C.H. Robinson Worldwide, Inc.

Good morning, ladies and gentlemen, and welcome to the CH Robinson fourth quarter 2020 conference call. At this time, all participants are on a listen-only mode. Following today's presentation, Chuck Ives will facilitate a review of previously submitted questions. If anyone needs assistance at any time during the conference, please press star followed by the zero on your telephone keypad. As a reminder, this conference is being recorded Wednesday, January 27, 2021. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Thank you, Donna, and good morning, everyone. On the call with me today is Bob Biesterfeld, our Chief Executive Officer, and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2020 fourth quarter results, and we will follow their comments with responses to the pre-submitted questions that we received after our earnings release yesterday. Before I turn it over to Bob, I want to update you on a couple of financial statement items that have been renamed. Beginning with our 2020 fourth quarter results, we have renamed the term net revenue to adjusted gross profit with no change to the composition of what is included in the metric. We believe the term adjusted gross profit is a better descriptor given that this non-GAAP metric includes the netting of significant expenses such as the cost of purchased transportation and the cost of products sourced for resale. A gap to non-gap reconciliation is included in both our earnings release and our earnings presentation. We also renamed the term operating margin to adjusted operating margin, again with no change to the composition of what is included in this metric. Adjusted operating margin is calculated by dividing income from operations by adjusted gross profit. Our earnings presentation slides are supplemental to our earnings release and today's comments and can be found in the investor relations section of our website at chrobbinson.com. I'd like to remind you that our remarks today may contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. And with that, I'll turn the call over to Bob.

