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spk08: Good afternoon, ladies and gentlemen, and welcome to the CH Robinson second quarter 2021 conference call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will open the line for a live question and answer session. To ask a question, please press star 1 on your telephone keypad. If anyone needs assistance at any time during the conference, please press star 0 As a reminder, this conference is being recorded Tuesday, July 27th, 2021. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
spk15: Thank you, Stacey, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer, and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2021 second quarter results, and then we will open up the call for live questions. Our earnings presentation slides are supplemental to our earnings release and can be found in the investor section of our website at investor.chrovinson.com. However, our prepared comments are not intended to follow the slides. If we do refer to specific information on any of the slides, we will first 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 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.
spk10: Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. During the second quarter, we delivered record financial results by staying focused on serving the needs of our customers and keeping their global supply chains moving in a capacity-constrained environment. We're pleased that we returned to truckload volume growth. We delivered record volume in less-than-truckload ocean and air, and we believe that our Tech Plus strategy that combines industry-leading technology with great logistics experts and great processes is the right strategy. As part of our global suite of services, our largest services delivered both year-over-year and sequential growth in total volumes, revenue, and adjusted gross profit, or AGP, which resulted in quarterly highs for Robinson in total volumes, revenues, AGP, and operating income. Excluding the fourth quarter of 2012, when we sold our T-Check business, our earnings per share was also a record high. I'll talk about how we achieved these results as I walk through my prepared comments on our second quarter results. In our largest service of NAS truckload, we grew our adjusted gross profit by $34 million, or 4% year over year. This came through a 6% increase in volume and a 7% increase in adjusted gross profit per load. This included an increase in spot market volume of nearly 30% year over year, due in part to an 85% increase in quotes and a 160% increase in volume that was driven through our proprietary real-time dynamic pricing engine. 40% of our spot or transactional business was priced via integrations with our dynamic pricing engine in the second quarter, delivering real-time pricing with capacity assurance from the largest network capacity in North America. While our business in the spot market increased significantly, our volume in the contractual business declined approximately 10% during the quarter as we continued to reshape our portfolio and pursue profitable volume growth. This included a balance of two things. First, honoring our contractual commitments with strategic customers, which is still resulting in a higher than normal percentage of loads with negative adjusted gross profit margins due to ongoing increases in the cost of purchase transportation. And second, managing acceptance rates in order to limit negative loads and to manage our business for profitability. We closed the quarter with an approximate mix of 55% contractual volume and 45% transactional volume versus a 65-35 mix in the year-ago period, and this was consistent with our mix in the first quarter of this year. Our average truck haul line haul cost per mile paid to carriers excluding fuel surcharges increased 47.5% compared to the second quarter of last year. Our average line haul rates billed to our customers excluding fuel surcharges increased 42% year-over-year. This resulted in the highest cost and price per mile on record and a 12% year-over-year increase in our truckload adjusted gross profit per mile. This combined with a 4.5% decrease in average length of haul resulted in a 7% increase in adjusted gross profit per truckload. We continued to reprice our contractual business in second quarter, including some underperforming contractual positions. The bid process continues to be a dynamic one. and 40% of our awarded contracts in second quarter were for terms between three and six months. Having said this, greater than two-thirds of our bid volume awarded to us in second quarter was still on 12-month contracts. During the quarter, we saw routing guide deficit tender in our managed services business decline slightly from 1.8 in March to 1.6 in June. However, the average in second quarter, 1.7, was unchanged from the market conditions in first quarter. In the second quarter, we welcomed an additional 6,900 carriers to our network, which represented an 88% increase over the carriers added in the second quarter of last year. Leveraging the scale and the information advantage that comes from the size of our carrier network is just one of the ways that we help customers navigate this capacity-constrained marketplace. Given the current structural constraints around the expansion of truckload supply, coupled with the continued reopening of the economy, as well as other factors, we do expect the current market conditions will persist through 2021. And as I said last quarter, we expect to grow our truckload volume during the remaining quarters of this year. In our second largest service line of ocean forwarding, we grew our adjusted gross profit by $72 million, or 92% year-over-year, This came through a 29% increase in shipments and a 49% increase in adjusted gross profit per shipment. Strong demand continues to outpace supply, with container and equipment shortages and other market disruptions continuing to constrain capacity. Our team's done a great job of strengthening our carry relationships, procuring incremental capacity to better serve our customers. The forwarding team continues to add new commercial relationships with strategic, multinational customers that are leading to increased award sizes. while also ensuring that our existing customers have access to the capacity that they need to meet their needs. Our customers and our results are benefiting from the investments we've made in digitization, data and analytics, as well as our global network that is supporting our expanded geographical and vertical expertise. We believe that these strategies and competitive advantages will enable us to create more value for customers and in turn win more business and sustain the market share gains that we've achieved. There continues to be a robust pipeline of new business from both new and existing customers. And as we move towards the peak holiday shipping season and into next year, we do expect that ocean demand will remain strong into early 2022. As part of our growth strategy, Less than truckload or LTL business, which is our third largest service, continued its strong momentum by gross profit by $23 million or 22% year over year. This came through a 23% increase in volume and a slight decline in adjusted gross profit per order. We're seeing balanced growth across our LTL modes and across customer segments. Through our strategic focus on