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spk09: Good afternoon ladies and gentlemen and welcome to the CH Robinson second quarter 2022 conference call. At this time all participants are on a listen only mode. Following the company's prepared remarks we will open the line for a live question and answer session. 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 Wednesday, July 27th, 2022. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
spk15: Thank you, Donna, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer, Arun Rajan, our Chief Product Officer, and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2022 second quarter results. and a room will provide an update on the innovation and development occurring across our platform. And then we will open the call up for questions. Our earnings presentation slides are supplemental to our earnings release and can be found on the investor section of our website at investor.chrobinson.com. Our prepared comments are not intended to follow the slides. If we do refer to specific information on the slides, we will let you know which slide we're referencing. I'd also like to remind you that our remarks today may contain forward-looking statements. Slide 2 in today's presentation lists factors that could cause our actual results to differ from management's expectations. 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. Our second quarter was another quarter of record profits, as our business model performed as we would expect it to in this part of the cycle. Our investments in our customer relationships through the early part of the cycle, while the cost of purchased transportation was rapidly increasing, are paying dividends as we retain and gain share with these customers through the terms of our agreements. Our strong results were again driven by significant operating margin expansion in our North American surface transportation, or NAS, business as we further improved the profitability of our truckload and less than truckload businesses and grew truckload volume in a declining market. Our global forwarding team continued to deliver strong financial results while benefiting from the market share that they've gained over the past couple of years. Additionally, our Robinson Fresh, managed services, and European surface transportation businesses all increased their adjusted gross profit on a year-over-year basis. Now let me turn to a high-level overview of our NAST and global forwarding results. Our NAST adjusted operating margin in Q2 was 44.3%, up 970 basis points year-over-year and 830 basis points sequentially, due to improved profitability in both truckload and LTL. In our NAST truckload business, our volume grew 2% year-over-year compared to the cast freight index that reflected a 2% decline in shipments. Our adjusted gross profit, or AGP, per shipment increased 48% versus Q2 last year, and 26% sequentially, as the cost of purchase transportation declined during the quarter and the percent of truckload shipments with a negative margin returned to historical levels. Our truckload volume growth included increases in dry van, flatbed, and temp control services, and throughout the quarter we pursued volume in the spot market and collaborated with our customers to use the spot market as part of their procurement strategy. This included a 21% increase in volume that was driven through our real-time proprietary dynamic pricing engine. During the second quarter, we had an approximate mix of 60% contractual volume and 40% transactional volume, compared to a 55-45 mix in the same period last year. Routing guide depth of tender in our managed services business, which is a proxy for the overall market, declined to 1.4 in the second quarter from 1.7 in the first quarter. Broadly speaking, route guides are performing well as first tender acceptance rates are near pre-pandemic levels, and the first backup provider is accepting rejected tenders most of the time. Since the exceptional market tension in January caused by COVID-related absenteeism and winter storms, the truckload market has seen greater balance return to the spot market. With the exception of road check week, where many drivers seemingly temporarily leave the market, The national dry van load to truck ratio hovered around 4 to 1 throughout the second quarter. Between 3 to 1 and 4 to 1 for dry van is considered a reasonably balanced market versus the ratio closer to 5.75 to 1 that we saw in the extraordinarily tight year of 2021. The sequential declines in truck load line haul cost and price per mile that we saw in February and March continued throughout the second quarter. This resulted in approximately 5% year-over-year decline in our average truckload line haul cost paid to carriers, excluding fuel surcharges. Although pricing declined sequentially in Q2, our average line haul rate billed to our customers, excluding fuel surcharges, increased year-over-year by approximately 1.5%, which was supported by our contractual truckload portfolio that was negotiated in prior quarters. This resulted in year-over-year increase in our NAST truckload AGP per mile of 46.5%. Slide seven of our earnings presentation shows the historical trend of our truckload AGP dollars per shipment. The past three years have been volatile ones in the freight market and our truckload AGP per shipment reached a new low and a new high within the past eight quarters. Putting this quarterly volatility aside though, our average AGP per shipment on a trailing two, five and 10 year view continues to remain relatively constant, which demonstrates the resiliency of our business model and our ability to obtain adjusted gross profits through cycles. Through it all, we've worked tirelessly to help our customers optimize their freight networks and their costs. Carriers improve their equipment utilization and to provide strong returns to our shareholders. As we prepare for the second half of the year, We expect the truckload cost per mile will decline further, both sequentially and year over year, due to demand deceleration in the three biggest verticals for freight. Weakness in the retail market is expected to persist. Further slowing in the housing market is expected. And there are early signs of deceleration in the industrial or manufacturing space, although this vertical is holding up the best on a relative basis. Our truckload contracts continue to trend towards 12-month durations. and we are proactively repricing some contracts in order to remain competitive in a changing market and to grow our wallet