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spk13: Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Third 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, November 2, 2022. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
spk19: Thank you, Donna, and good morning, everyone. On the call with me today is Bob Beesterfeld, our President and Chief Executive Officer, Arun Rajan, our Chief Operating Officer, and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2022 third quarter results and outline some new cost reduction actions. Arun will provide an update on the innovation and development occurring across our digital 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 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.
spk14: Thank you, Chuck, and good morning, everyone, and thank you for joining us today. On our second quarter earnings call in late July, I talked about a deceleration in demand that we were expecting to see in the second half of 2022 in three large verticals for freight, including weakness in the retail market and further slowing in the housing market. We're now seeing those expectations play out. and with slowing freight demand and price declines in both freight forwarding and surface transportation markets. Throughout the changes in the freight cycle, we've maintained our focus on continuing to improve the customer and carrier experience while scaling our digital processes and operating model to foster sustainable and profitable growth. Today, we believe that we're entering a time of slower economic growth, where freight markets will continue to cool from their pandemic peaks and will operate more reliably at more normalized rates with fewer disruptions. These changes in market conditions, coupled with many successful endeavors on our digital roadmap directed at scaling our model to be more efficient, are allowing us to take actions to structurally reduce our overall cost structure. Compared to our third quarter operating expenses, the actions we're currently taking are expected to generate $175 million of gross cost savings on an annualized basis by the fourth quarter of 2023. Inflation, other headwinds such as annual pay increases And tailwinds such as lower incentive compensation are expected to result in net cost headwinds of $25 million in 2023 that we expect to partially offset the gross savings, resulting in net annualized cost reductions of $150 million by fourth quarter of next year. We also continue to identify opportunities to accelerate our enterprise-wide digital and product strategy. To drive greater impact and speed of execution, Arun Rajan has been promoted to the role of Chief Operating Officer. Since joining CH Robinson in 2021, Arun has been a critical contributor to and strategic leader of our digital and product strategy. Arun is helping us to think and act differently as we accelerate our pace of digital transformation and scale our operating model. In his new role, in addition to leading the product organization, Arun will have expanded direct responsibility for both technology and marketing organizations, bringing these three critical functions together under a single vision and leadership structure will allow us to integrate these functions more deeply into single-threaded teams and to put the needs of our customers and carriers at the center of our organizational design to ensure that we're positioned well to meet the needs while accelerating the impacts across the business units of C.H. Robinson. Arun's teams will work directly with the business unit presidents to operationalize these efforts. Now let me turn to a high-level overview of our third quarter results for North American surface transportation and global forwarding. In our NAS truckload business, we grew our year-over-year volume for the sixth quarter in a row, albeit with a modest shipment growth of a half a percent. Volume growth in drop trailer, flatbed, and temperature control was partially offset by a decline in our dry van volumes. Within the quarter, we saw mid-single-digit volume increases in July turn into declines in August and September as freight demand weakened. Our adjusted gross profit, or AGP, per shipment increased 20.5% versus the third quarter of last year due to a meaningful increase in our contractual truckload AGP per shipment. On a sequential basis, our truckload AGP per shipment came down 15% from the record peak we saw in the second quarter, but remains above our historical average. The sequential decline was particularly pronounced in the spot market, where our AGP per shipment declined 25% as we continued to pursue volume in the spot market and collaborated with our customers to use the spot market as part of their procurement strategy. During the third quarter, we had an approximate mix of 65% contractual volume and 35% transactional volume, compared to a 60-40 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 from 1.4 in the second quarter to 1.3 in the third quarter, which is the lowest level we've seen since the pandemic impacted the second quarter of 2020. Changes in the national drive-in load to truck ratio also reflect the softening of the freight environment. While this ratio was between 3 and 4 to 1 for most of the third quarter, it has declined throughout October. with the latest reading approximately 2.6 to 1 in week 44. The sequential declines in truckload line haul cost and price per mile that we saw in first and second quarter continued throughout the third quarter. This resulted in approximately 17% year-over-year decline in our average truckload line haul cost paid to carriers, excluding fuel. Our average line haul rate billed to our customers, excluding fuel surcharge, decreased year-over-year by approximately 13%. This resulted in a year-over-year increase in our NASC truckload AGP per mile of 15.5%. Consistent with historical patterns, we expect to reprice approximately 60% of our contractual truckload business in the fourth quarter of 2022 and the first quarter of 2023. Encouragingly, our win rate on large