the LTL market, we built a $3 billion LTL business through a blend of organic growth, digital investments, and strategic acquisitions, such as freight quote and prime distribution, which has made us the largest and most comprehensive provider of retail consolidation services in the industry. This portfolio expansion has capitalized on e-commerce growth and combined a full suite of LTL technology and services, including common carrier, warehousing and retail consolidation, temperature control, parcel, home delivery, and reverse logistics. Our value proposition, which includes highly automated systems that are easily scaled for high volume growth, continues to resonate with shippers of all sizes and across industry verticals. This includes small businesses that utilize our freight quote by C.H. Robinson platform, as well as large enterprise shippers that look to us as a strategic partner to manage and optimize their LTL freight networks. In total, NAST overall second quarter volume grew approximately 16% year-over-year compared to a 30% increase in industry volume as measured by the CAATS Freight Index, due to a large pandemic-related decline in the index in second quarter of last year that we did not experience at the same level. While our growth for the quarter did not exceed the industry benchmark over a one-year time frame, we have outperformed the index for the two, three, four, and five-year time frames. Finally, our fourth largest service, International Air Freight, delivered strong results again behind a 43% increase in metric tons shipped. Adjusted gross profit was up 1% over second quarter of last year when we delivered 104% adjusted gross profit growth. Demand has been incredibly strong, partially driven by conversions of some ocean freight to air and a recovery of demand in Europe. Air freight capacity has continued to be strained, and we continue to position charter flight capacity to support demand from both new and existing customers. Our global forwarding customers that utilize our air, ocean, and customs and project logistics services continue to value working with and relying on Robinson's local experts in offices around the world that can deliver a full suite of global logistics services and customized solutions. We've built sustainable competitive advantages in our global forwarding business that will continue to deliver solid returns for our shareholders and benefits for our customers in the quarters and the years ahead. Because of the efforts of our Robinson team members across the globe and our advanced technology, our total company adjusted gross profit per business day improved by 5% sequentially in second quarter, 22% year over year, and 8% over the pre-pandemic second quarter of 2019. Bolstering our results were continued benefits of our digital investments, which continue to unlock productivity gains and deliver customer value in new and exciting ways. Our three primary areas of investment in digitization are focused on creating value for customers, value for carriers, and driving productivity improvement for our teams, which in turn drives improvements to both our top and bottom line results. Looking at the impacts of digitization through the lens of customer and carrier adoption, the number of daily and monthly average users across our customer and carrier-facing platforms continues to grow. with 27% year-over-year growth in daily average users of our customer platforms as just one example. As I mentioned earlier, the amount of customer quotes and volume that is being delivered through our real-time dynamic pricing tools has grown significantly. Enabling these digital connections improves efficiency for our customers, improves our response time for quote requests, and improves our win rates. We also continue to add digital connections with our customers at an accelerated pace during the quarter, with over 100 new customers connected via TMS and ERP connections in the second quarter of 2021. Our customers now have access to real-time pricing via our Navisphere customer web portal, direct through their TMS or ERP integrations, as well as via freight quote by C.H. Robinson. In total, we've enabled these dynamic pricing capabilities for over 87,000 customers across these points of connection. On the carrier side, we continue to deliver new capabilities and benefits to our carriers through our web and mobile versions of Navisphere Carrier and Navisphere Driver. During the quarter, we had over 290,000 fully automated bookings in our NAST truckload business. And finally, as it relates to productivity, we've again highlighted a couple of key metrics for NAST on page five of our earnings presentation. We continue to show year-over-year improvement in productivity as indicated by the 1,670-point favorable spread in our NASD productivity index, which represents the difference between our year-over-year change in NASD volume and the change in full-time equivalence in NASD. Another key metric that we review is shipments per person per day. This metric was up 17% in second quarter compared to the same quarter last year. Both of these charts show very clearly the relationship between the timing of our increased digital investments and the impact to these key operational metrics. We're encouraged with the progress that we're making on our digital and technology journey and the impact that these investments are delivering for our customers, for our carriers, and the impact to our overall results. Leading the industry with the most powerful supply chain technology and data platform has been a top strategic priority for Robinson and part of our competitive advantage in the marketplace. We've increased our investments and strengthened our technology and innovation capabilities with our customers' needs and experience in mind. We constantly listen to the voice of our customers and are focused on continually enhancing our customer and carrier experience. We've got bold ambitions to continue to evolve as a platform company, giving our employees, customers, and carriers the products and the information needed to succeed. Our customers rely on us to be an extension of their team, able to provide a global suite of services, create market-leading solutions that work, and drive smarter solutions through our information advantage. As we continue to create differentiated value for the nearly 200,000 carriers and customers of Robinson, I'm excited to have Arun Rajan join our executive team as Chief Product Officer on September 1st, reporting directly to me. Arun will lead our global product strategy, and his organization will sit at the intersection of our business strategy and technology platforms to provide a consistent, industry-leading customer experience and to drive our global digital capabilities across our suite of products. Arun is a seasoned and inspiring leader who brings decades of product and technology experience, developing and deploying products that enrich the customer experience and create value at industry-leading companies such as Whole Foods, Zappos, and Travelocity. Arun's deep product and leadership experience will be invaluable as we drive the next generation of innovation for our industry while creating sustainable, long-term value for our customers, our carriers, and our shareholders. I'll now turn the call to Mike to review the specifics of our second quarter financial performance.