Thank you, Chuck, and good morning, everyone. Our fourth quarter was marked by solid performance across our broad service portfolio, continued progress on repricing our truckload business to reflect the changing market conditions, and further advancements in our technology and transformation efforts that are providing meaningful improvements to our business results. Our global forwarding business sustained their strong execution in the fourth quarter. In our ocean business, the contracting number of carriers with meaningful size continue to value working with a global freight forwarder with our scale and reputation, and ocean shippers are increasingly coming to Robinson to meet their capacity needs as other providers fail to do so. The air market continues to be impacted by reduced cargo capacity. Air charters have evolved into a sustainable piece of our procurement strategy, and we again augmented our capacity in Q4 with charter flights to support demand from both existing and new customers. As a result, our shipment sizes have increased and our air tonnage is up year over year, despite the number of air shipments decreasing. Shippers continue to rely on Robinson's global supply chain expertise and our data and scale advantages to ensure critical goods are moved as quickly and as inexpensively as possible. We've bolstered our global forwarding procurement teams by hiring talent around the globe to focus on getting the capacity and competitive pricing needed regionally in a very volatile market. This, combined with our balanced portfolio of contractual and spot business, enabled us to optimize our adjusted gross profit per transaction, resulting in a 40% year-over-year growth in our Q4 global forwarding adjusted gross profit. There are several drivers of our recent growth in global forwarding that should continue to contribute to our long-term growth. While we continue to grow in our historical transatlantic and transpacific lanes, we've also added new customers in areas such as Europe, Oceania, Latin America, and South Asia. This geographical diversification is important in times of volatility across regional economies and trade policy uncertainty. Over the past five years, we've been building out our global leadership and commercial teams, bringing on new talent to strengthen our customer relationships and ensuring that we have the necessary training and development in place for that talent. We'll continue to build out our commercial and strategic sales teams across regions to support emerging vertical strategies and creating sustained high-value revenue streams. We've also created a more centralized global pricing framework that, combined with an increased use of data and analytics, is enabling us to deploy the right pricing strategies in a format that's more consistent and easily consumed by our customers. And lastly, our enterprise portfolio that allows us to offer end-to-end solutions for our customers is unique to the logistics industry. We believe these strategies and competitive advantages will enable us to create more value for our customers, win more business, and sustain the market share gains that we've achieved. Turning now to our NAS business. The global pandemic has had an outsized impact on our small business partners in 2020. A nearly 12% decline in our customer count during 2020 was driven almost exclusively by small and emerging market customers. Likewise, a greater than 6% decline in our active carrier count in 2020 occurred solely in the small carrier category, and we believe that this is reflecting carriers exiting the marketplace. Against this backdrop, we were very pleased to add 4,100 new carriers to our network during the fourth quarter, which represented an 11.5% increase year over year. As we entered fourth quarter, the North America surface transportation market was experiencing substantial capacity tightness. This was evidenced by a routing guide depth in our managed services business that rose to 1.8 by the end of third quarter, which was a level that we hadn't seen since mid-2018. This capacity tightness continued throughout the fourth quarter as well, with average routing guide depth remaining at 1.8 in each month of fourth quarter. and contractual routing guides continuing to operate with first tender acceptance levels that were well below normal. By reevaluating our contractual truckload portfolio throughout the quarter, we reduced our percentage of truckload volumes with negative margins. Our targeted and strategic approach included repricing some business to reflect the rising cost environment, exiting other business that did not show a clear path to acceptable profitability, and honoring contractual commitments while strengthening our long-term relationships to our customers. We captured more spot market opportunities in the fourth quarter, resulting in an approximate mix of 55% contractual and 45% transactional volume versus a 70-30 mix in the year-ago period. This shift is not atypical in a rising price and cost environment, and our efforts to automate how we tackle the spot market opportunities has had a positive impact as well. With double-digit growth in spot market shipments and very strong volume growth in our LTL business, NAST overall volume grew 8.5% year-over-year, excluding prime distributions volume. This outpaced industry volume growth in Q4 of approximately 4%, as measured by the CAATS Freight Index, and this represented our eighth consecutive quarter of market share gains in NAST. Due to continued tightness and capacity, the cost of purchased transportation continues to remain elevated. In the overall market, we observed third-party benchmarks indicating that fourth-quarter spot market costs were up approximately 44% compared to Q4 of last year. Our average truckload line haul cost per mile paid to contract carriers, excluding fuel surcharges, increased 32.5% compared to the fourth quarter of last year. And sequentially, our cost per mile increased 14% in Q4. Our average line haul rate increased billed to our customers, excluding fuel surcharge, increased 29% compared to the fourth quarter of last year. We made further progress in fourth quarter on repricing our contractual truckload business to reflect the rising cost environment, and the fourth quarter average line haul rate per mile billed to our customers, excluding fuel surcharges, increased 15% sequentially. Consequently, our fourth quarter truckload adjusted gross profit per load improved approximately 20% sequentially and also improved sequentially in each month of the fourth quarter. Having said this, we also saw instances of shippers implementing shorter bids or mini bids and some shippers delaying their annual truckload bids. In cases where annual bids have been delayed, we've either implemented short-term bridge pricing that was amenable to both parties in exchange for extending the contract, or we made decisions on how we managed acceptance of tendered volume. On last quarter's call, I commented that about 150 of our top 700 truckload accounts that represent $1.3 billion in revenues were scheduled to be repriced in the fourth quarter. However, about a third of those shippers that planned RFPs representing over $300 million in revenues have delayed their pricing events until the first quarter of 2021. This resulted in us repricing approximately $1 billion of our business during fourth quarter. We now estimate that we'll reprice around 145 of our top 700 truckload accounts that represents approximately $1.6 billion of revenues in the first quarter. Because of the efforts of our CH Robinson team members around the world, we were able to deliver solid performance across our broad service portfolio, including year-over-year growth and adjusted gross profit in our managed services, our Robinson Fresh, and our European surface transportation businesses. Our total company adjusted gross profit per business day improved sequentially in Q4 versus Q3 and grew year-over-year in each month of the quarter. Continued progress on our strategic technology initiatives and transformation efforts have resulted in meaningful productivity improvements within our business. A couple of these key metrics are displayed on slide four in our earnings presentation. Excluding volume and headcount from our 2020 acquisition of Prime Distribution Services, our productivity metrics continue to show a significant year-over-year improvement. as indicated by the 2090 basis point favorable spread between the year-over-year change in NAST volume and the change in full-time equivalence in our NAST business. As we've said in the past, this NAST Productivity Index is an important metric and a key output of our technology investments and our transformation efforts. Another way to view our productivity is by looking at shipments per person per day. And in the second half of 2020, we improved this metric by 26% over the second half of 2019. Our tech investments also continue to drive improvements in automation and the number of users on our platforms. One example of this is a 30% increase in fully automated truckload bookings compared to the fourth quarter of last year. During the fourth quarter, we had 35,000 unique carriers utilize our Navisphere carrier web portal. These carriers executed over 10 million load searches during the quarter, and 70% of the time, these carriers were presented with an option to automatically book a load related to their lane search. We continue to engage with our carriers to build technology that meets their evolving needs. And to that end, we've enabled 85% of our single-stop non-hazmat dry van freight in the U.S. to be booked by carriers automatically without any human intervention. The percent of our North American truckload freight available for automated booking will continue to increase during the first quarter as we add temperature-controlled freight and other sub-modes onto the platform. With engagement of nearly 200 customers since the launch of our ProcureIQ tool in September, we're experiencing positive early returns. We're yielding more volume growth with customers that have taken advantage of ProcureIQ's ability to provide them with tailored recommendations for optimal procurement and capacity strategies. And lastly, through our commercial connectivity efforts, we continue to add TMS and ERP connections to our platform, and we've enabled self-service access and direct digital connectivity to over 90,000 active customers with access to our truckload, less than truckload, and intermodal services. As a result of our ability to harness the benefits of our technology investment and our network transformation, we're on track to achieve our target of removing $100 million of long-term costs by the middle of 2021. And as we move into 2021, we continue to evaluate our global business operations to ensure that we're managing our business in the most efficient manner possible. investing in technology to unlock growth and efficiency, and creating better outcomes for our customers and our carriers by utilizing our unmatched combination of experience, our global suite of services, and our scale and information advantage. I'll now turn the call to Mike to review the specifics of our fourth quarter financial performance.

