C.H. Robinson Worldwide, Inc.

Q4 2022 Earnings Conference Call

2/1/2023

spk07: Good afternoon, ladies and gentlemen, and welcome to the CH Robinson fourth 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, February 1st, 2023. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
spk12: Thank you, Donna, and good afternoon, everyone. On the call with me today is Scott Anderson, our Interim Chief Executive Officer, Arun Rajan, our Chief Operating Officer, and Mike Zechmeister, our Chief Financial Officer. Scott and Mike will provide a summary of our 2022 fourth quarter results and our outlook for 2023. Arun will provide an update on our path to a scalable operating model to improve the customer and carrier experience, 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 Scott.
spk06: Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. I'd like to start today's call by expressing my appreciation and the Board's gratitude for the contributions that Bob Biesterfeld made to CH Robinson over his 24 years with the company, including his three years as CEO. Under Bob's guidance, CH Robinson navigated the challenges presented by the pandemic and the ongoing supply chain disruptions, and he played an important role in positioning Robinson for long-term success. We wish Bob all the best. In order to accelerate CH Robinson's strategic initiatives and take the company into its next chapter, the board felt that a change in leadership was needed. Jody Kozlak, the newly appointed chair of the board, is leading the search committee to find a new CEO. With Jody's background and expertise, I can't think of anyone more qualified to lead the board and the search process. To give you a little of my background, I've spent over 10 years as a director here at Robinson and the last three years as chairman of the board. I spent the first 25 years of my career at Patterson companies, most recently as CEO from 2010 to 2017 and also chairman from 2013 to 2017 I look forward to working closely with Jody and the board, as well as the whole Robinson team in the coming weeks and months. I'm excited to bring my experience and my knowledge of Robinson to the role of interim CEO. I'm leveraging the relationships I have with the senior leadership team to ensure that we continue delivering superior global services and capabilities to our customers and carriers while continuing to execute with great focus on our sustainable growth strategy. During my first few weeks as interim CEO, I've been meeting with our customers and employees who are highly engaged and motivated to win. And I'm confident in our ability to navigate this transition and deliver for our customers. Throughout the transition, we're increasing our focus on delivering a scalable operating model to lower our costs, improve the customer and carrier experience, and foster long-term profitable growth through cycles. The current point in the cycle is one of shippers managing through elevated inventories amid slowing economic growth, causing unseasonably soft demand for transportation services. At the same time, prices for ground transportation and global freight forwarding are declining due to the changing balance of supply and demand. While a correction in the freight forwarding market was certainly expected, the speed and magnitude of the correction in only two quarters was unexpected, with ocean rates on some trade lanes already back to pre-pandemic levels. As a result, our operating costs were misaligned. As was announced on our third quarter earnings call, we have taken actions to structurally reduce our overall cost structure. The actions are expected to generate net annualized cost savings of $150 million by Q4 2023, as compared to the annualized Q3 2022 run rate. If growth opportunities or economic conditions play out differently than we expect, we'll adjust our plans accordingly. I believe we're uniquely positioned in the marketplace to deliver for our shippers, carriers, and shareholders through a combination of our digital solutions our global suite of services, and our network of global logistics experts. Now let me turn it over to Mike for a review of our fourth quarter results.