contractual bids in the third quarter improved year-over-year as we pursued profitable share gains and responded to a changing market. In our NAST LTL business, we generated quarterly AGP of $161 million in the third quarter, up 23% year over year. This was through a 24.5% increase in AGP per order and partially offset by a 1.5% decline in volume. The LTL volume decline was driven by decreases in final mile, temperature controlled, and consolidation, while our common carrier business, which is the largest component of LTL, had flat volumes. In our global forwarding business, we're now seeing the market correction that has been anticipated. High inventories, reduced consumer spending due to rising inflation, and a muted peak season have all contributed to reduced import demands, which have also led to declining prices for ocean and air freight. For the third quarter, global forwarding generated AGP of $248.4 million, representing a year-over-year decrease of 20% versus a record high for a third quarter in 2021. Within these results, our ocean forwarding AGP declined by $55 million, or 26% year-over-year. This was driven by a 24% decrease in AGP per shipment and a 2.5% decrease in shipments. This is compared to a 12% volume growth in the third quarter of last year. The slowdown in global ocean demand was most evident on the US West Coast, where rates and volumes declined more than other trade lanes and allowed port congestions to ease. Activity on the US East Coast remains stronger as freight continues to be diverted from West Coast ports and due to relatively stronger demand in the transit Atlantic trade lane. Improving ocean schedule reliability and the ability for shippers to accept longer transit times has resulted in conversion of some air freight back to the ocean. This, combined with the slowdown in global demand, has impacted air freight volumes and pricing. Air freight capacity also continued to improve and drive prices lower in many trade lanes due to increased belly capacity on more frequent commercial flights. AGP in our air freight business declined $12.5 million, or 21% year over year, driven by a 16.5% decrease in metric tons shipped and a 5.5% decline in AGP per metric ton shipped. Overall, the forwarding team continues to provide differentiated solutions and customer service, selling aggressively in the market and leading to further additions of new customers and diversification of industry verticals and trade lanes, In the third quarter, for example, 60% of our AGP from new business was generated from trade lanes other than the Trans-Pacific Lane. Additionally, we've attained the status of being the leading ocean freight forwarder from India to the U.S. and from the U.S. to Australia. As shown on slide 10 of our earnings presentation, expanding our capabilities and presence in key industry verticals, trade lanes, and geographies is an important part of our sustainable growth strategy. For the enterprise, we continue to believe that through combining our digital solutions with our global network of logistics experts and our full suite of multimodal services, we are uniquely positioned in the marketplace to deliver for our shippers and carriers regardless of market conditions. We believe our strategy and competitive advantages will enable us to create more value for customers and in turn win more business, increase our market share, and enable sustainable, profitable growth. With that, I'll now turn the call to Arun to walk you through the product innovation and development that's occurring across our digital platform.
spk12: Thanks, Bob, and good morning, everyone. I'll begin by saying that I'm excited to take on an expanded role as the company's chief operating officer. I look forward to further building integration between our digital product strategy and our technology and marketing teams to accelerate delivery and adoption of our meaningful products, features, and insights to both sides of our two-sided marketplace. During the third 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. Due to the digital improvements that have been delivered, the number of carriers booking loads via Navisphere Carrier in Q3 increased 77% compared to the third quarter of last year. Since providing carriers with enhanced capabilities to place digital offers on loads via Navisphere Carrier, which improves the carrier experience and our productivity, we saw a 34% sequential increase in digital offers from Q2 to Q3. Another data point that demonstrates our progress is the execution of 658,000 fully automated bookings with carriers in our NAS truckload business during Q3, which is an increase of 87% compared to the same quarter last year and represented $1.2 billion in digital bookings in Q3 alone. Broadly speaking, we're focused on providing scalable digital solutions that deliver improved customer and carrier experiences and service levels by working backwards from their needs. Much of this is about operationalizing our information advantage at scale through features such as backhaul load recommendations for carriers. On the customer side, it's about getting customers insights around price and coverage. And one way to do this is to scale our market rate IQ and procure IQ products. Scalable digital processes will enable us to decouple volume and headcount growth and drive increased productivity and we are laser-focused on opportunities to automate or make self-serve processes that are core to our operating model. This includes increasing the digital execution of all the touchpoints in the lifecycle of a load, including order management, appointments, in-transit tracking, cash advances, and financial and documentation processes. Scaling these processes are foundational to being the lowest-cost operator, which ultimately gives us the pricing flexibility to accelerate growth and gain market share in the two-sided marketplace that we serve while delivering our long-term operating margin targets. I'll turn the call over to Mike now to review the specifics of our third quarter financial performance.