Thanks, Bob, and good morning, everyone. Our fourth quarter total revenues increased by 19.9% compared to Q4 2019, driven primarily by higher pricing and higher volume across the majority of our transportation service lines. Total company adjusted gross profit increased 10.7% in the fourth quarter, primarily due to our global forwarding business delivering a $51 million increase in adjusted gross profit up 39.6% compared to Q4 of 2019. As Chuck stated at the beginning of the call, we have renamed the term net revenue to adjusted gross profit with no change to the composition or what is included in that metric. Within global forwarding in Q4, our ocean business had the largest increase in adjusted gross profit, up $39 million, or 53% versus Q4 of 2019, driven by higher pricing and higher volume. On a monthly basis, compared to 2019, our total company adjusted gross profit per business day was up 8% in October, up 7% in November, and up 17% in December. Q4 personnel expenses totaled $309.3 million, up 3.4% versus Q4 of 2019. Recall that Q4 last year included a reduction in incentive compensation that aligned with the softer results. Average headcount in Q4 decreased 4.8% compared to Q4 of 2019, including the prime acquisition, which added two percentage points. Looking forward, we expect our 2021 personnel expenses to be approximately $1.4 billion based on our expectation of improved adjusted gross profit in 2021 and the higher incentive compensation aligned with those results. 2021 personnel expense also includes the impact of our ongoing long-term and short-term cost savings efforts, including the reinstatement of the company match on retirement contributions in the U.S. and Canada as of January 1st. Q4 SG&A expenses of $124.5 million were down $18.6 million, or 13%, compared to Q4 of 2019, primarily due to continued reductions in travel expenses. We expect our 2021 total SG&A expenses will be approximately a half a billion dollars, with travel expenses building in the back half of 2021 as the impact of the pandemic subsides. 2021 SG&A is expected to include $85 to $90 million of depreciation and amortization, which is down from $102 million in 2020, primarily due to completing the amortization related to a prior acquisition. In 2020, we delivered approximately two-thirds of the $100 million per year of long-term or permanent cost savings. As we indicated on our Q3 earnings call, we expect to deliver the remainder of that $100 million in long-term savings by mid-2021. For 2021 and beyond, we will continue to deliver long-term cost savings, primarily through process redesign and automation across the enterprise. One example is the continued optimization of our real estate footprint across the network, as we expect flexible work arrangements to become more prominent post-pandemic. Total fourth quarter operating income was up 51.2% versus Q4 2019, and adjusted operating margin increased by 870 basis points, primarily due to the increase in adjusted gross profit and our cost reduction efforts. Fourth quarter interest and other expenses totaled $12 million, up $1.2 million compared to Q4 of 2019. Our Q4 weighted average interest rate was 4.2%, which was flat compared to the Q4 of 2019. Our other expenses in Q4 also included a $1.1 million gain from currency revaluation compared to a $0.9 million loss in Q4 of 2019. Our fourth quarter effective tax rate was 24.1% compared to 21.4% in Q4 of 2019. The Q4 rate increase was primarily due to one-time items related to the tax provision in Mexico, which was favorable in the fourth quarter of 2019 and unfavorable in the fourth quarter of 2020. We expect our 2021 effective tax rate to be 20% to 22%, assuming no changes in the federal, state, or international tax laws. As a remainder, our first quarter typically has a lower effective tax rate due to tax benefits related to the delivery of our annual stock-based compensation in Q1. Net income totaled $147.8 million in the fourth quarter, and diluted earnings per share was $1.08, up 47.9% versus Q4 of 2019. Turning to cash flow. Q4 cash from operations was approximately $162.1 million compared to $211.6 million in Q4 of 2019. The $49 million decrease in operational cash flow was driven by a $112 million sequential increase in accounts receivable and contract assets compared to Q3. This 4.4% sequential increase in accounts receivable and contract assets coincided with a 7.7% sequential increase in total revenue, which was partially offset by a 3.1% sequential decrease in day sales outstanding. Q4 capital expenditures totaled $13.7 million, bringing our full year 2020 capital spending to $54 million. We expect our 2021 capital expenditures to be $55 to $65 million. We continue to prioritize the highest returning technology initiatives on a risk-adjusted basis, and we remain committed to our $1 billion investment in technology from 2019 to 2023. We returned approximately $113 million of cash to shareholders in Q4, which consisted almost entirely of share repurchases. We resumed our opportunistic share repurchase program in Q4 after pausing in Q2 and Q3 of 2020. The 51-cent quarterly dividend that we declared in the fourth quarter was paid on January 4th of 2021, rather than in December, which deferred the tax obligation for our shareholders. Over the long term, we remain committed to our quarterly dividend and opportunistic share repurchase program as important levers to enhance shareholder value. Now on to the balance sheet highlights. We finished Q4 with $244 million in cash and cash equivalents, down $204 million compared to Q4 of 2019. Over the long term, we intend to carry only the cash needed to fund operations. We also ended Q4 with $1.24 billion of liquidity comprised of our cash balance and $1 billion of committed funding under our credit facility, which matures in October of 2023. Given our liquidity position, we chose not to renew our $250 million accounts receivable securitization agreement that matured in December. Our debt balance at quarter end was $1.09 billion, down $142 million versus Q4 last year, and included no variable rate debt and no borrowing on our credit facility. Our gross debt to EBITDA leverage at the end of Q4 was 1.4 times, which aligns with our intention to maintain an investment-grade credit rating. Thank you for listening this morning. I'll turn the call back over to Bob now for his final comments.

Thank you, Mike. By all accounts, 2020 was a most unusual and challenging year, but we are emerging stronger. We expect the trends in improving pricing within NAS to continue. We're pleased with the growth in our global forwarding business, and we believe that we have a sustainable competitive advantage. The digitization of our business will continue, and we are enabling more and more of our volume to be transacted in a fully automated manner. As shippers and carriers continue to increase their adoption of these new platform capabilities, we expect to see continued productivity benefits as well as growth with both customers and carriers that prefer to operate in a truly frictionless environment. Due to several factors, including the shortages in the number of drivers and available carrier capacity, freight markets remain tight, and we anticipate that this will continue for much of 2021. We're committed to creating better outcomes for our customers and our carriers by delivering industry-leading technology that's built by and for our supply chain experts and by leveraging our global portfolio of services and our unmatched combination of experience, scale, and information advantage to meet their ever-changing needs. We're also firmly committed to the key interests of our investors, including profitable market share growth, investing in technology to unlock both growth and efficiency, while being a responsible corporate citizen and driving the transformation of C.H. Robinson so that we can continue to deliver industry-leading margins and enhance shareholder value. I'm incredibly proud of the resiliency, the compassion, and the dedication that the Robinson team members around the world have displayed during these unprecedented times, and I thank them for continuing to drive our company forward despite the disruptions caused by COVID-19 and for helping our company to emerge stronger. That concludes our prepared comments. And with that, I'll turn it back to Donna so that we can answer the pre-submitted questions.