share with customers. Although we're the largest provider of truckload capacity in North America, we only account for approximately 3% of the for hire market, which leaves us with significant market share opportunities to fuel our growth. In our NAST LTL business, we again generated record quarterly AGP of $166.9 million in second quarter, or up 30% year over year. through a 37% increase in AGP per order that was partially offset by a 5% decline in volume. As was the case in the last few quarters, the second quarter decrease in LTL volume was mainly driven by a normalization of business levels as our LTL volumes in the second quarter of 2021 were bolstered by a few large customers that benefited from the stay-at-home trend during COVID, which contributed to 23% LTL volume growth in the comparable quarter last year. In our global forwarding business, the team continues to provide solutions and excellent customer service in a market that's becoming more balanced. In this quarter, global forwarding generated another quarterly AGP record of $324.4 million, representing year-over-year AGP growth of 36%. Operating income also grew by 59 million, or 55%. Against increasingly tougher comparables, Q2 marks the ninth consecutive quarter of year-over-year growth in total revenues, AGP, and operating income for our global forwarding business. Within these results, our ocean forwarding business generated Q2 AGP growth of $77 million, or 51% year-over-year. This was driven by a 47.5% increase in adjusted gross profit per shipment and a 2.5% increase in shipments, which was on top of a 29% volume growth in the second quarter of last year. Global ocean demand is becoming more in line with the industry's overall capacity, and ocean rates, while still elevated, have started to come down. China ports appear to be back to normal operations, and while port congestion on the US West Coast improved in the second quarter, congestion is edging back up again. Congestion on the East Coast has risen due to a higher percentage of freight being routed to their ports as shippers attempted to mitigate risk from a potential labor dispute in the West Coast. With limited new vessel deliveries in 2022, We expect ocean rates will remain elevated compared to historical levels, but may taper a bit more in the second half of the year. Finally, our international air freight business delivered AGP growth of $4 million, or 7.5% year-over-year, driven by a 14% increase in AGP per metric ton shipped, which was partially offset by a 6% decrease in metric tons shipped. Air freight capacity has improved in certain trade lanes due to increased belly capacity, and we're seeing some conversion of air freight back to the ocean. Overall, the forwarding team has a great foundation to continue providing excellent service to our customers and to collaborate with them to leverage our flexible solutions for their shipping needs. Our win rates in our forwarding business are strong, and we continue to implement our pipeline of new customer business. For the enterprise, we continue to believe that through combining our digital products with our global network of logistics experts, and our full suite of multimodal services, along with our information advantage from our scale and data, we are uniquely positioned in the marketplace to deliver for our shippers and our carriers, regardless of the market conditions. We believe that our strategies and competitive advantages will enable us to create more value for customers and, in turn, win more business and increase our market share while delivering higher profitability and shareholder returns. With that, I'll now turn the call over to Arun to walk you through the product innovation and development that's occurring across our platforms.
spk01: Thanks, Bob, and good afternoon, everyone. As I said before, the role of our products is to relentlessly address customer and carrier needs, and we continue to make good progress on both fronts. During the quarter, we continue to deliver enhancements to our Navisphere product platform while extending the penetration of our digital offerings with both our carriers and our customers. Our work is improving both the customer and carrier experience with Robinson, as evidenced by the results outlined on slide 12 in our earnings presentation. I won't touch on each of these data points in my prepared comments, but I'll highlight a few that are extremely relevant and show progress in the benefits of our digital investments. In the second quarter, we executed nearly 600,000 fully automated bookings in our NAS truckload business, an increase of 107% compared to the same quarter last year. This represents $1.1 billion in revenue flowing through this digital channel. Because of the digital improvements that have been delivered, we've increased the number of carriers booking loads to our digital channels by 96% year-over-year. On the customer side of our marketplace, through further integrating and scaling our real-time dynamic pricing engine, we priced 71% of our SWAT truckload volume through this digital tool, resulting in $597 million of truckload business. Extending this capability allows us to be more responsive to changes in the market, better meet the needs of our customers, while also creating additional stickiness in our customer relationships. More broadly, we're focused on designing and delivering scalable digital solutions for growth, such as the progress I just described, by transforming our processes, accelerating the pace of development, and prioritizing data integrity. The four main pillars of this effort are scaling capacity of procurement, scaling demand generation, scaling quality customer outcomes, and scaling our marketplace dynamics, as outlined on slide 11 of our earnings presentation. These four pillars are focused on improving both the customer and carrier experience by working backwards from their needs and increasing the digital execution of all touchpoints in the lifecycle of a load, including order management, appointments, carrier offers and booking, in-transit tracking, and financial and documentation processes. As we do this, we will continue to apply the appropriate rigor to direct our tests and towards products, features, and insights that increase the rate at which we acquire, retain, and grow share of customers and carriers, which in turn serve as the primary inputs to power our future growth in the two-sided marketplace that we serve. I'll now turn the call to Mike to review the specifics of our second quarter financial performance.