spk13: Thanks, Scott, and good afternoon, everyone. Our Q4 financial results reflect the price declines and slowing demand in the freight forwarding and surface transportation markets that Scott referenced earlier. Our fourth quarter total company adjusted gross profit, or AGP, was down $88 million, or 10.3% compared to Q4 of 2021, driven by a 39% decline in global forwarding and partially offset by a 5.7% growth in NAST. The market softness was also prominent on a sequential basis, with total company AGP down 13%, including a 24% decline in global forwarding and an 11% decline in NAST. On a monthly basis compared to Q4 of 2021, our total company AGP per business day was down 10% in October, down 7% in November, and down 14% in December. In our NAS truckload business, our volume declined on a year-over-year basis for the first time in seven quarters, with shipments down 4%. Within the fourth quarter, monthly volume declined sequentially from October through December, as freight demand weakened. Our AGP per truckload shipment increased 6.5% versus Q4 last year due to an increase in our contractual truckload AGP per shipment. On a sequential basis, however, our truckload AGP per shipment came down 6.5%, but remained above our 10-year average. During Q4, we had an approximate mix of 65% contractual volume and 35% transactional volume compared to a 55-45 mix in the same period a year ago. Routing guide depth of tender in our managed services business, which is a proxy for our overall market, declined from 1.3 in the third quarter to 1.2 in the fourth quarter, which is the lowest level we've seen since the pandemic impacted second quarter of 2020. The sequential declines in our truckload line haul cost and price per mile that we experienced in Q1 through Q3 continued in Q4 as excess carrier capacity combined with slowing demand led to the softening market conditions. This resulted in an approximate 24% year-over-year decline in our average truckload line haul cost paid to carriers, excluding fuel surcharges. Our average line haul rate billed to our customers, excluding fuel surcharges, decreased year over year by approximately 21%. With the cost down 24% and price down 21%, we saw a 3% increase in our NAS truckload AGP per mile on a year over year basis. In our global forwarding business, higher customer inventory levels combined with softening demand contributed to significantly reduced import prices for ocean and air freight. In Q4, global forwarding generated AGP of $188.7 million, representing a year-over-year decrease of 39% versus the record high fourth quarter in 2021, which was up 72%. With these results, our ocean forwarding AGP declined $89 million or 43% year-over-year compared to an 86.5% growth in Q4 of 2021. The Q4 results were driven by a 36.5% decrease in AGP per shipment and a 9.5% decrease in shipments. AGP in our air freight business declined by $33 million or 51.5% year over year compared to a 92% growth in Q4 of 2021. This was driven by a 40% decline in AGP per metric ton and a 19.5% decrease in metric tons shipped. Despite the soft market, the forwarding team continues to add new customers and diversify our industry verticals and trade lanes. In Q4, approximately 50% of our AGP from new business was generated from trade lanes other than the Trans-Pacific lane. Now turning to expenses. Q4 personnel expenses were $427.3 million, up 1.7% compared to Q4 last year, including $21.5 million of severance and related charges driven by the restructuring that we initiated in November. The restructuring related costs were partially offset by a decrease in equity compensation as we reversed some previously accrued expense due to financial results that came in lower than previously expected. On a sequential basis, Q4 personnel expenses declined $10.2 million. Excluding the restructuring charges in Q4, personnel expenses declined $31.7 million sequentially due to lower incentive compensation and lower salaries and benefits associated with reduced headcount. Our Q4 average headcount declined 2% versus our Q3 average. The workforce reduction initiated in November affected approximately 650 employees. While nearly 150 of those employees had left the company prior to December 31, over 600 had exited as of early January. As we continue to make progress on delivering a scalable operating model, we expect our headcount to decline throughout 2023 as productivity improves. For 2023, we expect our personnel expenses to be $1.55 billion to $1.65 billion, down approximately 7% at the midpoint, compared to our 2022 total of $1.72 billion, primarily due to reduced headcount. Excluding the restructuring charges in Q4 of 2022, the midpoint of our 2023 guidance for personnel expenses is down approximately 6% year over year. Moving on to SG&A, Q4 expenses of $176.8 million were up $27.9 million compared to Q4 of 2021, driven primarily by $15.2 million of restructuring charges and a year-over-year increase in legal settlements, partially offset by a decrease in credit losses. The restructuring charges in SG&A primarily included an impairment to internally developed software related to the reprioritization of our technology investments that Arun will speak to shortly. Our approach to investments and investment prioritization is more data-driven and more focused on delivering a scalable operating model than in the past, which is improving the value of the benefits we are delivering and allowing us to pivot more quickly if investments are not delivering as expected. For 2023, we expect our total SG&A expenses to be $575 million to $625 million, compared to $603.4 million in 2022. The slight decrease at the midpoint includes an expected decrease in legal settlements in the absence of two one-time items that occurred in 2022. Those include the $15.2 million Q4 restructuring charge and the $25.3 million Q2 gain from the sale and leaseback of our Kansas City Regional Center. 