Mr. Ives, the floor is yours for the question and answer session.

Thank you, Donna. First, I would like to thank the many analysts and investors for taking the time to submit questions after our earnings release yesterday. For today's Q&A session, I will frame up the question and then turn it over to Bob or Mike for a response. Our first question is for Bob from Todd Fowler with KeyBank. Chris Weatherby from Citi, Jack Atkins from Stevens, Tom Wadowitz from UBS, and Brandon Oglenski from Barclays asked similar questions. How should we think about North American truckload volume growth? Is this a focus for Robinson, or can productivity improvements offset more stagnant volumes driving increased profitability? What is the right environment for Robinson to increase North American truckload volumes?

Thanks, Chuck, and thank you, gentlemen, for the question. You know, so for the year, our truckload volumes in NAS were basically flat, but our combined volumes, as I said earlier, between both truckload and LTL outpaced the rate of growth in the cash freight index in each of the past eight quarters. As I've said publicly several times, two of our primary initiatives are focused on taking share across all of our services, certainly inclusive of truckload, and improving our operating margins across the business. Growing profitable North American truckload volume remains a key focus for our team in MAST, and we feel as confident ever that the strength in our value proposition across the spectrum of our customers that we serve, from the largest, most complex shippers in the world to thousands of Main Street businesses. We've also got to be thoughtful about how these two goals around growing market share through volume growth and improving operating margin can sometimes be at odds. So with costs increasing in the third quarter at 16% versus last year and then increasing over 32% in fourth quarter against some contracts that were priced towards the tail end of 2019 in a very different marketplace, we had to make some intentional decisions throughout the quarter on how we were going to manage through that environment and evaluate where those critical customers were where we needed to honor commitments and where we were going to seek some pricing relief based on the marketplace and potentially put some volume at risk. And in some cases where we couldn't reach mutually agreed-to plans to move forward, we needed to exit some business if there wasn't a clear path to profitability. I would also say to keep in mind that we had about $300 million in business that we were expecting to reprice during the fourth quarter that was subsequently pushed out to the first quarter of this year. And in cases where we agreed to short-term committed pricing with those customers, the manner in which we calculate spot versus contract actually identified these shipments as spot for the quarter. So we experienced strong growth in the spot market this quarter, but it wasn't enough to offset some of the declines in our contract portfolio. In terms of the conversation about productivity, we continue to see a large profitability unlock there. As we said, the shipments per person per day were up 26% in the back half of the year, and our capabilities to drive frictionless and automated transactions continue to expand, and our cost to execute a shipment in that arena is down significantly on a year-over-year basis. So regardless of where we are in the cycle, our focus continues to be on improving our shipments per person per day and lowering our cost basis per transaction through improvements in our process and automation while still seeking to gain share.

The next question is from Jack Atkins with Stevens. Todd Fowler with KeyBank and Allison Landry from Credit Suisse ask similar questions. Bob, from a bigger picture perspective, what inning do you think you are in in terms of your digital transformation, and what are some of the major projects you expect to undertake in 2021?

So I guess in fairness to sports analogies, I used an innings analogy last quarter when talking about the freight cycle. So maybe this quarter, given that the Super Bowl is right around the corner, I'll use a football analogy. When we initially talked about our billion-dollar investment in tech, we time-boxed that as 2019 through 2023. So if you just think about that, we're a couple of years into a five-year plan. So maybe not quite at halftime, but midway through the second quarter and pushing towards the end zone. Over the past several quarters, we've announced several strategic partnerships with companies like Microsoft and Intel and most recently SAS, with each of these partnerships bringing new capabilities to life in our platform ecosystem. We've delivered new products like FreightQuote by C.H. Robinson and ProcureIQ, and have greatly extended the reach of our platform capabilities through our commercial connectivity initiatives that connect Navisphere into an industry-leading number of ERP and TMS systems. We've also established and launched our customer R&D incubator, which we call Robinson Labs. We've delivered capabilities enabling automated pricing for our customers across truckload and LTL, as well as automated load booking for our customers and carriers, and adoption continues to increase. Our Navisphere vision product continues to grow and add users as we add additional industry-leading capabilities to that product that provides global visibility across all modes and all geographies to inventory in motion and at rest. In terms of our Navisphere carrier platform, we're meeting carriers how and where they want to do business. We're developing solutions to improve the business outcomes and the quality of life for owner-operators, and this is increasingly being executed through our web and mobile platforms, and this is a form that's clearly a priority investment for us. We do believe that we're providing the best possible opportunities for carriers based on the scale and our ability to optimize and provide personal offerings for each carrier on our platform. On the backside of all these customer and carrier facing products and innovations, we also continue to invest in the scalability, the stability and the security of our systems as we transition more fully to the Azure cloud. So we're going to have several more announcements coming in the coming quarters that we're really excited about, but I also want to be clear on our strategy that we're not building necessarily a silver bullet or a big reveal in the background. This isn't going to be a big bang approach. We're taking an agile approach to all of this, and we're continuing to look at prioritizing those projects on the roadmap that we think have the highest return for our shareholders, and the greatest value for our customers and carriers. We also have to realize, too, that most of these technology changes that we're launching are accompanied by changes to our operating model and the areas of focus for many of our people. So much of what we talked about as it relates to our digital transformation and the public forum is surrounded and asked, but we also know that opportunities exist across our portfolio and work is underway across the board in each of our business units. A couple of data points that we shared in the deck in our prepared comments today around the NAS productivity index, the improvement in shipments per person per day, and the fact that we had over 7 million load searches last quarter alone returning an opportunity for a carrier to automatically book a truckload are all proof points that the roadmap is moving ahead and delivering strong results. Part of what makes this a tough question to answer is that while we timeboxed that billion-dollar investment from 2019 to 2023, We know that there's really no stop point for innovation. And so as part of our values of evolving constantly, we're going to continue to evolve. We're going to continue to innovate. And as soon as we finish out these four years, we'll be on to getting prepared for that next investment and that next horizon.