spk02: Thanks, Arun, and good afternoon, everyone. In Q2, we continued to leverage the strength of our non-asset-based business model to deliver another record quarter of financial results. Our second quarter total company adjusted gross profit, or AGP, was up 38%, reaching a record high of $1 billion with growth in each of our segments and services. On a sequential basis, AGP was up 14% and also grew in each business segment. On a monthly basis compared to 2021, our total company AGP per business day was up 43% in April, up 39% in May, and up 31% in June. After seven consecutive quarters of increasing price and cost per mile in our North American truckload business, both declined sequentially in Q2, with cost declining faster than price due to a softer demand environment and capacity that has grown over the past 12 months. The line haul cost and price per mile, which exclude fuel surcharges, declined sequentially in each month of Q2. As the cost of purchase transportation declined, our contractual truckload AGP per shipment improved and our NASS team managed our load acceptance rates to optimize our truckload AGP and look to the spot market to find additional volume opportunities. Q2 marked the seventh consecutive quarter of flat to increasing truckload AGP per mile. Truckload AGP per shipment improved 26% sequentially and by 48% compared to Q2 of 2021. Now turning to expenses, Q2 personnel expenses were $444.8 million, up 22.6% compared to Q2 last year, primarily due to increased headcount as we support growth and transformation opportunities across our business. We also incurred higher incentive compensation due to an increase in our projected annual financial results. For the full year, we now expect our personnel expenses to be at the high end of our previous guidance of approximately $1.6 to $1.7 billion due to the higher expected incentive compensation. As we discussed in our last earnings call, we expect headcount additions to be weighted more towards the front half of 2022. For the remainder of the year, we expect our headcount to be flat to down. If growth opportunities or economic conditions play out differently than we expect, we'll adjust accordingly. Moving on to SG&A, Q2 expenses of $117.2 million were down $8.5 million compared to Q2 of 2021. Excluding the $25.3 million gain from the sale and leaseback of our Kansas City Regional Center, Q2 SG&A was up 13.4%, driven by year-over-year increases in purchase services and travel expenses. For 2022, we continue to expect total SG&A expenses to be $550 million to $600 million, excluding the gain from the sale and leaseback of our Kansas City Regional Center. We also continue to expect $100 million of depreciation and amortization in 2022. Q2 interest and other expense totaled $27.4 million, up approximately $13.9 million versus Q2 last year, primarily due to a foreign currency revaluation due to the strengthening of the U.S. dollar primarily versus the euro and yuan. This FX loss was $8.4 million higher than the $1.9 million loss in Q2 of last year. Interest expense increased $4.3 million due to a higher average debt balance, but with lower net debt to EBITDA leverage. Our Q2 tax rate came in at 21.3% compared to 21.6% in Q2 last year, which brings our year-to-date tax rate to 20.0%. We continue to expect our 2022 full-year effective tax rate to be 19% to 21%, assuming no meaningful changes to state, federal, or international tax policy. Q2 net income was $348.2 million, up 80% compared to Q2 last year, and we delivered record quarterly diluted earnings per share of $2.67, up 85% year over year. As a reminder, our Q2 net income included the $25.3 million gain from the sale and lease back of our Kansas City Regional Center and a $10.3 million loss on foreign currency revaluation. Turning to cash flow. Q2 cash flow generated by operations was approximately $265 million compared to $149 million in Q2 of 2021. The $116 million year-over-year improvement was primarily due to the $154 million increase in net income. Over the past two and a half years, our net operating working capital increased by approximately $1.5 billion, driven by the increasing cost of purchase transportation. This reduced our operating cash flow by the same amount over that time. If the cost and price of purchase transportation come down, we expect a commensurate benefit to working capital and operating cash flow. In Q2, our accounts receivable and contract assets were down 1.5% sequentially, And our day sales outstanding, or DSO, was flat sequentially. Capital expenditures were $43.2 million in Q2 compared to $16.3 million in Q2 last year. We are raising our 2022 capital expenditure guidance from $90 to $100 million to $110 to $120 million, primarily due to higher level of internally developed software, which is tied to higher future returns. We returned approximately $409 million of cash to shareholders in Q2 through a combination of $337 million of share repurchases and $72 million of dividends. That level of cash to shareholders equates to approximately 118% of our Q2 net income and was up 100% versus Q2 last year. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our opportunistic share repurchase program to deploy excess cash. Now onto the balance sheet highlights. We ended Q2 with approximately $1.1 billion of liquidity comprised of $826 million of committed funding under our credit facilities and a $239 million cash balance. Our debt balance at the end of the quarter was $2.27 billion, up $901 million versus Q2 last year, primarily driven by increased working capital and share repurchases. Our net debt to EBITDA leverage at the end of Q2 was 1.35 times, down from 1.49 times at the end of Q1, due primarily to increased EBITDA. Let me take a moment to comment on our return on invested capital, or ROIC, which is an important metric for many investors. With our asset-light business model, we operate with a relatively low capital base, which naturally enhances ROIC relative to other asset-based logistics providers. In fact, 88 percent of our operating asset base is comprised of accounts receivable and non-cash intangible assets, with AR representing 67%. As a result, all else equal, ROIC for Robinson is impacted more by changes in receivables driven by changes in the price of purchased transportation than from proportionate changes in our capital expenditures. In Q2, we delivered our highest ROIC in a decade at 32.1%, up 890 basis points from Q2 last year, despite the contribution of a historically high receivables balance to our operating asset base. Going forward, if the price of purchased transportation continues to fall, then the receivables, which represent two-thirds of our operating asset base, will follow and represent a tailwind to ROIC, all else equal. By driving scalability into our model with focus on the four main pillars that Arun talked about, we expect to generate growth and efficiencies that support long-term growth and our total shareholder return. Thank you for listening, and I'll turn the call back over to Bob for his final comments.
spk10: Thanks, Mike. So as questions linger about global economic growth, inflationary pressures, and consumer discretionary spending, our global suite of multimodal services, our growing digital platform, our responsive team of logistics experts, our broad exposure to different industry verticals and geographies, and our resilient and flexible non-asset-based business model put us in a position to continue delivering strong financial results. While we're pleased with our performance this quarter and the fact that both NAST and Global Forwarding delivered operating margins above our publicly stated targets, we know that we have work to do to consistently deliver at these targeted levels. The work that the teams are executing that Arun referenced related to scaling our model, Eliminating internal legacy processes and improving quality while working backwards from the needs of our customers and carriers will drive continued improvement in operating profits long-term, as this work is focused on growth, customer satisfaction, and productivity improvements, which will in turn reduce our costs to serve our customers. As we look to the second half of the year, we are watching economic conditions closely, and the management team and the board continue to consider all strategies to grow operating profits and maximize long-term shareholder returns through all phases of the business cycle and various economic scenarios. This concludes our prepared comments. And with that, I'll turn it back to Donna for the Q&A portion of the call.
spk09: Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. In order to let as many people ask questions as possible, we do ask that you please limit yourself to one question. Again, that is star 1 to register a question at this time. The first question today is coming from Todd Fowler of KeyBank. Please go ahead.