spk06: Thanks, Arun, and good morning, everyone. Our Q3 enterprise results reflect truckload volume growth in NAST along with sequential and year-over-year price declines on softening demand in the freight forwarding and surface transportation markets that Bob referenced earlier. Our third quarter total company AGP was up $43 million or 5%, with growth in NAST partially offset by the decline in global forwarding. On a sequential basis, total company AGP declined 14% from our record AGP in Q2, with declines in both NAST and global forwarding. On a monthly basis compared to 2021, our total company AGP per business day was up 20% in July, down 1% in August, and down 2% in September. Q3 personnel expenses were $437.5 million, up 9.4% compared to Q3 last year, primarily due to a 13% increase in average headcount. On a sequential basis, personnel expenses declined $7.2 million due to lower incentive compensation. Our Q3 ending headcount also declined 1% from the end of Q2, which is consistent with our stated expectation of flat to declining headcount in the back half of the year. For the full year, we continue to expect our personnel expenses to be approximately $1.7 billion, which is the high end of our original guidance. This excludes one-time restructuring expenses in Q4 of $15 to $20 million related to the cost savings initiatives that Bob described. Moving on to SG&A, Q3 expenses of $162 million were up $28.5 million compared to Q3 of last year, driven primarily by increases in legal settlements, purchase services, and travel expenses. For 2022, we now expect our total SG&A expenses to be in the high end of our original guidance of $550 to $600 million, including the $25.3 million gain in Q2 from the sale and leaseback of our Kansas City Regional Center, which is largely offset by non-recurring legal settlement expenses. We also now expect 2022 full-year depreciation and amortization to be $90 to $95 million, which is down from our previous guidance of approximately $100 million. Interest and other expense totaled $16 million, down $0.7 million versus Q3 last year. Q3 this year included $20.8 million of interest expense, up $7.7 million versus last year, primarily due to higher average debt. The increased interest expense was partially offset by a $5.2 million gain on foreign currency revaluation. In Q3 of last year, FX revaluation was a $3.8 million loss. Our Q3 tax rate came in at 16.9% compared to 16.0% in Q3 last year. Our year-to-date tax rate is 19.2%, and we continue to expect our 2022 full-year effective tax rate to be 19 to 21%, assuming no meaningful changes to federal, state, or international tax policy. Q3 net income was $225.8 million, down 8.6% compared to Q3 last year, and we delivered diluted earnings per share of $1.78, down 4% versus last year, but up 78% compared to Q3 of 2020. Turning to cash flow. Q3 cash flow generated by operations was a record $625.5 million compared to $73.5 million used by operations in Q3 of 2021. The $699 million year-over-year improvement was primarily due to a $359 million sequential decrease in net operating working capital in Q3 driven by the declining cost and price of purchased transportation in our model. Conversely, Q3 of last year included a $412 million sequential increase in net operating working capital as costs and prices were rising. From the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1.5 billion. As the cost and price of purchased transportation have come down, we have realized the benefit to working capital and operating cash flow on a lag basis based on our DSO and DPO. To the extent that freight prices continue to decline, we would expect a commensurate reduction to working capital. Capital expenditures were $31.3 million in Q3 compared to $22.7 million in Q3 last year. We expect our 2022 capital expenditures to be at the high end of our previous guidance of $110 to $120 million. Driven by the increased cash flow in Q3, we returned approximately $607 million of cash to shareholders through a combination of $536 million of share repurchases and $71 million of dividends. The Q3 cash return to shareholders significantly exceeded net income and was up 156% versus Q3 last year, driven by the record cash flow. From a capital allocation standpoint, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our share repurchase program to deploy excess cash. Now on to the balance sheet highlights. We ended Q3 with approximately $1.1 billion of liquidity comprised of $896 million of committed funding under our credit facilities and a cash balance of $188 million. Our debt balance at the end of Q3 was $2.2 billion, up $472 million versus Q3 last year, primarily driven by share repurchases due to our expanded capacity to borrow given our EBITDA performance. Our net debt to EBITDA leverage at the end of Q3 was 1.36 times, down from 1.39 times at the end of Q3 last year. Finally, as Bob discussed, we are taking actions to reduce our costs by $175 million. When including expected net headwinds of approximately $25 million driven by inflation and merit increases in 2023, we expect to realize net annualized cost savings of $150 million by the fourth quarter of 2023. This savings is in comparison to the annualized run rate of our operating expenses in the third quarter this year. Related to these actions, we are expecting non-recurring restructuring charges in the fourth quarter of this year of approximately $15 to $20 million, which are incremental to our 2022 expense guidance, as I mentioned earlier. These net annualized cost savings are intended to be long-term structural changes. Investments to scale our digital processes, particularly in NAST, enable us to take these actions and adapt to changing market conditions to foster long-term profitable growth for our shareholders. Now I'll turn the call back over to Bob for his final comments.
spk14: Thanks, Mike. As inflationary pressures weigh on consumer discretionary spending and global economic growth, we continue to believe that our global suite of services, our growing digital platform, our responsive team, and our broad exposure to different industry verticals and geographies supported by our resilient and flexible non-asset-based business model put us in a position to continue to deliver strong financial results. But we also need to continue evolving our organization to bring focus to our highest strategic priorities, including keeping the needs of our customers and carriers at the center of what we do while lowering our overall cost structure by driving scale. The work that our team is executing on related to scaling our digital processes and operating model while working backwards from the needs of our customers and carriers is entirely focused on driving improvements in our customer and carrier experience, which in turn will drive market share gains and growth. We're focused on improving productivity, which in turn reduces our long-term operating costs and increased profits, leading to continued strong returns to shareholders. This concludes our prepared comments. And with that, I'll turn it back to Donna for the Q&A portion of the call.
spk13: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We do ask that you please limit yourself to one question to allow as many questions today as possible. Again, that's star one to register a question. The first question today is coming from Todd Fowler of KeyBank. Please go ahead.
spk05: Great. Thanks and good morning. Bob, I guess maybe to start, you know, if you can maybe share with us on the cost savings that you're expecting going into 23 Yeah, maybe some comments around the buckets where you see those savings coming from, you know, how we should think about those across segments. And as you think about kind of this initial stab on the cost side, you know, do you see additional opportunities as you move beyond this? Do you have to wait until you get to the end of these cost savings for some other opportunities? Or can you identify some things as you continue to move forward? So a lot kind of packed in there, but maybe you can share some thoughts on that.