Our next question is for Mike from Scotch Kneeburger with Oppenheimer and Todd Fowler with KeyBank. Bascom Majors with Susquehanna asked a similar question. Adjusted operating margin inflected positive and was up 870 basis points year over year to 32.3% in Q4 of 2020. Do you view the current margin level as sustainable or expandable in coming quarters? With mix of business and productivity enhancements, can you provide an update to what you view as normalized net operating margins for NAST? From a financial standpoint, besides headcount, where or how will these surface in reported results?

Thanks for the questions. I think it's important to note that our long-term operating margin targets, or adjusted operating margin targets as we're now calling them, have not changed. For the enterprise, our long-term target for adjusted operating margin continues to be 30% or better. Continued productivity improvements will be a tailwind to help us offset some of the expected headwinds that we've talked about in 2021, like incentive compensation and the return of some of the short-term cost savings from 2020. For NAST, our long-term adjusted operating margin target continues to be 40%, with the ongoing expectation to grow volume faster than headcount. So shipments per person per day is a good way for you to see our productivity initiatives coming through in our results. For global forwarding, our long-term target continues to be 30%. While we delivered 32.5% in Q4, which exceeds our long-term target, we would suggest that mid-20s is a better way to think about it as the margin normalizes over the near term.

The next question for Bob comes from Chris Weatherby of Citi. Please speak to the strength in ocean. Given congestions and overall robust demand, can this last through more than the peak season?

So from where we sit today, there's nothing showing us that demand for Robinson services are necessarily slowing down in the ocean space. You know, I think it's well known that historically in the winter months, carriers are typically, you know, instituting more blank sailings and removing double-digit, you know, percentages of capacity in order to adjust to lower demand. And we're just not seeing that manifest itself this year. which tells us that demand is there and things really aren't slowing down. Our bookings are really strong as we look out for the next several weeks to come, and as we engage with our clients, their forecasts are strong. And, frankly, new customers are coming to us daily for space, and that list of new customers is longer today than it's ever been. I think our global scale continues to enable us to provide capacity solutions in the ocean space, especially in our core trade lanes. where others are not. And, again, I just want to reinforce just, you know, the strength of the commercial activity in our forwarding business and the amount of new sales and growth with existing customers has just been really, really strong in the ocean space.

The next question for Bob is from Jack Atkins with Stevens. Scott Schneeberger with Oppenheimer, Chris Weatherby with Citi, Brian Ostenbeck of J.P. Morgan, and Brandon Oglenski with Barclays asked similar questions. After such a strong result in global forwarding in 2020, how should we think about your ability to hold on to the gains you have seen over the past 12 months in adjusted gross profit per load in your air freight and ocean freight operations?

So eventually that balance of supply and demand will come back into more normal cadences in both air and ocean. And so as that happens, we do anticipate that our adjusted gross profit per shipment will could come down from some of the historical highs that we've experienced in different quarters in 2020. We've evidenced some of that normalization already when we look back at the peaks of air freight in the second quarter and how that's played out through the balance of this year. Again, it's critical to reinforce so that we believe that we've taken several structural steps in our forwarding business, including our global procurement strategy, the addition of more charters to our air freight mix, which is becoming a more and more important part of our offering there, and the use of more advanced pricing analytics in setting our pricing strategies that we believe are going to continue to improve results over our historical revenue in past quarters, regardless of those market conditions in both air and ocean. So, you know, our story in forwarding isn't really just a story of margin expansion. We've had great volume gains in both air and ocean in terms of air tonnage and TEUs on the water driven by that commercial activity that I just mentioned.

The next question from Mike is from Jack Atkins with Stevens. Chris Weatherby with Citi, Scott Schneeberger from Oppenheimer, and Allison Landry with Credit Suisse asked similar questions. Given the strong productivity gains you are making in the business, how should we think about headcount in 2021 versus the consolidated Q4 level of approximately 14,900? Can you hold it flat in a robust freight year?

Yeah, with the solid momentum on productivity initiatives, we delivered the improvements in the NAS productivity index and the shipments per person per day that you saw on the charts in our Q4 presentations. So your question is a good one because we also expect robust freight in 2021, taking into account continued progress on productivity initiatives and covering the expected demands of the business. At this point, we would expect average headcount for 2021 to be closer to or slightly higher than our Q4 ending headcount of 14,888. That said, our focus is on driving productivity per person. So we will manage our staff opportunistically to drive overall value for the enterprise by flexing up or down appropriately to capture opportunities for growth and deliver additional efficiencies.

Allison Poliniak with Wells Fargo asked the next question for Bob. Several other analysts asked similar questions. How are you thinking about managing through the current cost environment where you note in your slides that costs are up 32.5%? If we remain at this elevated level, can pricing push higher than this quarter's 29.5% increase to help offset this headwind? Or is this a phenomenon we should expect throughout 2021?