spk07: Hey, great. Thanks. Good afternoon and congratulations on the results. Bob, I guess maybe to start, you know, if we take a look at slide seven, where you've got the truckload AGP, and it's certainly helpful to see, obviously, the profit per load versus the percentage. But can you talk to your thoughts around the sustainability, you know, the profit per load is obviously at a very elevated level versus the last 10 years. You know, would you expect it to be able to remain at this level with some of the dynamics in the marketplace? Or how do you think about kind of the sustainability of the profit that you're seeing right now?
spk10: Sure. Thanks, Todd. Thanks for kicking us off. Maybe I'll paint the picture of how we've seen this play out in the past and then try to tie it into where we are today. You know, after, I think Mike said, seven consecutive quarters of year-over-year rising cost of purchased transportation in our truckload business, we finally saw that moderate and turn negative this quarter on a year-over-year basis. And, you know, while we can't be certain about the economy looking forward over the past couple of cycles, What we saw was on that year-over-year basis, cost typically declined year-over-year for around seven quarters after that inversion quarter from going kind of positive to negative. And I'd look at Q3 15, Q1 of 17, kind of as those two points on slide seven. And then again, from Q4 18 through Q2 of 20. So no way to be sure that that's how it's going to play out this time, but probably worth noting of how it's played out in the past. know AGP per load during the second quarter two point was at the highest point it's been in the past decade and we're certainly not considering this to be the new normal as we think about our long-term planning and believe that eventually it will revert to the mean I think the question that we have is just how long will it take to do that so we're certainly not building our strategy or our long long-term cost structures around maintaining the level of earnings per load that we experienced in second quarter over the long term now With that as a backdrop, I think encouraging that we continue to make progress on our digital initiatives and more and more of our transactions, as you heard Arun say, are now flowing through more fully automated and frictionless processes. And so while the market will undoubtedly shift from this point over time, we've got a clear view on what it's going to take to deliver against that 40% operating margin target through the cycle, both in terms of the components of volume, AGP per transaction, and just our overall cost structure. So as we continue to digitize more of that work, we see a clear path to lower our operating costs on a per transaction basis. As I said in my prepared comments, if you look through the volatility of each of these quarters going back to 2013, that average AGP per shipment is virtually unchanged on a two-year look back, a five-year look back, or a 10-year look back.
spk07: Yeah, no, I got that in the comments. So that makes sense. And it sounds like that from your view, we're still relatively early in kind of the cycle with what we typically have seen. So Bob, I appreciate the comments. I'll turn it over. Thanks, Bob.
spk09: Thank you. The next question is coming from Jason Seidel of Cowan. Please go ahead.
spk16: Thanks, operator and Bob and team. Congrats on a good quarter. Wanted to talk a little bit on the pricing side. I think you guys said that Pricing ex-fuel was up on the contractual side about 1.5%. But you also made some comments that you were proactively repricing some business. Can you talk to the instances where you took the proactive stance to reprice that business and just how much that might have come down from prior pricing trends? And where do you think that should set up for in 3Q? Sure.
spk10: So just to clarify on the data point, the 1.5% was the overall book of business, not just the contract. So I just want to make sure that everyone's clear on that. Largely, if I think about the contract side of our business and the repricing, we continue to see most of our business that we've repriced in the first half of this year renew on 12-month terms. And just as we saw in the upward trajectory of the market over the past six or seven quarters, there was constant repricing there. And we expect to see that now, not broad-based, but us proactively going back and having conversations with customers, aggressively and intentionally using the spot market as a strategy to help customers access lower cost of purchase transportation outside the course of their contractual agreements. That drives volume for us and savings and opportunities for the customers. Within the contract book of business, Our win rates for the quarter were strong. You know, we define our win rates as kind of the percentage of freight that we bid on that ultimately we are awarded. And that increased by 110 basis points in the second quarter of 22 compared to the second quarter of 21 and was right in line or ahead of kind of our long-term average win rates. And as I said, most of these are coming at 12-month terms. You know, I would say the market, at least our customer relationships, I'd say people are mostly acting rationally as it relates to these contracts. We're not seeing shippers largely come out and rip up bids or awards or go back and do repricing activities. So we feel good about the state of the contract business as well as our ability to use the spot as an intentional strategy with our customers to continue to drive volume.
spk16: Okay. That was my one. Appreciate the time. Okay. Thanks.
spk09: Thank you. The next question is coming from Brian Ostenbeck of J.P. Morgan. Please go ahead.
spk05: Hey, thanks. Good afternoon. Appreciate you taking the question. So I wanted to ask more about the automated bookings. It was up substantially again on a sequential basis. How much further room to run do you have on that metric alone? And if you can talk more broadly about how that integration of more technology and more automation is impacting employee productivity, is there any pushback on the receptivity of it? And then if you can just tie in some comments about digital competition, digital natives overall. Some of them have been paring back headcount. Wondering if you're seeing anything in the markets from that side as well. Thanks a lot.