spk03: Thanks, Bob, and good afternoon, everyone. As Bob mentioned, we delivered solid quarterly financial results across a variety of top-line and bottom-line metrics in Q2, driven by strong performance and a favorable market as we continue to leverage our Technology Plus strategy. In Q2, we established quarterly total company records in volume, total revenue, adjusted gross profit, and operating income. Our total company AGP was up 22% compared to Q2 of 2020, driven by strong performance from ocean, truckload, LTL, and air. On a sequential basis, each of our business segments delivered AGP growth compared to Q1. On a monthly basis compared to 2020, our total company AGP per business day was 21% in April, up 12% in May, and up 35% in June. With the cost per mile and price per mile in our truckload business reaching all-time highs in Q2, our AGP margin percentage . This is simply a function of a larger denominator in the AGP margin equation. To illustrate that, share some facts about our Q2 AGP per mile versus our AGP margin percentage. Our Q2 truckload AGP per mile was approximately 3% higher than our 10-year average. while our AGP margin percentage was more than 350 basis points below our 10-year average. As truckload pricing is predominantly determined by dollars per load as opposed to percentage markup, having an all-time high price results in a compressed margin percentage. We continue to be focused on growing our overall AGP dollars by optimizing volume growth and AGP per shipment across our service offerings. With our customer focus and digital investments continuing to drive growth and efficiency into our model, we have solid strategies to generate sustainable long-term growth. Turning now to expenses, Q2 personnel expenses, $62.9 million, up 20.8% compared to Q2 of last year due to higher incentive compensation costs and the impact of short-term pandemic-related cost reductions in Q2 last year. Our Q2 average headcount increased 0.7% compared to Q2 of last year, and our average full-time equivalents were up 3.1%. Headcount was added primarily to deliver on our long-term growth expectations, particularly in our global forwarding business. In addition, the June 3rd acquisition of Combinex Holdings BV in our European surface transportation business added approximately 100 new employees to Robinson. Given our increase in headcount and higher incentive compensation associated with our 2021 profit expectations, we now expect our 2021 personnel expenses to be $1.42 to $1.48 billion, which is up from our prior guidance of $1.4 billion. Q2 SG&A expenses of $125.7 million were up 0.4% compared to Q2 of 2020. We continue to expect 2021 total SG&A expenses to be approximately $0.5 billion, which includes travel expenses building in the back half of the year. 2021 SG&A is expected to include approximately $90 to $95 million of depreciation and amortization. This is up from our prior guidance of $85 to $90 million, but down from the $102 million in 2020, primarily due to the completion of amortization related to a prior acquisition. Second quarter interest and other expense totaled $13.5 million, up approximately $3.3 million versus Q2 last year due to the impact of currency revaluation. Q2 results included a $1.9 million loss due to unfavorable currency valuation compared to a $1.8 million gain on FX in Q2 last year. I'm pleased to report that we've completed the work that delivers the $100 million per year of long-term cost savings that we committed to a year and a half ago. Our annualized run rate savings surpassed $100 million in Q1 of this year. Going forward, we will continue our efforts to drive efficiency into our business model primarily through process redesign and automation across the enterprise. Our Q2 income from operations was an all-time quarterly high at $260.6 million, and our adjusted operating margin of 34.8% was up 410 basis points compared to Q2 last year. Q2 net income was $193.8 million, up 34.6% compared to Q2 last year, and diluted earnings per share finished at $1.44, which was up 35.8% year over year. Turning to cash flow, our Q2 cash flow from operations was approximately $149 million, a decrease of $298 million compared to Q2 last year, driven primarily by the outsized improvement in working capital in Q2 last year. Q2 operating working capital increased by $81.8 million, or 5.6% versus Q1, compared to a sequential increase of 6.7% in AGP. Over the long term, we expect our working capital to continue to grow at a rate slower than our AGP. Capital expenditures were $16.3 million in Q2, up from $10.3 million in Q2 last year, primarily driven by increased investments in hardware and software. Year-to-date through Q2, our capital expenditures were $30 million, and we continue to expect 2021 capital expenditures to finish in the range of $55 to $65 million. We returned approximately $205 million of cash to shareholders in Q2 through a combination of $135 million of share repurchases and $70 million of dividends. That level of cash returned to shareholders represents a 199% increase versus Q2 last year when we were not repurchasing shares out of an abundance of caution due to the pandemic. During Q2 this year, we repurchased approximately 1.4 million shares at an average price of $97.47 per share. And at the end of Q2, we had approximately 5 million shares of remaining capacity on our 15 million share repurchase authorization from May of 2018. Our cash balance at the end of Q2 was $173 million, down $189 million compared to Q2 of 2020. We intend to carry only the cash needed to fund operations and to efficiently repatriate excess cash from foreign entities. We ended Q2 with $902 million of liquidity, comprised of $729 million of committed funding under our credit facility, which matures in October of 2023, and our Q2 cash balance. Our debt balance at quarter end was $1.37 billion, up $274 million versus Q2 last year, driven primarily by share repurchases and increased working capital. Our net debt to EBITDA leverage at the end of Q2 was 1.2 times, down sequentially from 1.3 times at the end of Q1. From an M&A standpoint, the deal flow in the market remains robust, and we expect to see more industry consolidation through the end of 2021. While we don't comment on specific companies or transactions, we do see the potential for Robinson to play a role. We continue to be focused on value creation with our capital allocation and remain disciplined in that regard. We continue to prioritize companies that can expand our geographic presence, particularly in global forwarding, add or improve our service offerings, offer compelling cross-selling opportunities, help us build scale to leverage our flywheel, or to enhance our digitization efforts to deliver growth, quality of service, or efficiencies. A strong fit with the Robinson culture is also important in our M&A efforts. Overall, we're making excellent progress against our strategic initiatives to drive growth and efficiency into our model. That said, we have tremendous opportunities for growth and efficiency ahead of us, as we still represent just a small percentage of the overall addressable market in global logistics landscape. From a capital allocation standpoint, we continue to be committed to disciplined capital stewardship, maintaining an investment-grade credit rating, and generating sustainable long-term growth to our shareholders. Thank you for listening this afternoon, and I'll turn the call back over to Bob now for his final comments.