Thanks, Allison. I'm going to try to answer this by putting this quarter into the context of what we've seen broadly over the past decade. So if we think about actual customer rates and carrier costs per mile, excluding fuel, so not rate of change, but actual customer rate per mile and actual carrier rate per mile, Q4 represented the highest average rates that we've seen on record over the past decade. Additionally, the year-over-year change in rates and the change in costs were the highest rate of change that we've seen in both metrics over the past decade as well. So if we look back a bit, the previous peak in terms of the rate of change in price and cost occurred back in the first quarter of 2018 at around 24% and 25% respectively. And it wasn't until two quarters after that where we at C.H. Robinson experienced the peak in terms of actual price and actual cost per mile on a rate per mile basis. So if we compare the average truckload price in fourth quarter of 2020 to the previous peak in customer pricing in Q3 of 2018, customer pricing has only increased by an absolute value of 7% over that time period peak to peak. So when we make that same comparison on cost per mile, costs are up about 13%, again, making that peak to peak comparison. So in terms of the rate of change, I certainly don't expect costs or customer pricing to continue to increase at such a high rate that we experienced in the fourth quarter. As we know, contracts are going to continue to reprice. Spot market demand will soften because of that, and the cycle will play out as it largely normally does. But in terms of actual price and actual cost per mile, on the customer side, a 7% increase over the time horizon greater than a couple of years really isn't outside of the ordinary. And so we see pricing on the customer side likely kind of maintaining and potentially gravitating higher throughout the course of the year. In terms of cost per mile, as more freight moves out of the spot market and into contracts, we would expect to see some moderation in cost relative to what we saw in fourth quarter. So if we look within the fourth quarter, we did see this start to play out, and that trend is now carrying into January. So to go a little deeper, in October, the rate of change in price exceeded the rate of change in cost by about 400 basis points. In November, that came down to about 300 basis points. And in December, that rate of change in cost and rate was basically moving at the same equilibrium. And in January, we've seen this inflect with the change in customer pricing being around 100 basis points above the change in carrier cost. On a sequential basis, both cost per mile and customer rate per mile are moderating some in January when compared to December, but they're still up on a year-over-year basis. It's probably also worth noting that in the fourth quarter, with such a robust peak season, it isn't necessarily out of character for our costs to increase faster than price in that environment, given that we purchase transportation largely in the spot market, while more than half of our customer pricing is tied to contracts that typically extend out a year in length.

The next question is for Bob from Jordan Alliger with Goldman Sachs. Matt Young with Morningstar, Bruce Chan with Stiefel, and Allison Landry from Credit Suisse asked a similar question. What are your thoughts on the air freight forwarding markets, specifically the capacity situation and how it relates to air cargo rates as we move into the tougher comparisons of Q2 of 2021?

So there's no doubt that the second quarter of 2020 was the peak in terms of air cargo pricing and will definitely represent a tough comparable for us. In the macro freight environment, though, there really hasn't been much indication of adding meaningful capacity outside of charters in the foreseeable future. And as we see additional lockdowns occurring in different countries, we're hearing more and more that it's becoming difficult to staff some of these flights, which could add a constraint as well. We're expecting that space will remain tight and demand will remain strong with the vaccine rollout and with all the supporting products, PPE, et cetera, along with continued low inventory levels. So available capacity is likely to continue to be an issue until such a point that passenger flights really start coming back to more normal levels on international air travel.

The next question comes from Jack Atkins with Stevens. Chris Weatherby from Citi and Todd Fowler from KeyBank ask similar questions. Mike, given all the puts and takes around expenses in 2020 and the return of temporary costs and incentive compensation in 2021, could you provide us with some insight into how we should think about personnel cost inflation per employee in 2021 versus a similar point in the last freight cycle in 2018? Hey, good question.

As I mentioned in the prepared remarks, we expect our 2021 personnel expenses to be approximately $1.4 billion, which is based on our expectation of improved adjusted gross profit in 2021 and the higher incentive compensation aligned with those results. Regarding the return of temporary cost savings from 2020, The most significant within personnel expense would be the return of the company match on retirement contributions for employees in the US and Canada, which came back on January 1st. You mentioned 2018. I do think 2018 provides a meaningful point of comparison for personnel expense expectations in 2021. As you recall, 2018 was a year of strong performance for Robinson, which led to higher incentive costs, including bonuses, equity, and commissions. So given where we are in the freight cycle, it would be reasonable to think about 2021 in comparison to 2018. Specifically, if you look at total personnel cost per employee in 2018, we were a little over $88,000 per employee. If you add 2% inflation per year to get from 2018 to 2021, it gives you a decent outlook relative to our expectations for 2021. That outlook, combined with the staffing expectations that I talked about earlier, gets you to our overall personnel expense expectations of $1.4 billion for 2021.

The next question for Bob is from Brandon Oglenski with Barclays. Brian Ostenbeck with JP Morgan and Robbie Shanker with Morgan Stanley ask similar questions. Was the decline in truckload contractual mix to 55% a strategic decision or more the result of capitalizing in the near term or record spot rates? Understanding that management is expecting a continuation of market tightness for much of the year, when would be a good time in the cycle to seek higher contractual mix exposure?

So there's a couple of questions there. I'd start with saying that it's, you know, the 55-45 mix is really a blend of some intentional choices in managing the yield within our portfolio, as well as just market-driven factors. Simply, as more freight moves to the spot market, as routing guides fail in the industry and repricing occurs with higher frequency, our mix tends to shift in that direction as well, as you've seen through time. Our spot and contract mix over the past couple of quarters closely mirrors that of really third quarter of 17 through maybe the third quarter of 18, call it the past peak cycle, where our mix ranged from 50-50 to 60-40, leaning more heavily to contract. Looking through the past several years, 50-50 was really the lowest percentage of contractual freight, and that happened in fourth quarter of 17. And then we kind of max out, if you will, at around 70% contract in more balanced markets, such as what we saw in the back half of 2019. As we start to implement the pricing changes that occurred during fourth quarter, as well as the business that we intend to reprice in the first quarter, we're I would anticipate that that mix starts to shift back closer to the 60% range, leaning heavier towards contract in the next couple of quarters. I think that's kind of the best way that I would think about it right now.