2023 SG&A expenses are expected to include approximately $90 to $100 million of depreciation and amortization expense compared to $93 million in 2022. Q4 interest and other expense totaled $42.5 million, up $24.1 million versus Q4 of last year. Q4 of 2022 included $24.8 million of interest expense, up $10.7 million versus the prior year, primarily due to higher short-term average interest rates. Q4 results also include a $16.9 million loss on foreign currency revaluation, up $10.4 million compared to Q4 of last year, driven by the relative weakness of the US dollar. As a reminder, the FX impacts are predominantly non-cash gains and losses on intercompany balances, which is why they are not hedged. Q4 tax rate came in at 20.9%, bringing our full-year tax rate to 19.4%. We expect our 2023 full-year effective tax rate to be 19 to 21%, assuming no meaningful changes to federal, state, or international tax policy. Q4 net income was $96.2 million, and diluted earnings per share was $0.80. Adjusted or non-GAAP earnings per share, excluding the $36.7 million of restructuring charges, was $1.03, down 41%, compared to Q4 of 21, which was up 61% versus the prior year. Turning to cash flow. Q4 cash flow generated by operations was a record $773.4 million compared to $75.9 million in Q4 of 2021. As we have talked about in prior earnings calls, we were expecting an improvement in working capital when the cost and price of purchased transportation came down. The $698 million year-over-year improvement was driven by a $650 million sequential decrease in net operating working capital in Q4 due to the declining cost and price of ocean air and truckload in our model. Conversely, Q4 of last year included a $200 million sequential increase in net operating working capital as costs and prices were rising. If you look back at the period when cost and price of purchased transportation was rising from the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1.5 billion. Between Q3 and Q4, as the cost and price of purchased transportation has come down, we've realized over $1 billion of benefit to working capital and operating cash flow. That benefit has come in on a lag basis based on our DSO and DPO. Driven by the increased free cash flow generation in Q4, we returned $507 million of cash to shareholders through $438 million of share repurchases and $69 million of cash dividends. The Q4 cash return to shareholders significantly exceeded net income and was up by 128% versus Q4 last year, driven by the record cash flow. Consistent with our capital allocation strategy, to the extent that we have excess cash after managing through our commitments, investments, and holding to an investment-grade credit rating, we are committed to returning that cash to shareholders through share repurchases. Capital expenditures were $27.8 million in Q4, bringing our full-year capital spending to $128.5 million, up $58 million compared to 2021. The increase was primarily due to an increase in internally developed software. We expect our 2023 capital expenditures to be in the range of 90 to $100 million. Now onto the balance sheet highlights. We ended Q4 with approximately $1.34 billion of liquidity comprised of 1.12 billion of committed funding under our credit facilities and a cash balance of $218 million. Our debt balance at the end of Q4 was $1.97 billion, up $55 million versus Q4 last year, primarily driven by our expanded capacity to borrow, given the strong EBITDA performance. Our net debt to EBITDA leverage at the end of Q4 was 1.29 times down from 1.42 times at the end of Q4 last year. As I mentioned, our capital allocation strategy is based on maintaining our investment grade credit rating, which allows us to optimize our cost of capital. As we anticipate reduced earnings in 2023, given the strong results in the first half of 2022, we are planning for a lower level of debt to deliver our leverage targets. To the extent that we reduce our debt levels, this may reduce the amount of cash used for share repurchases. In December, our Board authorized and declared a 10.9% increase in our regular quarterly dividend taking it to 61 cents, beginning with the dividend that was paid in January. We have now distributed uninterrupted dividends without decline for more than 25 years. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our share repurchase program as important levers to enhancing shareholder value. With that, I'll turn the call over to Arun to walk through our strategy to deliver a scalable operating model and strengthen our customer and carrier experience.