spk14: Thanks. Yeah, I can start and I'll let Mike weigh in a little bit too, Todd. You know, in general terms, if you think about our cost structure right now, it's about 75% personnel, 25% SG&A. And so generally, I think about the cost reductions kind of following that same approach. You know, as we look forward, I think there's really kind of three drivers in terms of what's driving these cost reductions. Obviously, You know, we're seeing a changing marketplace. We're seeing supply chains operate more efficiently, more effectively with less disruptions. And so over the course of the past couple of years, we've had to really ramp staff in order to deal with many of those exceptions. Just it required more human engagement, more human labor. And as supply chains ease, it'll allow us and afford us the opportunity to make some difficult personnel decisions there in order to take costs out of the model. Additionally, as Arun talked about, a lot of work on the digital endeavors to scale the overall model and drive efficiency in the model that too will provide us those opportunities.
spk06: Yeah, I think that covers it. I think I put an additional emphasis just on the digitization efforts. And while 175 worth of cost reduction initiatives, net 150 is important for our model, it's not where we end. It's just an articulation of the progress that we're making. And that digitization is really the key for us to continue to drive costs down going forward.
spk14: And I think, Todd, too, you asked kind of by segment, and I would just state that, you know, this will be broad-based, you know, primarily NAST and forwarding related, but there will be cost reductions, you know, across the enterprise.
spk11: Okay.
spk16: Thanks for the thoughts. Thanks, Todd.
spk13: Thank you. The next question is coming from Jason Seidel of Cowan. Please go ahead.
spk04: Thank you, operator. Bob and team, good morning. Appreciate you taking my call. You know, we've been seeing a lot of talk about spot pricing in the truckload sector, and there's been some talk about maybe finding a bottom here, if you will, for a bit. Would love to hear some of your thoughts on that, and then maybe if I can squeeze one more in. Just thoughts on that 60% of the new business being generated from lanes other than Transpacific in global forwarding. I thought that was rather interesting. I wonder what's behind that.
spk14: Yeah, so I'll talk a little bit about the cycle and spot more specifically. We often use the TMC routing guide as a proxy for kind of where we see the industry overall in terms of routing guide performance. And obviously, it's critical to understand how effectively routing guides are holding up in the contract space to kind of get a sense of the unplanned freight that moves into the spot. The TMC routing guide depth of tender was hovering around 1.3. In September, it dropped to 1.24. And so when we look at that from a historical context, from a load acceptance perspective, that's really reflective of times like 2009, 2019, and the first half of 2020. So I think that kind of helps to paint the picture of the current, you know, contract compliance that exists. In terms of where we see the cost market going, in general, as we think about 2023, we think that the cost forecast that we have have the beginning of the year and the end of the year looking pretty similar, but with a deceleration in spot pricing and truckload pricing in the first half of the year with a slight reacceleration in the back. with we kind of think that that floor, the cost floor comes in kind of that April, May time period. And so there is very little unplanned freight in the spot market today. I think we are seeing a number of shippers intentionally use the spot as a mechanism to capture lower cost savings and keeping some freight out of the contract market. As it relates to your second question around forwarding, you know, we're certainly proud of our leadership position in the Trans-Pacific. And we continue to add business in the Trans-Pac, but we've also been very focused on diversifying the overall global forwarding portfolio so as not to be so reliant upon that. And so, you know, seeing strong growth in Europe and Southeast Asia, Oceania, Australia, LATAM, India as examples. You know, we climbed to the number one spot as the leading forwarder from India to the U.S., as well as from the U.S. to Australia. So hopefully that gives you some color.
spk04: So it was more a concerted effort to diversify yourself as opposed to just where the market was going in general. Yes.
spk16: Perfect. Thank you very much for the time. Appreciate it. Thank you.
spk13: Coming from Brian Ostenbeck of J.P. Morgan, please go ahead.
spk02: Hey, good morning. Thanks for taking the question. So I just want to come back to the conditions in the contract market, Bob. You had a 55-35 split. You had spreads with spot market contract kind of widening out through the quarter, but margins came in a little bit weaker than we would have thought, or at least that was historically suggested. Was that the compliance aspect of it that caused some of that weakness? Was it just less spot market volume than before? than we would have thought. I mean, it does seem like it declined fairly quickly. And then just a quick clarification maybe for Mike on that legal settlement. It sounds like that's in the SG&A guide and offsetting the other charge-offs. I wanted to see if you could expand on that and perhaps where that was located from a segment perspective because that was a fairly large number you just called out.
spk14: Yeah, so if I go to the truckload AGP, what we saw in the quarter, Brian, was continued strength in the AGP per truckload shipment in our contract business. So that was up considerably on a year-on-year basis. So the model is reacting in the contract business as we would expect it to. Our spot business, as we continue to pursue share and grow volume in the spot, You know, we've had to get really aggressive in that area in order to grow volume. And so you're seeing a pretty significant drag on the overall AGP for shipment just based on that 35% of the volume that's in the spot. So our margins in spot, our AGP for truckload shipment today in spot are much lower than they are in the contract space. It's really the inverse of where we were in the third quarter of last year where the margins in spot were far greater than that of the contracts. And that's kind of flipped as it sits right now. But But net-net, our AGP per truckload is up considerably compared to Q3 of last year and continues to be above the historical average.