The next question is for Bob from Brian Ostenbeck from JP Morgan. What is the strategy to improve and deliver industry-leading margins in a cyclical business with secular concerns regarding new competition? Could Robinson become more multimodal over time and build out other service lines and geographies? Thanks, Brian.

So in just the past two years, we've experienced both our record high quarterly adjusted gross profit per load and our record low quarterly adjusted gross profit per load that we've seen over the past decade. So to your point, there's definitely some volatility and some cyclicality that we need to control for in our largest service line of truckload. And we're doing this through our efforts to lower our cost to serve, through the digitization and the automation of the business that we've talked about, working on appropriately balancing that portfolio between spot and contractual business, and by continuing to redesign and reorganize our network to maximize our commercial effectiveness in order to both take share and drive top-line growth. Our investments in technology, our broad and global suite of services, and our development of innovative new capabilities are going to continue to fuel that top-line growth of our diversified business, which we see as one way to combat that cyclicality. I feel better, I can say confidently, I feel better today than I have at any point in the past about the focus that we have on cost management within the organization. We'll deliver on that $100 million cost reduction in half the time we originally planned to, and we're going to remain focused on finding additional opportunities to reduce our operating expenses as we move forward. In terms of diversification, clearly this has been part of our strategy over the past several years. You look at our LTL business and the growth that that has taken on, that is a critical part of our overall business mix, and the growth and returns have frankly been industry leading. Our investments in diversifying and expanding into our global forwarding network, adding talent and enhancing our capabilities has also helped to balance the overall portfolio, and it's maybe never been more clear than it was in the fourth quarter with the outperformance of our forwarding group. And it continues to provide us a combined commercial value proposition that's resonating in the market. Across the rest of the portfolio, our managed services business continues to grow freight under management and provides a really unique solution, blending both technology and supply chain expertise to some of the largest and most complex customers in the world. And that creates a really sticky relationship with a high rate of recurring revenue and creates a lot of connectivity between Robinson and the client over time. And the results in our Robinson Fresh business unit have stabilized and continued to improve over the course of the last couple of years, and they're providing strong returns. And our Europe Surface Trans business continues to take share well ahead of the marketplace in Europe. So we feel like we've been on this path of diversification, Brian, for a while. You know, both it makes sense from a commercial standpoint, helps us to sell a really unique value proposition in the market, and it's helping us to kind of balance out the portfolio in terms of revenues and returns to our shareholders.

The next question for Mike is from Chris Weatherby with Citi. How are you going to direct free cash flow in 2021? Where do buybacks fit in the hierarchy? How about M&A? Any areas of interest? Thanks for the question, Chris.

In terms of capital allocation, our top priority continues to be the close-in investments, primarily related to technology and process redesign that fuel growth and efficiency in our core business. We are also committed to continuing our dividend without decline. Next would be M&A, where we continue to maintain a strong pipeline of opportunities. To the extent that we have capital available while maintaining an investment-grade credit rating, our share repurchase program offers an excellent lever to return value to shareholders. We continue to see M&A as a lever that can potentially help us expand our geographic presence, add or improve services, build to scale or enhance our technology platform. We'll continue to look for well-run businesses that also fit nicely in the Robinson culture.

The next question is from Brian Ostenbeck with JPMorgan. Bob, how have Robinson's recent efforts to connect with multiple TMS and ERP platforms progressed relative to expectations? Has it generated an increase in net new business activity? What does further adoption of digital interfaces with customers mean for operating leverage in the future?

Thanks, Brian. Multiple questions there, and I'll try to tackle them one at a time. Our progress in connecting with TMS and ERPs has been on pace with our expectations. We've got longstanding relationships and connections with these companies, and connecting our real-time pricing engines through modern APIs has been really successful and fast-paced. Some of these connections are faster and smoother than others, as you might expect. To the question of has it increased business activity, we are experiencing significant growth in our quoting activity and tendered volume through these digital connections to our pricing services and other functionality like in-transit visibility and other operational and analytical insights. The obvious benefit of these connections is the availability for quoting and committing 24-7, 365. We're also able to respond to opportunities much faster in these forums than relying on older, more manual processes. So we've seen significant productivity uplift on our transactional business, and we do expect the share of our automated transactional business to continue to grow, which will yield positive productivity impacts. You know, to your final question around the competitive landscape, it is quite active in all parts of our business, including this space. And I'd say that our win percentage and our adjusted gross profit per shipment in these automated pricing APIs are on par with our traditional transactional margins. But we're capturing those adjusted gross profit dollars with a lower per unit cost to serve.

The next question for Bob is from Brian Ostenbeck with J.P. Morgan. How is Robinson becoming more ingrained in supply chains and driving visibility for customers? How many shippers can take advantage of a program similar to the one you just announced with SAS?

Brian, in my 22 years with Robinson, our ambition to solve our customers' toughest problems has always been central to our approach. As a result, we've got the opportunity to get involved in really exciting and challenging arenas within the supply chain that extend well beyond just the pickup and drop-off and the transportation of freight. Our investments through these years have taken us deeper into new modes and services, developed deep vertical expertise, expertise in geographies and industry segments with many unique characteristics and supply chain attributes that we can bring to bear for our customers. The SAS relationship is a great example of an opportunity to partner with another industry leader to extend our collective value in new, unique, and exciting ways to shippers and receivers. We're obviously in the early stages of our work together, and the initial engagements are now underway. We believe that this work together with SAS has the potential to unlock values in many areas of our business and across our shared customer base. This collaboration is going to facilitate visibility of the entire inventory lifecycle in a way that no other companies can do, from planning to cash settlement. And it's going to require the best of each of our company's technology and our expertise in order to ideate and innovate together to bring real value to our customers.