spk10: Yeah, you bet. I'll use the technical term that Arun and I will ham and egg the answer to this one, and I'll kick it off. I mean, on the carrier booking side, we had about $1.1 billion in freight that was booked through the digital channels. If you think about the question of how much of your freight is that, I think we were right around $4 billion in truckload freight in NAS for the quarter. Check me on that, Chuck, right? And so about 25% of the revenue running through, you know, running through that fully digital channel, and that will give you a perspective of the $600 million on the customer side as well. From a productivity perspective, you know, even with the additional headcounts that we've added into NAST over the past several quarters, if I use, I'll use 2018 or 2019 because the headcount was virtually flat as kind of the pre-pandemic comparison, our shipments per person per day in NAST are up about 16%. in total. And obviously, the technology investments have a lot to do with that. One point that I'd add to that, though, and I think an area where we could have been more effective in communicating with our investors and the analysts is that over that time period, our headcount has started to include more and more employees that work in our consolidation and warehouse facilities post the acquisition of Prime. So knowing that those warehouse employees you know, are never going to really contribute to the productivity focus of our truckload marketplace. If you net out the increase in those warehouse employees, our headcount in NAST is actually down about 2% in terms of the employee base that really focuses on the customer and carrier marketplace compared to 2019. And so, you know, the productivity index there, the shipments per person per day, we're actually up about 21% in total over that time period. As it relates to kind of the digital natives, we're not seeing anything necessarily drastically different in terms of how the marketplace is acting right now. I think there's less focus of growth at all costs, I guess I would say, in this industry and many others. And so a rational pricing environment and an environment where industry participants with scale are pricing the market rationally, we think is a good thing for Robinson. I'd maybe open it to Arun to see if there's anything you'd add.
spk01: Yeah, I think the only thing I'd add is that there's definitely more room to run. I look at digital bookings as sort of the first step, and that was sort of the first proof point of how we can move the needle. But if you look at digital execution of every step in the lifecycle of the load, order management, appointments, carrier offers and booking, which we've made progress on, but in transit tracking, financial and documentation processes, So then just looking at the entire life cycle of a load, while we made progress on the productivity front, as Bob pointed out, there's still a lot more opportunity for us to drive up digital execution and all those steps.
spk05: Arun, could you phrase that and maybe use a baseball analogy with what inning we're in, how far you can get the 25%, anything else just to give us some additional context of where you are versus where you expect to be in several years' time? Thanks.
spk01: I'd say, I mean, you know, if you look at 25% on the booking side, I think we have more room to run on. I won't come up with a percentage, but I'd say, you know, there's no reason that we shouldn't aspire to double that percentage. And in terms of some of the other steps in the process, I'm not ready to make a hard commitment there, but there's certainly opportunity. Let's think of it as like, There's a digital versus manual ratio that we looked at for each of our steps. I'd say we're in the early innings on those.
spk10: Yeah, and I would say, too, just some of our conversations in terms of our prioritization of work, while digital bookings is probably the metric that people talk about the most as being kind of the leading edge of digital transformation, we actually believe the highest leverage points are not the actual booking and much more so some of the operational tasks that Arun spoke to, because that's really where a lot of our people's time ends up being spent. And the more we can move those towards digital on the back end of a digital demand signal from a customer or before digital booking with a carrier, that's where the real productivity lifts. And ultimately, our ability to drive down the cost of an incremental transaction really, really happens.
spk05: Thanks, guys. Appreciate it.
spk09: Thank you. The next question is coming from Ken Hexter of Bank of America. Please go ahead.
spk11: Hey, good afternoon, Bob and team. I thought that was a great answer. Thanks for that on the digital side, and congrats on a great quarter. Just a bit intrigued, Bob, on your market comments. Other carriers seem to suggest they're not feeling it yet, yet most obvious you're seeing it in the spot rates as they come down and the benefit you're talking about on the cost. So Maybe talk a little bit about what customers are saying in terms of the impact and your thoughts on where we are in the market. And is this a factor of what the smaller carriers are feeling versus the larger in terms of that spread widening?
spk10: You know, it's an interesting question, Ken. You know, a lot of talk about, you know, the small carriers and, you know, the rate and the speed or if they are, you know, exiting the market at pace. You know, I'll be candid. I was quite surprised to see that we actually added 12,000 additional carriers throughout the course of this quarter, right, which is, I think, a record number of new carrier signups for us in any given quarter. I really had expected that that number would go down. So perhaps the health of the small carrier is a bit better than is being advertised. The other way you might look at that is if, you know, those small carriers were working with another broker or That other broker doesn't have the network density today that they once had, that they're retreating to safety or retreating to Robinson. So, you know, overall in the network, I mentioned it in the prepared comments or the industry, I mean, we're definitely seeing on the consumer side things start to soften there. We're seeing the consumer trade down. On the construction side, we're starting to see that come in. Manufacturing holding up relatively well compared to those other areas. You know, our aggregate demand in truckload has come down sequentially from Q1 to Q2, just in terms of the total number of tenders. But on the flip side of that, we've seen acceptance rates go up significantly, many fewer canceled loads, many fewer negative loads. And so the health of the business on the contractual side has been really, really good. And as I say, you know, using spot as an intentional strategy to, you know, automate that with customers, giving them access to the lower cost spot market has helped us to maintain share. Appreciate it. Thank you, Bob.
spk09: Thank you. The next question is coming from Gordon Alliger of Goldman Sachs. Please go ahead.
spk04: Yeah. Hi. How are you? So shifting to the forwarding side of the equation, can you maybe give a little more color on your thoughts on the outlook from here? Obviously, trends have been super strong and we've seen some moderation, but I guess maybe more importantly, can you talk to the share gains that you mentioned? What's actually driving that above the market and what customer base are you penetrating to get these share gains and who might you be taking share from? Thanks.