spk01: Thanks, Mike, and good afternoon, everyone. During the fourth quarter, we continued to focus our efforts on working backwards from customers' and carriers' needs to build a scalable operating model. A scalable operating model improves customer and carrier experience and improves service levels while simultaneously reducing our cost to serve. These efforts include operationalizing our information advantage at scale by giving customers insights around price and coverage and providing features to carriers that improve their utilization and cash flow. Increased digitization is a key element of the scalable operating model. There are a number of data points that demonstrate our progress in 2022, including 183% increase in loads booked digitally by carriers, and increased digitization across the board as evidenced by 2.3 billion digital transactions with customers and carriers, which represented a 30% increase year-over-year. In 2023, we will continue to deliver meaningful improvements to our customer, carrier, and employee experience by accelerating the digital execution of all touchpoints in the lifecycle of a load, including order management, appointments, in-transit tracking, cash advances, and financial and documentation processes. We made progress on this front in Q4 as well with the automation of appointment related tasks increasing 34% year over year and in transit tracking automation increasing by 450 basis points versus Q3. We are focused on opportunities to automate or make self-serve those processes that are core to our operating model, which we expect will enable us to decouple volume and headcount growth and drive increased productivity while simultaneously improving the customer experience and service levels. Throughout 2023, we'll provide updates on the progress we're making on shipments per person per day, which is a key metric to measure our productivity improvements. During the recent restructuring effort, we continued our ongoing evaluation and prioritization of our tech and software projects. Through the assessment of those projects, we determined that some were no longer relevant to the acceleration of our scalable operating model, and we incurred the restructuring charges that Mike described earlier. The remaining projects are better aligned to improve the customer and carrier experience and reduce our cost to serve, and therefore, we're allocating more of our investments to those projects. We've also taken steps to align compensation and incentives to support our strategic priority of creating a scalable operating model, which is foundational to being the low-cost operator, which ultimately gives us the pricing flexibility to unlock and accelerate long-term market share growth while delivering our long-term operating margin targets. With that, I'll turn the call back over to Scott for his final comments.
spk06: Thanks, Arun. As inflationary pressures continue to weigh on global economic growth and freight markets present cyclical challenges, we need to continue evolving our organization to bring greater focus to our highest long-term 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. I believe in the strategy that the team is executing on to deliver a scalable operating model. We expect this initiative will continue to drive improvements in our customer and carrier experience and amplify the expertise of our people, all of which will drive share gains and growth. And as Arun said, we expect these efforts will also improve our productivity, which will reduce our operating costs and lead to improved returns for our shareholders. I'd like to close by saying thank you to our employees. for persevering during the period of extended market disruption and the market correction that has followed, and for continuing to provide industry-leading service to our customers and carriers. This concludes our prepared remarks, and with that, I'll turn it back to Donna for the Q&A portion of the call.
spk08: 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 two 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. In the interest of time, we do ask that you please limit yourself to one question to allow as many people the opportunity to ask questions as possible. Again, that's star one to register a question at this time. Today's first question is coming from Jack Atkins of Stevens. Please go ahead.
spk14: Good afternoon, and thank you for taking my question so Scott if I could address this to you, you know that the change in. Leadership at the CEO level would would indicate that the board believes that a change in strategic direction is necessary, but. If I listened to the message on the conference call today it's very similar to the message three three months ago from the company, so I guess my fundamental question here is what is actually changing. at CH Robinson today, and as you think about the qualities that you're looking for in the permanent CEO, what are those, and where does the board want to take this company over the long term? Thank you.
spk06: Yeah, thanks, Jack. Appreciate the question. A few things. First of all, the board was unanimous in our decision, and it really was around an opportunity for this to be an inflection point of performance at the company and new leadership being a component of that. um, in terms of making that happen. Um, you know, as I said in my prepared remarks as well, we were also unanimous in our appreciation of Bob's contribution to the company over his career. Um, I think this is a tremendous opportunity, uh, here at Robinson and, and couldn't be more excited after the five weeks I've spent with our people and in the field, um, our core strategy of, uh, uh, building on our, our operating model going forward, I think is solid. Um, Obviously, new eyes in terms of a new CEO will give some perspective to that as well. But strategically, we are absolutely in a spot with global supply chains becoming more complex to be a go-to partner in the future. So this is not a shift in strategy for the company. This is really a shift in sort of accelerating performance and moving at a faster pace.