spk06: And then, Brian, just to add a little bit of clarity on SG&A, we were up 21% in the quarter, 28 overall, guiding to the high end of our original guidance, including the $25 million gain on the sale-leaseback of our Kansas City Regional Facility, which was in Q2. But we also had called out, in your point, about non-recurring legal settlements in the quarter and on the year largely offsetting that gain from Kansas City. And so just a little more specifically in the quarter on the legal settlements, you know, they represented about a third of that increase in expense in SG&A for Q3.
spk02: And, Mike, which segment in particular did that impact, or was that more in the corporate sector? line item?
spk06: Yeah, it's a corporate line item, but impacting, you know, the NAS business.
spk11: Okay, thank you.
spk13: Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.
spk08: Thanks, operator, and good morning, everyone. Bob, just going back to your second quarter commentary back in July, you had some pretty cautious outlook comments, especially with regard to global forwarding. And it looks like that caution was on point. You had division EBIT down almost 50% sequentially. So I guess we were a little surprised to see that you were still adding headcount there, up about 100 people quarter over quarter, just Maybe you can help us to reconcile those two things, why you were adding when the outlook was so conservative.
spk14: Yeah. In forwarding, admittedly, we likely got ahead of ourselves in terms of headcount. We certainly did not expect that the market was going to come down as rapidly as it did. We were certainly cautious. A lot of the headcount, the way that we pre-plan our workforce plans, Bruce, were hiring in advance of opportunity. And so many of those hires were already in, I'd say, in flight leading into the quarter. They were offers that had been extended and accepted. And we didn't feel like it was the right thing from the talent brand perspective to be rescinding offers in that environment. So, you know, as we talk about, you know, the cost reduction initiatives and kind of that balance between SG&A and personnel, that will clearly, you know, deliver a drawdown in headcount commensurate with the cost reduction. And as I said before, that'll be focused primarily on asking for it.
spk08: Okay, fair enough. And then just maybe to follow up really quickly, can you give us an update on how you're thinking about the portfolio, just in terms of you know, strategic alternatives that maybe you consider, what businesses you see as core or non-core, and whether you have any kind of processes in place to maybe monetize, you know, some of those assets.
spk14: Yeah, you know, Bruce, I think it's really prudent to continually review the business portfolio and to assess the best way to create long-term shareholder value, right? That goes without saying. You know, as you see in our earnings back on slide 10, we continue to believe that global growth and continuing to drive share gains through our integrated solution design between forwarding, surface trans, managed services, and fresh, are part of that sustainable growth strategy. And each of them, in its own way, kind of feeds the flywheel of growth overall. You know, particularly across NAST and forwarding, as we look at instances where we engage customers with both of those services in comparison to where customers just engage one or the other, we see on a five-year category, we see over a $450 billion basis point increase in the five-year revenue CAGR growth rate of customer revenue when we integrate both services with those customers. So we see greater growth and greater retention. And so, you know, again, we continue to review the portfolio. We continue to, you know, take the view that we have to do what's right for the customer, for the company, and for the long-term value of our shareholders. But there is nothing to update today specific to the portfolio.
spk08: Okay. Appreciate the color.
spk13: Thank you. The next question is coming from Jack Atkins of Stevens. Please go ahead.
spk03: Okay, thank you. Good morning. I guess first, just a quick housekeeping item. Mike, so was the legal settlement in the third quarter about $8 or $9 million? And I just want to make sure, is that in NAST or is that in corporate? So that's my, I guess, first part. I guess secondly, when we think about the $150 million in cost savings. Can you help us think about why is that taking four quarters to implement? And then I guess bigger picture, Arun, as you execute on your technology initiatives within your purview, would you expect that number to potentially expand over the course of the next few quarters as you see additional efficiency opportunities?
spk06: Yeah, Jack, let me just start off and cover your question about the legal settlements in Q3. The legal settlements were $9.4 million. They impact NAST, the business.
spk14: Yeah, and Jack, in terms of timing, we're going to take the appropriate pace to this to ensure that we're able to not disrupt the business, not disrupt our customer relationships, and not put future growth at risk. Arun can talk about the roadmap and kind of some of the things around operationalizing, and we've talked about kind of making self-serve automating and eliminating some of those legacy tasks, and so some of this will phase in as those are delivered as well.
spk12: Yeah, Jack, so right now we have a clear roadmap to increase productivity in NASK by roughly 15% by the end of 2023, which all ladders up to the $150 million that Bob described. As it relates to additional opportunities, so if you recall, we've talked about the lifecycle of a load, so starting from order management to appointments to in-transit tracking and financial documents, et cetera. What we're focused on as part of this initial unlock of 15% productivity improvement is on in-transit tracking and appointments. Having said that, there are certainly the other opportunities that are starting, that are probably earlier in the cycle. We have more confidence in the 15% based on in-transit tracking and appointments. As we gain confidence in other efforts, there's likely more opportunity, but we don't have line of sight to that just yet.