spk10: Thanks, Mike. Our record quarterly volumes, revenues, adjusted gross profits, and operating income demonstrated the strength of our non-asset-based business model that includes a diverse portfolio of services. As I said earlier, we have bold ambitions to continue to evolve as a platform company, and we're committed to creating better outcomes for our customers and carriers by delivering industry-leading technology that's built by and for supply chain experts and by leveraging our unmatched combination of experience, scale, technology, and information advantage. We'll stay the course with our strategy of pursuing market share gains that align with our profitability expectations, and we'll continue to invest back into the business in order to drive innovation, improve service to our customers and carriers, and drive growth across our global suite of modes and services. I believe that the team at Robinson is the most capable team of supply chain experts in the world, and I'm incredibly proud of how our team has helped thousands of customers navigate globally disrupted supply chains while delivering strong results for our shareholders. And as we continue to create differentiated value for the nearly 200,000 carriers and customers of Robinson, I'm thrilled to have Arun Rajan join the Robinson team to drive our next generation of innovation. I'm also excited by a return to office that our U.S. employees began this month, coming back to a more flexible and hybrid work model. And we look forward to seeing more of our people around the world return to the office as appropriate, guided by local health guidelines. And I'd like to thank the Robinson team members around the world for learning to work and collaborate in new ways, for rapidly advancing our digital capabilities, for creating a more open and inclusive environment, and for ensuring the health and safety of our people across the globe while continuing to help us emerge stronger. This concludes our prepared session. And with that, I'll turn it back to Stacey for the live Q&A portion of the call.
spk08: Thank you. In order to let as many people ask questions as possible, we ask that you limit yourself to one question. As a reminder, to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Jordan Oliver with Goldman Sachs. Please go ahead.
spk13: Yeah, hi. I was wondering if you could talk a little bit further about, you know, your thoughts on the truckload markets. Obviously, I know you focus more on net revenue dollars, but maybe some of your big picture thoughts on the selling price trends versus the purchase transport. And do we start seeing, you know, some tightening of that or anyway, just your thoughts on those two aspects of net revenue? Thanks.
spk15: Hello?
spk10: Can you hear me, Jordan?
spk13: Yeah, I hear you.
spk10: Sorry, it sounds like we have technical difficulty there. The old 20-20, you're on mute, I guess. As we think about the market as we see it right now, we continue to see the spot market pulling the contractual market up in truckload. I mean, obviously, these numbers on a year-on-year basis in the 40% range are clearly outsized because of the depression that we had in the freight markets in the second quarter of last year. But we do expect to continue to see pricing increasing through the balance of the year. Sequentially, we're continuing to see... To your point, we do manage the business really to net revenue dollars on a per truckload basis. We're staying really focused right now, Jordan, on growing our overall AGP or net revenue dollars by really optimizing that balance between volume growth and AGP per shipment. You know, we've been working hard to avoid contracts that can contribute more loads with negative margins. And I think, as I said in the last quarter's call, we entered the bid cycle late in 2020 and early into 21, you know, facing sustained AGP per truckload that was well below the range of acceptable profitability for us. And so we really had to take a couple of steps in addressing negative files, avoiding those contracts that instituted a lot of risk around negatives, and then focusing on that balance between both spot and contractual. So we had a belief early in this year about where we thought the contract would go. truckload market was going to move. And at this point, we appear that that view was fairly accurate. That did cause us to miss some opportunities early in the year. But those are really coming back to us now, either in shorter-term contractual agreements or more true spot market.
spk13: Thank you.
spk08: Your next question, Jack Atkins with Stevens. Please go ahead.
spk15: Okay, great. Good afternoon, and thank you for taking my questions. So I guess, Bob, just we kind of take a step back and think about the investments that you all have been making in technology to drive productivity through your business over the course of the last several years. And I know it goes back further than that, but specifically over the last several years. You know, it certainly feels like we're at a tipping point here, and I'm just curious – if you could maybe talk about when you think we're going to start seeing sort of that acceleration and productivity that's going to drive clear market share gains that the market can sort of view to really get a gauge on the level of, you know, top-line growth and incremental profitability from all these investments. I guess we're just trying to get a feel for when we're going to hit the tipping point and really see those market share gains accelerate, if that question makes sense.
spk10: Yeah, it makes sense, Jack. And, you know, I think we're a couple years into this increased investment, and obviously technology spend and investment and digitization has been ongoing for us. You know, as I look at the operational results and the financial results, I believe that we're seeing some of those things today. We're certainly, you know, creating value in new ways for both customers and carriers. Some of the NAS productivity information that we provide today in the deck certainly speaks to the productivity uplift that we've gotten within NASP, whether it be shipments per person per day or that NPI, the NASP productivity index. You know, I believe that we've spent the last several quarters really building capabilities and different digital capabilities and different digital products. And today we're really pushing for broad adoption of that. I mean, I talked in my prepared comments around You know, the ability to leverage our, you know, proprietary pricing that's driven by algorithms and models against our customers. I mean, today virtually almost every single customer of Robinson's can now access, you know, that pricing engine either through the web portal, whether it's a freight quote or direct to their TMS or ERP. The fully automated bookings, the digital freight matching that's occurring on the carrier side, well over 290,000 fully automated truckload bookings. That's not only a big productivity lift for us, but it's also a new way for us to attract and engage with carriers in a different way that may prefer that method of booking. Again, I go back to we're not at the finish line of either introducing new capabilities or getting those out into the wild, but I do think we're starting to see some really early stage results and impacts into the business. Just in the spot market alone with the roughly 30% volume growth that we had this quarter, a lot of that was driven through those digital pricing engines and connections. So I think we're in a good place, Jack. Again, as I said in the prepared remarks, adding Arun Rajan, a really strong product leader with a lot of experience at two digital native platform companies, I look at that as a really strategic move for us to help accelerate and to help us be even better there.