spk10: It's a lot there, Jordan. Sorry. No, that's all right. I'll just I probably won't get these in the right order, so I might ask you to repeat a couple of those. So let's talk first about kind of the customer base and where the growth is coming from. If I give you a really simple customer segmentation, A, B, C, D, with A being really big customers and D being smaller customers, going into the pandemic, our customer mix tended to skew towards the Bs, Cs, and Ds, right? More mid-cap to smaller customers. As we went into the pandemic and throughout and into today, the vast, we've won in all segments and we've grown in all segments, but we've grown outsized in really that what I'll call customer type A or the really large global customers is where we're winning the most and the most impactful to our overall volume. In terms of the forward look on the forwarding business, we do expect that we will continue to see some softening in the marketplace within within forwarding and domestically as well. But given the share gains that we've made, given the work that the forwarding team has done in order to really structurally, I think, put that business in a different place in terms of profitability, we feel like we've got a forward look that's going to allow us to continue to deliver at or above the kind of stated 30% operating margin targets for that business. You know, we are today the number one NDOCC from all of Asia to the U.S., along with the number one from China to the U.S. So if we are going into some moderating economic environments, we're doing it with a strong tailwind and still a strong pipeline of customers to implement. So maybe tell me if I've hit on your question, what have I missed?
spk04: Yeah, the only other thing was, like, who might you be taking share from? Is it like a smaller freight forwarding base out there? Is it larger players? Any way to assess that?
spk10: It's really difficult to assess. I think you can look at our share gains relative to some of our peers and draw your own conclusions on that, Jordan, but I don't have a kind of a play-by-play that I would feel comfortable sharing in a public forum that would have any level of accuracy to it.
spk04: Okay, thanks so much. Yep, thank you.
spk09: Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.
spk13: Hey, everyone, and thanks for the time. Congrats on the great print here. Bob, you've had some really helpful comments on the overall demand equation, and I just maybe wanted to pick up on some of that. I know it's still kind of early to talk about peak season here, but, you know, as you start discussions for capacity planning on the global forwarding side, You know, what are you hearing from them, especially if you think about some of those issues that you mentioned with, you know, labor disputes and increasing congestion at the ports?
spk10: Yeah, so the way that we're thinking about the peak season right now, and I'll, you know, given our exposure to the ocean market, I'll start there. You know, looking at the Trans-Pacific trade lane, where we're obviously, you know, that's where the most of our density is, we've seen rates, you know, steadily decline here over the course of the past couple of months. I think that's mainly been caused by the issue of high inventories and either canceled or reduced POs that have been driven by the impact of just this continued inflation on the consumer. You know, concurrently, other shippers have been pulling forward orders and stocking up for the holiday season early due to the fears of the congestion with labor negotiation on the West Coast ports and kind of this looming congestion on the East Coast. And so we really look at the convergence of those two factors likely leading to a more muted peak season. You're looking at the air freight in the same corridor. Our air volumes have started to come down a bit over the past couple of months. And again, against that backdrop of a more muted peak season, you know, seeing as much of our air freight volume is driven by ocean conversions, we'd expect a bit of slowing there as well through the balance of the year. I think the outsized maybe alternate perspective there is that perhaps it's just a later peak as, you know, We work through inventory here domestically, and then we may find ourselves in a spot where we say, hey, we don't have what we need for the holiday. We could see a later peak as well, but that's speculation at this point.
spk13: Okay, that's really helpful. And then just maybe a quick follow-up. We've heard some noise about maybe some concerns about production over in Europe with some of the Russian gas supply. Have you seen any of that on your European trans business or on your forwarding side?
spk10: Not that I could speak to Bruce with any level of expertise. It hasn't elevated itself to any of our really broad-based management team discussions related to trends in the business.
spk13: Got it. Appreciate the time.
spk05: Thank you.
spk09: Thank you. The next question is coming from Jack Atkins of Stevens. Please go ahead.
spk03: Okay, great. Good evening, and thanks for taking my question. Congrats on the great quarter. So, Bob, I guess maybe just kind of going back to the thoughts on the sustainability of the 40% net operating margin in NAS through cycle. Historically, we've seen your profitability in NAS follow AGP per load pretty closely. I guess as you sort of look forward and you think about over the next several quarters and a normalization of that AGP per load. Do you feel like that the product work that Arun has been undertaking over the last couple of quarters and the efficiency gains and productivity gains that you guys are beginning to see in the business are going to be able to spool up enough to really sort of offset a normalization of AGP to the degree that it materializes either later this year or into 2023?
spk10: Yeah, it's the right question to ask, Jack, and I'll take that on and then open it up to the rest of the team here, too. So I want to lead with one comment. When you say that the work that Arun is leading, and leading is the appropriate thing, but I also want to characterize this work as not just being technology work or product work, but really us thinking about the entire system of how C.H. Robinson works, and system not in the reference of technology systems, but just the entire system from quote to cash And how do we best engineer every touchpoint along the way, both through technology and thinking differently about how we execute the business? And so that is critical work at the core of unlocking value at C.H. Robinson. And we're making progress there. But let's go back to kind of how indirectly I think your question, Jack, is, hey, if AGP comes down, can you grow volume enough to drive the business? And so here's how I'm thinking about that a bit is, you know, we've now grown truckload volume for five consecutive quarters. And that's the first time we've done that since 2016 into 2017. Volume in our truckload business in July continues to be positive year over year. And actually on a per business day basis, it's at the highest level of the year in both truckload and LTL. Our total truckload volume has increased on a per business day basis sequentially each month of this year, including July. The employee additions that we've made into the team over the past several quarters are starting to get their legs under them a bit, a little bit more capable to actually help us drive growth. And, you know, there are signs that the freight market is decelerating. And you probably saw in our client advisory that we published on July 21st that based on the indicators we look at, we now expect truckload costs to decline on a full year basis around 15% for the full year. Now, you know, given that type of environment, what we also believe is that You know, we will continue to see increased acceptance rates in our contractual business. We would expect to see less volatility in the cost of purchase transportation over the next several quarters in that environment, which allows us to lean in a bit more in terms of accepting volume, taking on a bit more risk, because the risk on the downside just simply isn't as great in that type of environment. And so I do feel very confident in the fact that our team should be and will deliver volume growth through the back half of this year. And I think that, you know, if we execute the plan accordingly, we could start to see that, you know, volume growth ahead of headcount growth even by the end of this year.