spk03: Okay, thank you.
spk13: Thank you. The next question is coming from Jordan Alliger of Goldman Sachs. Please go ahead.
spk01: Yeah, hi. Morning. Maybe just following up a little bit. Can you talk to a little more of the timing of the cost savings as they roll through next year? Is it evenly spaced? And is there a way to get some sense for what SG&A and personnel expense could look like in 2023 after all these savings? And then finally, I know you don't give guidance per se, but Holistically, thinking about this plan and the productivity savings you just mentioned, can that EBIT margin stay north of the 30% level for the total company? Thanks.
spk06: Yeah, just in terms of the timing on the expense savings initiatives, we obviously want to get after those as quickly as possible, but as Bob said, we've got to do it with the right cadence in terms of what we're delivering on the business, the market conditions, the pace of the digital efforts. We, in our normal course, will come back and give you guidance on many of our expense line items on our Q4 earnings call.
spk14: Yeah, and in terms of kind of the operating profits of the business, we will continue to work backwards from our stated operating margin targets of 40% for NASC, 30% for forwarding, and mid-30s for the enterprise. And so we're using that as a guide as we continue to move forward here and kind of the solve for. And so that in itself will help to kind of determine the pace in which the cost reductions come.
spk16: Okay, thank you.
spk13: Thank you. The next question is coming from Ken Hexter of Bank of America. Please go ahead.
spk09: Hey, great. So, Mike, just to clarify, because I know we keep getting on this cost, I guess, because it wasn't as explicit as possible. The $25 million gain last quarter is just partially offset by the $9 million legal sentiment, right? It wasn't a full offset. I just want to clarify that from your earlier statement. And then... I guess looking at the difference, Bob, on the profitability on NAST and in truckload in specific, was there just inordinate fuel gains last quarter that added to this? I'm trying to figure out why the sequential decline in these margins, what shifted here to make that? I mean, your percentage went down from on the spot from 40 to 35, right? So you went up on the contract, and so you said the contract margins were much, much greater. Just trying to figure out why that margin then overall went down so dramatically, and is it worth then chasing that spot volume business? Is it still contributory?
spk06: Yeah, Ken, let me take your first part of your question just to make sure we're clear on that SG&A question. You know, the comments about Q2 and the Kansas City gain were in the context of our annual guidance being at the high end of our original guidance that we gave on SG&A. And so with that, we had one-time legal settlements in Q3, but we also had smaller settlement in Q1, and we're really talking about what we believe will happen for the year. So the comment about, you know, non-recurring legal settlements largely offsetting the $25 million gain was really a comment about the year in its entirety, all of 2022, not just what we experienced in Q3, which was a $9.4 million charge for non-recurring legal settlements. Hope that's clear.
spk14: Yeah. Yeah, and as it relates to the contract business, as you know, the contracts are constantly repricing, and so part of the drag on the contract you know, AGP per shipment in third quarter was caused by, you know, bids that we repriced in the second quarter and through the third quarter that are resetting at lower AGP per shipment. You know, we've seen costs, you know, they came down precipitously, if that's the appropriate word to use, you know, in the second quarter, which caused that record spread that we had, the highest AGP per shipment in our history. And so, you know, as costs have normalized, as contracts are repricing we're still in a place where we feel very good about kind of the health of the contract portfolio. The spot market business is still contributory in terms of pursuing those share gains and those volume gains. So, yes, it's down from second quarter. We certainly didn't look at the second quarter as being a sustainable adjusted gross profit per shipment, and certainly we're not building any plans around that. But to be clear, too, There is no fuel impact to our truckload business. It's a straight pass through. There is headwinds and tailwinds with fuel in our LTL business. When fuel is going up, it tends to benefit our LTL business. When it comes down, it's a headwind.
spk09: And then just to clarify on the $150 million, Bob, is that a shift in incentive comp pay and commission structure, or is that just reducing the people, as you mentioned earlier, given the digitization, just to get started for the following.
spk14: Yeah, it's going to be a, there's going to be a component of all of the above to that. You know, we think there's puts and takes, headwinds, tailwinds in terms of next year. Incentive comp will be a tailwind. You know, reduced headcount will be an impact. So there's enough, you know, as I said, kind of at the onset of the call, if you think about 75-25 being the split between personnel expense and SG&A, you know, one way or another, it will likely closely follow that.
spk11: All right. Appreciate the time, guys. Thank you.
spk13: Thank you. The next question is coming from Bascom Majors of Susquehanna. Please go ahead.
spk15: Just going back to forwarding, if we look at the sequential trend, gross profit was down $75 million or so from 2Q to 3Q, yet operating costs were up $6 million. Can we drill into that a little more besides the ad count question earlier, just how much of this is a lag ability to respond and how much of this is a structural cost increase? Because if we look at spot rates, it seems that that pressure will certainly be more this quarter than last and with the West Coast being all the way back to call it 2018 levels, but the cost structure and OPEX and forwarding being 50% above that this quarter.
spk16: So any thoughts on that would be really helpful. Thank you. Yeah, it's almost exclusively personnel expense basket. And the ability to control that going forward?