The next question for Mike is from Brian Ossenbeck with J.P. Morgan. Working capital appears to have moved with revenue growth. Have there been any changes in day sales outstanding or bad debt from any of your customers?

Thanks, Brian. You are correct. In Q4, accounts receivable plus contract assets increased sequentially by 4.4% over Q3, while total revenues increased 7.7%, driven by higher pricing and volumes. The result in Q4 was a sequential improvement in day sales outstanding of 1.7 days compared to Q3 when using ending AR balances. That said, over the past two quarters, DSO has been running a couple days higher than last year, and I'll talk about the ways we've been addressing that in a minute. Our bad debt expense was notably higher in 2020 compared to 2019, driven primarily by increased reserves as we monitored the impact of the pandemic on certain categories and customers. While our bad debt expense in 2020 was approximately $6 million higher than our prior three-year average, we did see a reduction in bad debt expense of approximately $600,000 in Q4 compared to Q4 of 2019. We continue to closely monitor our receivables by customer, by category, and across a variety of key metrics. We utilize internal and external credit and risk data to enhance our credit and collections results, and we've tightened credit limits, enhanced electronic invoicing, and maintained greater focus on higher risk categories with additional safeguards, all of which led to sequential improvement in the Q4 results.

The next question for Bob is from Brian Ossendeck from J.P. Morgan. You are almost at the one-year mark for the prime acquisition. How has that opportunity developed compared to expectations, and has it driven any synergies across the Robinson portfolio or with customers? What other industrial verticals or logistics capabilities are attractive at this point?

We are really happy with the acquisition of Prime. I mean, truly a great team with great leadership, and we're really proud of the work that that team did this year. The Prime team exceeded their full-year profitability expectations against some really challenging hurdles throughout the year, driven by costs associated with increased costs in labor, safety protocols that we've undertaken for our frontline workers, and the rising costs of purchased transportation. In terms of synergies, part of what really attracted us to Prime at the time of acquisition was the opportunity to bring together their expertise in retail consolidation and warehousing with the Robinson expertise in transportation and distribution. So we've got these several shared customers and the combination of the two companies' capabilities made for an even stronger value proposition for our customers and for the industries that we serve. As some retailers over the course of the last year have evolved and tightened their supply chain performance metrics, this has driven a lot of interest and demand from many new shippers that serve these retailers. Achieving some of these new on-time and full or supply chain reliability requirements are really difficult without a partner like Robinson that has the capabilities to bring to life between Robinson and Prime, especially if you're not typically shipping in full truckload quantities. So we're seeing several other retailers now piloting programs with us with opportunities for large national rollouts. And we're seeing great opportunities to cross-sell forwarding and inland transportation services to many of Prime's legacy customers. From a cost perspective, there was some redundancy in several markets where both Robinson and Prime maintained warehouse facilities. And we're in the process today of bringing those together under shared facilities in order to capture some cost and efficiency synergies as we move to a common network. We also see opportunities moving forward to leverage that network to augment our large-format home delivery network as well as providing other retail services.

The next question is from Brian Asenbeck from J.P. Morgan for Bob. What is the strategic rationale behind launching the Robinson Fresh produce offering? Are there any startup costs you will incur? How have your retail and food service customers viewed the announcement?

As our role with our retail partners has evolved in fresh over the last decade, our integrated supply chain solutions have really expanded and penetrated right into the actual product itself. It's no longer about selling just a product. It's really about providing the complex supply chain solutions that go with it. So we felt like this was really the right time to consolidate our brand story and allow us to take advantage of our 115-year history in the produce supply chain and really connect the dots between our services, our products, and the consumer growing demand for healthy and high-quality fresh produce. In terms of startup costs, we're rolling the brand out over the first half of 2021 to align with the primary growing seasons of the products that we'll market under the Robinson Fresh label in order to maximize the use of existing packaging disruption, et cetera. And so there really won't be any material costs due to the brand launch. Initial feedback in terms of our retail and food customers has been really positive, both in the look and feel of the brand, the quality of the product and the packaging, but they're also supportive of the overall strategic rationale for making the change.

The last question is from Garrett Holland with RW Baird. LTL volume was clearly very strong in Q4 of 2020. Talk about the expectations for the drivers of LTL freight demand and your ability to continue gaining market share.

Yep. Thanks, Garrett. Our LTL service continues to deliver strong results, as you saw again in fourth quarter, and we're really proud of the unique service offering that we have in the marketplace. We really think that we've got probably the most comprehensive offering of LTL services in the industry at scale, including our common carrier programs, our consolidation programs that I just talked about for retail and other industries, as well as our temperature control programs that cover the spectrum from fresh products through frozen goods. Our market share gains in 2020 have been fueled by some tailwinds that many companies felt, including e-commerce and home delivery, but they've really been across the board. As I mentioned earlier, the combination of Prime and Robinson and Retail Console has proved to be a winning formula in the marketplace. We expect to continue to realize growth in LTL as we've built out customized solutions across industry verticals and solutions for customer of all sizes from those Main Street businesses that are engaged with our freight quote by C.H. Robinson platform to large enterprise shippers that value our ability to consolidate capacity, optimize their network demands, and leverage our Navisphere order and planning capabilities to avoid costs and to improve service.

That concludes the Q&A portion of today's earnings call. A replay of today's call will be available in the investor relations section of our website at chrobinson.com at approximately 1130 a.m. Eastern time today. If you have any additional questions, I can be reached by phone or email. Thank you again for participating in our fourth quarter 2020 conference call, and have a great day.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.