spk15: Okay. Thank you.
spk08: Your next question, Todd Fowler with KeyBank Capital Markets. Please go ahead.
spk03: Hey, great. Thanks and good evening. So I appreciate, Mike, the commentary on the impact that the higher rate per mile has on the reported gross profit percentage here in the quarter. But how should we think about, you know, the widening of the spread that we saw between buy and sell rates during the quarter? I think it's a little bit unusual to kind of see that gap start to widen again, maybe at this point in the cycle. So how do we think about how gross profits should trend in the back half of the year based on that dynamic? Thanks. Yeah, thanks, Todd. That's a great question. And, you know, for Robinson, you know, price always follows cost, and that's particularly exaggerated in our contract business. And so, you know, with respect to our AGP margins, you know, the margins are best at Robinson when the cost of purchase transportation is coming down. And so when you look at our business now, it's still going up. It's been going up here for quite some time, and it's reached an all-time high. We think that there's going to be tightness in this market that may sustain through the end of the year, potentially. But at some point, if the costs start coming back to five-year averages or 10-year averages, that's when those margins start widening for Robinson. And that's when you start comparing us back to what happened in Q3 of 18 or Q4 of 18. 18, you know, when the pricing started, when the cost started coming down, you know, that's the widening of the margin. Got it. That makes a ton of sense. So if we're looking at slide nine, we need to think about that line coming down versus going up. Yeah, that's right. Great. Thanks for the time tonight, guys. Thanks, Bob.
spk08: Your next question, Rafi Shankar with Morgan Stanley. Please go ahead.
spk04: Thanks. Good afternoon, everyone. So, Bob, some of your legacy broker peers, not digital guys, legacy guys, are talking about 8%, 10% gross margins being the new normal for the foreseeable future and talking about trying to scale up with that level. Do you see it the same way and kind of, you know, how do you think about the current kind of 12%, 13% level over time, maybe even detachment cycle a little bit?
spk10: Yeah, I don't subscribe to the 8%, you know, average adjusted gross profit margins over time. You know, what I would tell you, and again, I'm going to flip Ravi back to adjusted gross for actual just net revenue or AGP dollars per load. And I would tell you, in second quarter, our net revenue per load is basically right at the midpoint of our five- and ten-year trailing averages, right? Now, clearly, back half of 18, front half of 19. We saw outsized margins when costs started to drop against our contract business. We've got a whole bunch of customers that are at those 8% to 10% margins today, and they're highly profitable relationships for us because they're highly digitized, highly connected, highly automated on both the front end with the customer and the back end with the carrier. So I really think that, you know, that eight margin range that you talk about is so dependent upon mix, right? Because if I can have a highly efficient customer relationship that's integrated via API on the customer side and integrated with carriers on the back side, you can run that business profitably all day long at, you know, at mid-single-digit, high single-digit margins. But if you've got a lot of labor, a lot of work that needs to go into carrier procurement, a lot of issues with shipping and receiving, that's not 8% to 10% business in my imagination. And I think there's so many variables that go into that, it's not going to be. Now, clearly, we're taking steps to digitize both in the front end and the back end, front end with the customer, back end with the carrier, that drive greater efficiency and allow us to think differently about that. But ultimately, as we think about our operating expenses and our costs to serve, You know, we're sitting here running a whole bunch of what-if scenarios of what if it's 8, what if it's 10, what if it stays at 15, but we want to ensure that we've got the right operating model that we can survive and thrive regardless of what happens because a lot of that is outside of our control, as witnessed this quarter just by the rapid run-up in cost and sales. Great. Thank you.
spk08: Your next question, Tom Wadowich with UBS. Please go ahead.
spk05: Um, yeah, good afternoon. Um, I wanted to get your thoughts on maybe, you know, be changing. I guess I, I, you know, look at it a little bit with the 2018 framework, but this cycle seems meaningfully different. So I'm just wondering if the way you manage NASP and the mix of business, um, you know, do you want to target that differently in the future? It seems like the contract business has been a struggle the last couple of years. So, you know, does it make sense to consider instead of trying to be a 65%, 70% contract, and I know you were less than that in the quarter, does it make sense to potentially target, you know, more of a 50-50 mix? Or, you know, just wanted to offer that as a question, given it seems the market's changed. And then I guess if you'll allow me a second one in terms of two for one, but In the forwarding, I don't think you get a lot of credit for the strong results in forwarding because I think people don't believe that it's going to persist. Do you have any thoughts on the sustainability of that strong results in forwarding, maybe, I don't know, if you look to 2022 or just out a couple quarters? Thank you.