spk14: As part of this, there is a plan in place to control that moving forward. We continue to believe that 30% operating margins is the appropriate level of profitability for that forwarding business. And so as we think about how do we solve for that, it's It's really three levels, three levers, right? And I don't mean to oversimplify it, but it's what are the trends in volume, what are the trends in AGP per shipment, and what are ultimately the personnel expenses needed to support that, to deliver that operating margin?
spk16: Thank you, Bob.
spk13: Thank you. The next question is coming from Chris Weatherby of Citi. Please go ahead.
spk07: Hey, thanks. Good morning. I wanted to ask you about your philosophy on volume growth. I think there's been a push to continue to try to gain share through fluctuations in the market and NASDAQ. It sounded like this quarter that was challenging from a spot perspective. I wanted to get a sense of maybe how you think about it. Volume growth was pretty close to break even in NASDAQ. Is it something that you think you can do? Does it make sense to do in these types of markets where you might end up seeing sort of an impact on profitability as a result? I just want to get your sense on how you're thinking about that.
spk14: Yeah, I think in general, as we've talked about before, Chris, we believe that volume growth through the cycles is an important component of the health of the overall business, right? And yet the play that we run, so to speak, is different depending on the market conditions, right? Aaron and his team have a lot of work in place to really, you know, take a systematic approach to maximizing the yield and determining the appropriate level of volume in which corridors and under what terms we should be accepting freight. But in general, I mean, as I look at 2023 and what we expect the marketplace to look like, you know, if we're going to grow volume in 2023, which we expect to do, it will likely come, I won't say exclusively, but it will likely come through the contract market. And so, you know, we'll reprice around 60% of our truckload business between the fourth quarter and the first quarter. And we know that in order to drive growth there, we're going to have to be aggressive in those truckload pricing events. And so I don't know if that directly hits on your question, Chris, but if not, I can certainly build on that.
spk07: Yeah, it does. It's helpful. I guess that sort of gets to the point that you mentioned on the approach to contract pricing. Anything you can share with sort of where the market is today relative to how you might think about that, what type of aggressive actions you might need to take to be able to get share in that piece of the market?
spk14: You know, we feel as though that we've really improved our pricing science, our pricing methodology, and our approach to response to these bids. And we see some clear demand signals in areas of, you know, short haul and drop trailer that we're aggressively responding to. But in general, I mean, What we're seeing, and I won't speak to where necessarily we see the market going, but what I would say is what we're seeing in early renewals in this quarter is that the AGT per truckload shipment is coming in at levels below where our contract freight has been through the last couple of quarters. And so, again, in order to drive growth in NAST in 2023, it's going to have to be fueled by volume growth primarily.
spk16: All right.
spk11: Thank you very much. Appreciate it.
spk13: Thank you. The next question is coming from Scott Group of Wolf Research. Please go ahead.
spk18: Hey, thanks. Good morning. Mike, just a few follow-ups for you. Any color on the 10 million of losses at corporate just seems higher than normal. And then if we're doing our math right, SG&A, does that go higher, Q4 versus Q3, and then Just want to clarify, the $150 million of savings, are you including, are you basing it off the reported three Qs, so including that $35 million, $40 million of annualized legal, or are you excluding the legal settlements when you talk about the savings versus Q3?
spk06: Yeah, so first I'll kind of go backwards. So first of all, the annual run rate is just as reported, so not including the legal settlement. The SG&A, we guided to the high end, and so, yeah, I guess if you take the very high end of our guidance of $600 million and look at our year-to-date, you'd be seeing $172 million, $173 million-ish kind of number would be the Q4 plug there. to get to the high end, which is higher than what we had in Q3 of, you know, 162-ish. And then back to your first question, I think you were asking about in our all other and corporate results, our income from operations, which was a $10 million loss compared to what would have been a $3.4 million loss a year ago, and that's driven by unallocated expenses that we hold at the corporate level, and think about that as primarily our investments and growth in the product organization. In terms of the other business units, like Robinson Fresh Management Services and EST, which are included also in that group, those are generating income positively and up versus Q3 last year.
spk18: Okay. And then maybe just, Bob, real quick, the price versus cost spread still positive, you know, four points in Q3. You think that stays positive into Q4?
spk14: Sorry, can you repeat that? You cut out a little bit. Can you repeat that?
spk18: Yeah. Sorry about that. So the truckload price cost spread down 13, down 17 was still, you know, positive in your favor. Do you think that stays positive in Q4?
spk14: From where I sit right now, I would believe that to stay positive in Q4.
spk18: Thank you, guys.
spk13: Thank you. The next question is coming from John Chappelle of Evercore ISI. Please go ahead.
spk10: Thank you. Good morning, everyone. I think we've covered a lot, Bob, about the ever-evolving market here. It's changing awfully quickly. I was wondering if you can provide some perspective on this cycle versus prior cycles. Most especially, how are some of your competitors acting? You know, if you're going after volume aggressively, maybe at the expense of yield, Are others doing the same? Is it more disciplined this time? Does it offer you a better opportunity for, you know, Robinson-specific market share growth versus prior cycles? Just any context to this, you know, upcoming maybe 12 months versus 19 and 16.
