Q3, so you kind of think about it that way. I think what was interesting when we were looking at price per mile and cost per mile This quarter in comparison to last year was just how much the decline was on a percentage basis. So we were As we kind of pointed out there, we're down 27.5% on a rate per mile and 28.5% on a cost per mile. And so when you look at year over year, those are the largest that we've seen in over a decade. Sequentially, It was the 5th straight quarter that price per mile came down and also the 5th straight quarter that cost per mile No, that's the way we're seeing it play out.

Speaker 12

Okay. And then maybe just as a quick follow-up, you don't give us some of the same detail in terms of the buy and sell rates The Fortiing business understands different modes, more complicated. But I guess, as you think about the rate at which Your customer rates are coming down and correcting what the publicly available indices we might be looking at. Is that spreads Also widening a little bit or are we getting to a point where your forwarding business has caught up to where sort of market rates are today?

Speaker 3

Yes. Like we kind of said, that business gets rebid, repriced here and we've been going through that and Hard to say where you hit bottom. That especially in the Oceanside, you have a capacity issue there that's got to play out In terms of there's certainly capacity coming into the market there. And there's a little bit coming out, but not as much as coming in. And so how that plays out is yet to be seen, particularly considering the macro environment and what's there in demand.

Speaker 3

The market is looking at the possibility of a recession here for the remainder of the year. Obviously, that impacts demand. And so that Supply demand kind of play in the ocean business is a little bit harder to call at this point and how Pricing will get reflected there.

Speaker 12

And on the air side?

Speaker 3

Yes, similar dynamics on the air side. I wouldn't say much different there except for the capacity situation is obviously a little bit different. But It will key off the macro demand environment and that I think is yet to be seen.

Speaker 8

All right. Thanks for the time, guys.

Speaker 3

Thank you.

Operator

Thank you. We're showing time for one last question today. The final is coming from Ken Hoexter of Bank of America. Please go ahead.

Speaker 11

Great. Thanks for squeezing me in. Scott, We just, how do you think about the core brokerage? I know you had some questions in the prepared remarks on the timing of the CEO. But Should CH be moving to more automation and less people intensive?

Speaker 11

I guess I want to understand your thoughts on the design for the company and where you think it's headed.

Speaker 2

Yes, Ken, great question. I think it's a combination of both. I think the technology amplifies the expertise of our people And our ability for our people to drive continued growth and drive operating leverage for the business And grow without adding headcount is one of the key things to what we're doing. So to me, We're on a path to have multiple wins, win for our customers, win for our carriers, and a win for our people, when we do this the right way.

Speaker 11

But I guess to take it a step further, do we see a reshaping of it where we're seeing big layoffs to shift the dynamic of that balance in the near term?

Speaker 2

No. I think one of the things that Robinson is so strong at is our commercial engine. And I think one of the things we have to do is leverage the technology. We've seen that in terms of how we compete against our technology competitors. So this is an additive game, a 1 plus 1 equals 4 or 5.

Speaker 2

And one of the things Arun is doing and part of Our cost reduction strategy here is also to drive costs out of areas and take complexity out of the organization to drive it towards the right things that grow the business and grow margin.

Speaker 11

That's helpful to understand. And then just a follow-up On the capacity exits, I guess there are a lot of peers that are focused on you mentioned the digital peers focused on positive and Profitable volume growth and taking share. Maybe can you just spend a minute talking about the competitive dynamic in the market right now?

Speaker 3

Yes, I'll make a couple of comments there, Ken. So I mentioned that the competitiveness seems to have heated up, Particularly on the brokerage side here and we could certainly go out and get more volume, but we're committed to getting profitable volume. And so we are not interested in getting into any kind of competitive situation that would lead us Two issues with negative loads are chasing that kind of volume. So we've been pretty disciplined there. We've got really good Pricing engines, we feel like we've got great understanding in the market.

Speaker 3

And so we feel like we can compete pretty effectively there with our data advantage and our people And connectivity to the customers in a way that we'll continue to be able to make strides both on a Market share gain standpoint and against our margin targets.

Speaker 11

Great. Scott, Mike, thanks for the time. Appreciate it. Thank you.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Ives for closing comments. Yes.

Speaker 1

Thank you everyone for joining us today. That concludes

Operator

You may disconnect your lines or log off the webcast at this time and enjoy the rest of your

Powered by Quartr
Earnings Conference Call
C.H. Robinson Worldwide Q1 2023
00:00 / 00:00