spk10: Sure. That was technically two, Tom, but we'll dock you one next quarter. But we'll take them. Thank you. On the contract side, on the truckload piece, you know, clearly we're working to shape that portfolio today, right? And we shape that portfolio based on how we go to market, how we respond, you know, in pricing to those bids. As I said in my prepared comments, I think it's 40% of our awards during the quarter. You know, we're for those shorter term, three and six months agreements. We're doing a lot of things with customers today. We're you know, not in the spot or contract per se, but kind of in that in-between space where we're keeping that customer out of the spot, it's slightly beneficial to us, it de-risks things for the customer, de-risk things for us as well. So we're getting pretty creative around pricing because to your point, the volatility that has existed in the market from 17 to today is unprecedented, certainly. But moving to a true 50-50, you know, I think disadvantages us because really 85% of truckload freight in a typical market is moving under contract terms. And so we really want access to that. We think that we're really good at serving customers in that contractual arrangement. We can look and feel like a large asset and aggregate all of the independent owner operators under a single technology umbrella and bring to life the capacity there that most customers wouldn't, they're not built to access on their own. So I don't know that we'll ever get to 50-50 on a sustained level, but we do consistently work to shape that, shape the kind of the makeup of the contract versus spot. On the forwarding side, you know, I think it was at this point last year that everyone was kind of saying there's no way that Robinson's going to comp 104% growth in air freight in the future. This must be transitory. And we just did. And so, you know, we don't see anything fundamentally changing in the air and ocean markets, you know, between now and Chinese New Year at a minimum. But what I would just really reinforce is there's so much work that Mike Short and his leadership team in forwarding has done over the course of the last couple of years. We've challenged... beliefs of how we can scale that business, of what the returns can be in that business. And with modest, I would call modest headcount increases in the business over the course of the last couple of years, we've increased volume significantly and certainly increased the revenue significantly. So there's been a lot of commercial activity that's occurred. We've added a lot of new logos to that business. We're a better forwarder today, I believe, than we were two years ago based on the scale that we've created. And that market does just continue to be so dislocated that shippers that were typically BCOs that weren't working with NBOs are now bringing NBOs into the mix to manage through that. So, you know, I'm not a prognosticator of exactly what you know the the size of that business is you know 24 months from now or 36 months from now but but i really believe that there's a lot of sustainability of the results that we're delivering and forwarding um both on you know because of the cycle and also the work that's been done there and the investments around technology and investments and talent on a global basis great thanks for the time your next question brian austen back with jp morgan please go ahead
spk14: Hey, good evening. Thanks for taking the question. Bob, maybe another one on the contract. Please expand on your previous answer a bit. Do you think that behaviorally things have changed enough to kind of keep this hybrid mix of shorter-term contracts, something that's more out of the market, like just your look to adapt to and offer more in the future, or is this just kind of the sign of the market, and you'll just kind of roll with what's given to you. So I just wanted to see how you were addressing that and if customers are giving any indication that they'd be moving more so in that direction and what that might mean for your mix going forward. Thanks.
spk10: I think it's a mix, Brian, in terms of how we're going to market and different pricing options that we're putting in front of customers, and also a realization by shippers that there's a ton of work that goes into an annual bid and a lot of cost associated with that. And between 2017 and today, there have just been too many instances where 30 days after implementation, routing guides are failing, you know, acceptance levels are low or the inverse of that, like happened, you know, in 18 and the 19, you end up disadvantaged as a shipper and you're paying, you know, mark rates well over the market. And so I do think that there's going to continue to be investment and a de-risking on both sides because it's, you know, with the volatility that's been there, it's unrealistic for a share to think that they're going to, you know, hand over a 12-month contract at a price when you've got this much volatility and transfer that risk. And likewise, a carrier is simply not going to take that amount of risk on when the markets are moving as quickly as they are. So, you know, I do think that we're finding different ways to approach pricing and to get pretty creative to find solutions that are winning in the market for large blocks of freight that are helping shippers to deal with the volatility.
spk15: Okay, great. Thank you.
spk08: Your next question, Chris Weatherby with Citi. Please go ahead.
spk12: Yeah, I wanted to kind of come back to the comment that you made before about sort of the direction of margins and sort of, you know, the level that we're at now. And obviously the absolute dollars of rate has an impact on where those percentages kind of shake out. So looking at gross profit per load, you know, certainly makes sense. I guess, though, I want to understand sort of the ability for direction to change in the back half of the year. So, we've been sort of, you know, stuck between 12% and 13%, understandably so. But as you start to see the potential for rates level off potentially in the back half of the year, the sort of shorter-term, you the better contract versus spot mix, it would seem that you'd be able to see some sequential improvement in margins. I want to make sure I'm understanding the comments you made before. Were you saying that you don't expect necessarily to see that until you see rates down on a year-over-year basis, or is there some other factors that kind of play into your thoughts around NAF margins in the back half of the year?
spk10: Yeah, so I made mention earlier, Chris, and let me know if this – It's on your question, if not, we can pivot. I made comments that we've been in this process of repricing. We've been focused on taking negative loads out. I will tell you, we are still at an elevated level around negative loads in our contract business. You know, on a quarterly basis, you know, if you look 2012 to today, we normally average, I don't know, $20 million roughly of negative files on a quarterly basis. We're at about $60 million this quarter. So there's a $40 million delta between what normal looks like and second quarter of this year just in our contractual business. And so, you know, that is the opportunity that we continue to pursue. You start, you know, taking that over the course of the year and you start to get some big numbers pretty quickly. So we continue to work on that opportunity to pursue the way to improve the profitability in that contractual business. That, I would tell you, is probably the biggest difference. You can take that down to operating margin. You can take that down to net revenue margin. But that's probably the biggest difference between the front end of 18 and today is just the existence of the spot market margins are roughly the same. But the contractual margins are far lower right now than they were then just because of the existence of those negative loads. So we've got to keep chipping away at that.
spk12: That's very helpful, and that does help me with the answer. So presumably, you know, that's a sort of quarter-by-quarter type of progression that should move you in the right direction, assuming rates don't take a further spike up, I would guess, right? So just want to make sure I understand sort of the duration we're talking about here.