spk14: Yeah, so as I think about these cycles, I mean, each one has its own unique characteristics. But, you know, typically we see that the up cycle lasts seven quarters or so, followed by a similar duration on the down cycle. And so as we think about the next few quarters, we're expecting downward pressure on contractual pricing. In terms of behavior of competitors, I don't think that our strategy is unique to Robinson to say if we want to grow share next year, it's going to come through the contract market. And so I would expect to see aggressive competition and aggressive pricing in the market because that's ultimately, if In normal circumstances, 85% of truckload freight roughly operates in the contract market. Companies will be aggressive to gain their share in that space.
spk10: Would it be fair to say the high highs of this cycle could potentially translate to possibly a higher floor, or does it just make the volatility more extreme?
spk14: You know, it's hard for me to forecast that from where we sit right now. I think, you know, we believe that the cost floor is higher than where it has been in the past. So if you, you know, if you take that, you know, then potentially it means higher lows, if you will. I think what we're seeing from customers today is, you know, in pricing, they're tending to move back towards 12-month duration of their bids. So you know, not seeing as many mini bids or short-term bids and the such, so more normal pricing circumstances. But, you know, customer objectives in pricing is, you know, there's been obviously a lot of disruption to service and cost and networks over the course of the past couple of years. And so, you know, working with shippers to, you know, try to get back to the quality expectations that they had pre-pandemic, in some cases, you know, back to the pricing expectations that they had pre-pandemic, and also helping shippers to kind of reevaluate their network and their network footprints to optimize their overall costs. Got it. Thanks, Bob. Thank you.
spk13: Thank you. The next question is coming from Amit Mahatra of Deutsche Bank. Please go ahead.
spk17: Hey, everyone. Mike, I just had a question. First one, I guess, on the cost savings plan. So I really appreciate the delineation between gross and net cost savings. But just trying to understand how much of that 150 net is actually realized in 23 versus kind of run rating. And then just maybe a bigger picture question for Bob. So, Bob, you said Arun has, you know, helped the organization think and act differently. And I wanted you to expand on that a little bit. And, you know, really, what is the appointment of Arun as COO accelerate? And what's kind of the financial impact implications. I don't know if you think about it that way, but that would be helpful. I'm just trying to sniff out if there's a real change going on because you have, you know, the company has a great market position. It's a high return business. So I'm just trying to see if there's a real inflection with this leadership change at the COO level that we should anticipate as a result of the appointment. Thank you.
spk06: Yeah, just on the first question there, Matt, I, you know, the The run rate or how much of it drops to the bottom line in 2023, that'll be guidance that we provide when we come back on our Q4 earnings call. We, as we customarily do, will provide you guidance for the year on personnel and SG&A that'll help you understand, you know, how that drops and, you know, in comparison to the headwinds on inflation and merit increase and investments and all the rest.
spk14: Yeah, and related to Arun's role in his promotion, I guess what I would say from where I sit is Arun is a seasoned executive, and he's got experience in many facets of executive leadership that extend beyond just product and technology. And while he's highly skilled and technical, he's also, from a leadership perspective, really a transformational leader that elevates the performance of people and teams around him. Expanding his scope at Robinson is going to help us to bring together teams that are critical to advancing our progress in digital which in turn is going to fuel growth and improve efficiency, allow us to compete to win as our industry, right? Our industry continues to evolve and change at a rapid pace. And we're, you know, really thinking about where is this industry going to be, you know, three years from now, five years from now. As I think, you know, my technical knowledge is deep in the supply chain space and his is deep in the world of digital first companies and building scalable platforms. And collectively we complement each other's skill sets and we'll work collectively with each of the business units to achieve our long-term growth goals. The work up to this point has been exclusively focused within the NAST organization, and this allows us a platform to bring together those critical components and work across the enterprise.
spk17: Yeah, so that's fine. But the question I have, though, is does that translate to – like greater drop through of net revenue as net revenue grows, greater market share gains. I mean, that's the real question. And how quickly can kind of this acceleration or change in leadership at the operational level kind of help realize that opportunity?
spk14: Yeah, I would say 100% of the efforts today are focused on scaling procurement, scaling customer demand, you know, and operationalizing those internal changes and improving the yield in the overall marketplace. So creating that two-sided marketplace so we can have the appropriate liquidity, the appropriate cost structure to deal with, you know, lower AGP potentially in the future on a per transaction basis than what we experienced today. And so all efforts are focused on growth in customer and carrier, you know, acquisition, retention, and growth. And then, you know, completely focused on the digital transformation, which in turn drives the lowest operating cost structure in the industry, which we believe we can achieve through these efforts, which in turn enhances profitability. Thanks a lot, Bob. I appreciate it. Okay. Thank you.
spk13: Thank you. Unfortunately, that brings us to the end of the time we have for the Q&A session. I would like to turn the floor back over to Mr. Ives for closing comments.
spk19: Thank you. Yeah, that concludes today's earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a great day.
spk13: Ladies and gentlemen, thank you for your participation and interest in C.H. Robinson. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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