spk03: Okay, that's great. Thank you very much.
spk10: Thanks, Jack.
spk09: Thank you. The next question is coming from Scott Group of Wolf Research. Please go ahead.
spk12: Hey, thanks. Afternoon, guys. If I go back and look at some prior cycles, your costs and pricing historically have bottomed at sort of low double-digit declines. Sounds like you think it'll be worse this time around, and just curious for your thoughts on why. And then if I look at your price versus cost in second quarter, it was a 650 basis point spread. Do you think that that spread starts to compress from here. And I guess if that does happen, just any thoughts, implications on margins, AGP, all that. Thank you.
spk10: Thanks. Scott, take me back to the first part of your question where you talked about the decline. I wasn't quite tracking that.
spk12: Sure. I mean, if you go back and look, you've been giving us your price and your cost numbers for a while. And, you know, they typically You know, bottom is, you know, double digits. You're referring to slide six?
spk10: Yes. We're looking at slide six in the deck. Okay, got it, got it. Yeah, so, you know, I certainly didn't mean to insinuate that I think it's going to be worse this time. So if that came through, I don't have enough forward visibility to say that I think it's going to be worse this time. I mean, what I would, you know, obviously agree with is we're at an AGP per shipment that is at an all-time high, and we're not modeling our cost structure properly. for how we staff our business or make our investments off of that was the point that I attempted to make in my comments. The last couple of cycles, it's been six or seven quarters peak to trough in terms of the amount of time that it's taken to get there and typically an equal amount up trough to peak. And so I'm kind of using that as the framework for what might likely play out over the course of the next couple of years. typically from peak to average, you know, is a few quarters to kind of get back into that median AGP per file. Now, again, I don't have a crystal ball, but I think oftentimes the past is a good predictor of the future. And so that's what I would use to kind of frame up how we're thinking about this cycle.
spk02: And, Scott, I'd add, you know, relative to the 650 basis points that you're referring to, which is price up one and a half, cost down five, You know, in this business, as you know, price follows cost. And so that spread will really be determined by how steep that cost drop-off is. So if it tapers off, you could expect, I think, that spread to be lower. If it's steeper, that spread gets wider. And so that's really back to how long will it take for this thing to bottom out.
spk12: Okay, that makes sense. And I didn't want to put words in your mouth, Bob. Sorry, I thought you made on the prior question a comment that You think full-year costs are down 15, and so they started up 20, so that implies a pretty sharp drop in the back half.
spk10: Yeah, yeah, yeah. Yeah, that's accurate, Scott. And more specifically, I would say within that advisory, we go on to say that we believe that the first quarter is the only quarter that's going to see any sort of industry-wide price increase. In order to get to a year-over-year down 15, you have to see some decreases in the back half of the year. We're kind of calling... week 43, the floor, because you kind of run into support of the cost to operate a truck at that point. We would expect to see it kick up there for the seasonal, you know, last several weeks of the year leading into the holidays.
spk12: Makes sense. Thank you.
spk10: Thanks.
spk09: Thank you. The next question is coming from Chris Weatherby of Citi. Please go ahead.
spk14: Hey, great. Thanks. Good afternoon, guys. I wanted to come at the 40% operating margins and ask a little bit from the cost side. So you talked a bit about the volume growth and the truckload side, which obviously has been really strong over the last few quarters, as you noted. I guess I want to get a sense in a tougher market, sort of the cost initiative that you're working on. And I know heads are first half weighted, so we'll probably see some benefits as we move into the back half of the year. What are the other things you think can help support that 40% and In the last quarter, you gave us sort of a peek into the second quarter in terms of how things were operating from an operating margin perspective in April. I'm curious if you have the ability to do that in the month of July just to give us a sense of how things are going.
spk10: Yeah, we won't talk about the kind of the sequential operating margins by month within the quarter. Again, maybe Arun and I can kind of take this on together. I mean, if we think about headcount and NAST, definitely believe that the second quarter will be Will be the peak you know we've got a number of interns that will cycle through through the second quarter into the beginning of the third quarter. that'll draw down headcount we we've you know, based on kind of where we see the economy going and what we've added we we are slowing hiring. towards the back half of the year, and so you know and asked if we ended the year with a headcount number that was lower than where we are today, it would certainly not be a surprise to anybody in this room, certainly. you know, as it relates to the highest leverage points of how we drive efficiency and reduce our cost per transaction, it really leads back to the work that Arun referenced that he and the team are leading. And, you know, we've identified, you know, a very specific opportunity to eliminate costs, you know, associated with these, I won't call them non-value added activities because that's not an accurate depiction, but, you know, non-revenue generating activities would likely be the right way to say it, the different parts of the load cycle, the appointments, the load activations, the load acceptances, we have an idea of the amount of operation and personnel expense associated with executing that. And through investments in the whole system and the digitization of those, we see a very realistic way to reduce the operating expenses within NAS. And Arun, if there's anything you'd add.
spk01: Yeah, I would just say, I think Bob nailed it, but it's really scalability of the operating model that we're going after, and that means changing processes, eliminating processes that maybe don't make sense, automating things that ought to be automated, or making self-serve things that are better made self-serve. But that impacts the whole system, like Bob said, the business system and the operating model. And we have clear line of sight in terms of initiatives that drive unlocks in terms of manual work that could be directed elsewhere or manual headcount that could be directed elsewhere.