spk10: Yeah, you're absolutely right. You're also taking the Tom Wadowitz two questions instead of one. But Chris, you know, you're absolutely right in the fact that if you assume that the market is going to, at some point, reach some sort of equilibrium at a higher price point, that's really when you can start getting those negative loads out. Certainly, we're taking steps along the way, but, you know, if you're constantly chasing a rising cost of hire, you know, through the course of the contract, it gets hard to take those out. If you reach some stasis or equilibrium, you know, even if that's a, you know, year-over-year 30% increases or whatever, then you can really start to plan to take that out and improve profitability. Understood. Thank you.
spk08: Thank you. Your next question comes from Vascom Majors with Susquehanna. Please go ahead.
spk09: Yeah, good evening, and thanks for taking my questions. You talked about the long-term stickiness of some of what you've done in forwarding. But looking at the ocean business specifically, it looks like it's risen double digits in net revenue sequentially for five straight quarters here. Can you talk a little bit about the momentum in that improvement and if it's continuing? I don't know if you can give us that trend by month or some thoughts on how the early third quarter is going, but just trying to get a sense for where that's headed in the short term to think about where it can go long term. Thank you.
spk10: Yeah, you are right. On the ocean, AGP has increased, you know, each of the last five quarters and trying to look and see, sorry, I got ocean in front of me here and volume as well. So, you know, I would say it's overused, but the flywheel, I believe, continues to feed that business, right? And so we're continuing to bring on new logos, continuing to build – new logos that are larger shippers. And so our award sizes are like three and a half times today what they were five years ago. And so as we continue to build more trade lane density, as we continue to be able to do more consolidations, we really see that that just continues to grow exponentially over time.
spk09: And in the short term, is that momentum still continuing month after month? Any thoughts on the sequential trim within the quarter would be helpful.
spk10: Yeah. I mean, in general, what I would say about July, Bascom, is that July for us really looks a lot like June, right, in terms of adjusted gross profit per day and really the performance of each of the underlying services. They really carry forward pretty cleanly from June to July.
spk09: Thank you.
spk08: Your next question, Alison Laundrie with Credit Suisse. Please go ahead.
spk01: Alison Laundrie Thanks. Good afternoon and appreciate you taking my question. I was hoping you could maybe talk in a little more detail about hiring Arun Jha as the Chief Product Officer. Seems like a pretty strategic hire, obviously an impressive resume. What are the key initiatives or product offerings that we should expect them to focus on? I'd imagine there's a tech aspect to it. But also, should we maybe read this as a signal that you're potentially looking at entering other markets, whether organically or through M&A? And if so, might that include something that is somewhat more asset-intensive than your current business? Thank you.
spk10: Sure. So, you know, hiring Arun is really part of our long-term commitment to bring our customers and our carriers the best products for their businesses, right, supported by a global network of experts and the people that they can rely on. Those are the things they tell us the better. And in the context of that, when I talk about products, I'm really talking about customer and carrier-facing technology, right, the extension of the Navisphere platform and how that intersects with our customers and our carriers. You know, Arun has got extremely deep product knowledge and his leadership experience is going to be invaluable for us as we drive really that next generation of innovation here at Robinson and throughout the industry. The chief product officer position is one that I've been considering for quite some time and have been looking for the right talent to add to our team. But it was really critical that I found the right person because I really see this as a fairly transformational step for our organization. And Arun, in me getting to know him over the course of this process, I've really found to be quite a transformational leader. He's got this long history of developing and deploying products that really enrich customer experience and create value at industry-leading, digital-first platform companies. So in his role here at Robinson, he will lead all of our global product development and innovation across the entire Navisphere platform and how that intersects with, again, our customers and carriers. In terms of it being a signal to adjacencies or looking at M&A in other areas, I certainly wouldn't read through it in that respect. So it's really about creating the product organization and organizing ourselves effectively around those products as we bring them to market.
spk08: Your next question, Scott Group with Wolf Research. Please go ahead.
spk11: Hey, thanks, afternoon. So any thoughts on sequential net revenue in the third quarter? Sometimes it's up, sometimes it's down. And then longer term, maybe just some thoughts on the net operating margins for NAST and forwarding. Forwarding has never been higher than NAST sort of towards the low end of the range. Where do you think these margins can go over time?
spk10: Yeah, so Q3 net revenue, you know, again, July looks a lot like June, and that's kind of as far as I would, as deep as, I mean, on a net revenue per business day, the numbers are pretty similar. The growth rates are probably a little bit higher in July than they were in June, just given the comparisons. So let's talk about the operating margin. You know, as I was thinking we might get this question, I was trying to think about, you know, we often get the question of how does it compare to previous times in the cycle? And so just as a point of comparison, I picked second quarter of 2018 and second quarter of this year. And if you go back in time, At that time, you know, for second quarter of 18, NASDAQ was at like 41%, forwarding was at 20.7, and overall we were at 32.6. Today, NASDAQ is at 34.6, forwarding at 45.3, and we're at 34.8. So our operating margin as an enterprise today is actually better today than it was in what I would consider kind of a similar time in the cycle. Where we can go, I still believe that upper 30s and 40s is an opportunity for NAST. We're certainly engineering our cost structure to be able to get there. And the biggest factor there is net revenue dollars per truckload. That's what is going to be the biggest mover of that. But we're certainly doing a lot of things in the cost structure to try to get back to close to 40% operating margins in NAST. We said for a long time that our goal was to move the forwarding business to 30% operating margins, and now all of a sudden we've shown ourselves that we can do 45. I'd say we'll still guide towards that 30% range for forwarding, but you know, the sustainability of our current margins, we'll continue to look at and could, you know, reserve the right to revisit the kind of the guidance, if you will, for that forwarding business. But if we can keep the enterprise in that mid-30s range, we think that that's, you know, is consistent with past quarters and certainly very feasible for us.
spk11: Thank you, guys. Appreciate it.
spk08: Your next question, Dave, is Azula with Barclays. Please go ahead.
spk07: Hey, thanks for taking the question. I noticed you had mentioned truckload. I believe it was truckload. Link to hauled 4.5%. I was just wondering how that is trending sequentially. Whether you think the trend is really just due to kind of pandemic comps or whether there's some sort of change in either business mix or mix of freight within your current customer base?
spk10: That's really been an ongoing macro trend over the course of the past several years. As e-commerce becomes more prevalent, as inventory gets placed closer to consumers, we've continued to see that trend down over the past several years.
spk08: Thanks. Next question, Bruce Chan with Steeple. Please go ahead.
spk02: Great. Thanks for the question, and congrats to you, Arun. This is probably a similar question to what some of the others have been getting to, but if I could just maybe be a little blunt about it, I guess I still don't understand why we still have so much contractual business that's running underwater. I get that you run your business very collaboratively with your customers and you manage for the long term and on your contracts, but market volatility is theoretically a good thing for brokers over the cycle. If I look back over the previous cycle, it just doesn't seem like we've really seen that. We've got a market that's really tight. The cycle is probably longer than a normal one. You're providing a ton of value to your customer. Are things just that competitive right now that you can't move faster here, or is there something else that's going on?
spk10: Well, Bruce, we just delivered a quarter with... record revenues, record volumes across, you know, the suite of our entire services. And in the spot market grew our truckload volume by over 30%, which is really in line with what I've seen a lot of other, you know, companies that are more focused on the spot market brokerage have delivered very similar results. Our focus on the contractual business, I think the 85% of the freight that moves in the contracts is a market that we want to be in. We want to participate in that through cycles. Why is it that we're still having a high degree of negative loads in that business? Look, you know, we forecasted where we thought this year was going to go, but we, you know, didn't expect 42% increase, 47% increase in carrier cost of hire in the second quarter. And so, you know, we've got a – deliver results for multiple stakeholders certainly but you know our customers are are what ultimately create the value for our shareholders and so i'm a firm believer that we need to do our best to manage our commitments to those to those relationships um through cycles because it it pays dividends in long term You know, when I look at our top 500 customers that make up close to 50% of our revenue and see the retention rates that we have with those customers of 99 to 100% in any given year, you know, I think that's a testament as to why we take the positions we do with those customers, you know, because we try to take the long-term view.
spk02: Okay. No, that's great. That's a fair point and appreciate the call. Thanks, Bruce.
spk08: Next question, Ari Russell with Bank of America. Please go ahead.
spk06: Hey, good afternoon, guys. Thanks for squeezing me in. Bob, so I wanted to get your thoughts on one of, you know, your large startup competitors, digital competitors, has announced that, you know, they're acquiring Transplace and kind of enhancing their offerings in LTL. So I wanted to get your thoughts there, but I wanted to kind of contextualize it in thinking about, you know, C.H. Robinson for a long time is said that your competitive advantage or your moat is kind of your scale and the ability that you have to provide kind of comprehensive solutions in really tight freight markets. So maybe you could talk about kind of thoughts on the kind of competitive landscape and also maybe how C.H. Robinson has been able to differentiate itself kind of given the real tightness and capacity that we've seen over the last couple of months.
spk10: Yeah, absolutely. You know, I won't comment on competitors' strategies or their moves, but, you know, I certainly will speak to our competitive advantages and those things that you cited I still believe to be the case, right? We are highly focused on ensuring our customers are successful, navigating challenging freight markets. We continue to have the largest network of carriers in North America, which we're now more and more often digitizing. digitizing those relationships with those carriers, which allow us to move faster. We signed up 6,900 new carriers in the quarter last quarter. Those are all new carriers that we can bring to life to help serve our customers. You know, as I go back to the last question that was asked, Our word matters to our customers. Our commitment to our customers matters. We continue to differentiate on that customer promise. So the blend between technology plus having a global suite of services, our ability to go into a customer and offer them a leading global forwarding product, a leading surface transportation product, I believe our LTL business would be equivalent to the fifth or sixth largest asset-based LTL carrier, and we don't own a truck or a warehouse. I mean, that's a $3 billion business. We're the largest non-asset-based LTL provider by, you know, multiples of the next closest competitor. And so those things of scale, of service excellence, of commitment, of technology and investment, those are continuing to resonate with customers and continuing to help us to win in the marketplace. And I believe that to be true today, and I believe that that will be true in the future.
spk06: But does that manifest itself in the form of kind of better margins or kind of better growth rates over time?
spk10: Yeah, I believe that it does. Again, I believe that if you want to talk about operating margins, I believe that we have a path to 40% operating margins in that, something in excess of 30% in forwarding, 35% operating, 30s operating margins for the business. And, you know, we are investing back in the business. We are investing in building capabilities. We're investing in building better technology that our customers will use and love. We're building technology that our carriers will use and love, and we're hiring really great people across the globe with great experience to bring these services to life.
spk06: Okay, great. Thanks for the time.
spk08: Thank you. I would like to turn the floor over to Chuck for closing remarks.
spk15: That concludes today's audience call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a good evening.
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