spk14: Okay. That's helpful. I appreciate the call, guys. Thank you so much.
spk09: Thank you. The next question is coming from Tom Wadowitz of UBS. Please go ahead.
spk06: Yeah, good afternoon. Bob, you've seen quite a few freight cycles. You've got great information for understanding how the cycles work and your commentary today seems fairly cautious just in terms of activity and, you know, kind of coming weakening in freight. Do you think that, I guess when I look at second quarter, it seems like there hasn't really been that much of a decline in activity. You know, if you look at imports, they've actually continued to be pretty strong in first half. So do you think that what we're looking at is a fairly significant step down in And, you know, you're kind of anticipating that in the next month or two, that there's just kind of a delay between the impact of weaker consumer activity and the actual step down in freight. Or are you just saying kind of more of a moderation? And then I guess, I don't know if this is related or not, but on contract and spot, do you think that, you know, kind of contract rates hang in there a bit better or and that there's just a lot more pressure in spot, or you think contract has to have a, truckload has to have a big step down as well? So I guess two questions within that. Thank you.
spk10: You bet. So I'll take the second question first. I mean, we're seeing resiliency in our contract business. And I don't mean to articulate that there's been no changes. There's been no conversations with customers, right? I mean, we're having conversations with customers, and we continue to see that contract portfolio lean more and more towards more traditional, you know, bid cycles, 12-month bid cycles. And I would broadly describe that there hasn't been a tremendous amount of downward pressure on the contract markets. I would expect as we go into the third quarter and the fourth quarter, and go in to see bid renewals. Those bid renewals are going to look different from a pricing standpoint than those that we did in the fourth quarter of last year or the first quarter of this year. My caution, look, I feel great about this quarter. We grew our truckload volume in a down market. Ocean volumes were positive. LTL volumes were down, but we can explain much of that just through a couple of specific customers and customer losses or changes in their activity from the stay-at-home trend. So I feel really strong about the business fundamentals. I'm concerned about the state of the consumer based on what we're seeing from some of the retail reports over the course of the past several days here. I'm seeing us working with retail customers moving inventory around intra-company more so than I have at any time in the past. And so I think the inventory thing is real and we're starting to see that and feel that in the business. I try to be cautiously optimistic in any scenario, but I think we have a very clear path to continue to drive growth in the back half of this year across our services. I don't know, there's probably 200 million truckloads that aren't hauled by C.H. Robinson right now. So the market itself, whether it goes into recession or contraction or expansion, that shouldn't be the limiter of growth for, for Robinson. So that hopefully that helps Tom.
spk06: Yeah. And it's really focused on the market. Not so much. You know, your business has performed remarkably well in the quarter, right? It was a great, great quarter, you know, and you can do better than the market, but it was more a question on the market. So it sounds like you think maybe more moderation as opposed to a big step down in activity for in the market.
spk10: It, it, I think that's right. I mean, if I just look at the DAT load-to-truck ratio, and that's one that we use in our client advisories and we look at it internally, I mean, we're coming off of ridiculous high levels of load-to-truck ratios. In January, it was 12 to 1 or whatever. Last year, it was 5.75 to 1. It's basically right now at the five-year average, 3.6, 3.7 to 1. And so this feels a lot different, obviously, for all of us industry participants than it did 12 months ago. But it's kind of average. I don't think we're in the freight recession or freight Armageddon. I just think we might have forgotten what average feels like for a while here. And the business is executing. Routing guides are holding up. First tender acceptance rates are up. So I don't think that, again, from where I sit, I think we've got a healthy market still. But we should exercise caution and a forward look.
spk06: Sure. Makes sense. Thanks for the time.
spk10: Thank you.
spk09: Thank you. The next question is coming from John Chappelle of Evercore ISI. Please go ahead.
spk08: Thank you. Good afternoon. Bob, Jordan kind of alluded to this as it related to the forwarding community, but in the traditional broker business with the NAST, what's the competitive landscape shaking out like? I mean, on the one hand, you have you know, some pretty full pockets from a phenomenal last few quarters. But on the other hand, the labor market is still tight. Inflation is really high. There's a lot of uncertainty in the market right now. Does this push a lot of the smaller brokers out? And does that provide opportunity and or risk to CH Robinson going forward?
spk10: You know, it's interesting that there's some 20,000 different, you know, property brokers in this industry, right? And from small mom and pops that operate other house to those are the size and scale of ours. So one of the biggest challenges, I think, for – I think one of the reasons why there's so many small brokers and so many very few of scale is one of the biggest challenges is just simply working capital. And as truckload pricing has been so high over the course of the past couple of years, it takes a lot of working capital in order to fund and scale a business like that. So I think many of those businesses have been constrained based on that. If we start to see the market come down, you may likely see some exodus of some of those smaller – smaller brokers. But, you know, given their size relative to ours, there's not a real, I don't know, I want to say an eminent threat to our model that comes from that population. You know, I think, you know, many of the upstart companies that have come on in the last five years that have gotten to some scale that have been largely funded by VC and private equity, likely their owners are taking a different approach right now to profitability versus growth at all costs. And so, you know, I think that adds some rationalization to the overall environment that we're seeing and that we're competing in and winning in every single day. Okay. That makes sense. Thanks, Bob. Okay. Thank you.
spk09: Thank you. Ladies and gentlemen, this brings us to the end of the question and answer session. I will turn the floor back over to Mr. Ives for closing comments.
spk15: That concludes today's earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a good evening.
spk09: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.
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