spk14: And then in terms of the qualities for the next CEO, can you maybe talk about that for a moment?
spk06: Yeah. As I mentioned, Jody Kozlak, our board chair now, is the head of the search committee. Just for background, Jody was the former chief HR officer at Target. So she's familiar in processes like this. We're using a leading executive search firm that's helping the board. We're going to take our time. We're going to be thorough and inclusive, and we're going to be broad in terms of the type of qualities we're looking at for the next CEO. Like I said before, this is a tremendous opportunity for somebody. You know, we're looking for an experienced operator with sharp strategic thinking and someone who really can take Robinson to the next level. I think the next 10 years for Robinson are going to be the most exciting for the company going forward. So the opportunity here is fantastic for the next leader.
spk14: Okay. Thank you for the time.
spk06: Thanks, Jack.
spk08: Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.
spk10: Thanks, operator, and good afternoon, everyone. Maybe just to follow up on the strategic question, and maybe in a little bit more of a pointed way, But when you think about your customer base, how many of them use you for end-to-end service? How many are both Nest and Global Forwarding customers? And then when you think about Bob's kind of statement before that Global Forwarding was an intrinsic part of Robinson, do you feel the same way about that division going forward? Thank you.
spk06: Yeah. First, why don't I turn it over to Mike for some specifics on that, and then I'll give my perspective.
spk13: Yeah, you know, as we look at the combination of NASC and global forwarding, we've seen some great opportunities from a cross-selling standpoint between the two. And, you know, as we pointed out, if you look at the last 12 months, you know, we've had over half of our revenue in AGP comes from customers who use both surface transportation and global forwarding services. You know, we've looked deeper into this. You know, we could probably do a better job at taking advantage of the relationships on both sides, but we have had some pretty compelling results. And I'll share with you one of the studies that we did where we looked at the last five years and we looked at customers who use both NAST and global forwarding versus customers who use one or the other. And the five-year compound annual growth rate for customers who use both was 400 basis points better than those who used one or the other. So we've been able to leverage customer relationships, bring business from NAST customers to global forwarding customers and vice versa. We believe as we think about customers and what they need and what they want, that we can bring a full complement of services that they really need. where they can get stuff from center Asia, center China, to center U.S. with us and do it in a way that is value-added to their supply chain. So we believe in the ability to leverage both of those businesses, and that's our plans going forward.
spk06: Yeah, and I'll add on to that. I was on the board in 2012 when we did the Phoenix acquisition, which really was sort of – the baseline of our modern global forwarding business. And we have built a substantial business in global forwarding and I think have just begun to see those cross-selling benefits. I'm a believer that, as I said before, global supply chains are getting more complex and partners that can solve problems, and I've seen that already in customer meetings I've sat in over the last five weeks, can create tremendous value for multiple players including robinson that being said as a board we always stress test the portfolio and challenge ourselves as to the best ways to drive value for customers and shareholders so you know i would say you know particularly i would say after the last two years we have a great franchise in our robinson global forwarding business and we have a tremendous opportunity in a world where supply chains are just so much important post-pandemic.
spk10: And just a quick follow-up there. You all talked a lot about this new, I guess, global platform and some of the tech changes that you're making. Arun, I didn't hear a whole lot about the global forwarding side of that. Maybe just some quick comments about what's in store on the technology side for forwarding. And ultimately, do you feel that Navisphere is the right platform there?
spk01: Yeah, in terms of scalable operating model, we think of that cross-divisionally across NAST and global forwarding. The opportunity as it relates to creating a scalable operating model exists in global forwarding just as much as NAST. In terms of an increased focus in that context, global forwarding is already down the path, but we believe there are acceleration opportunities that the product and tech organizations will be focused on starting the back half of this year As it relates to Navisphere, I think of Navisphere as a system of record. There is a lot of, much of the work that we're doing that's probably around Navisphere in terms of how we harvest the data out of it, run our algorithms, and present it back to customers and carriers in whatever form they choose to consume it.
spk13: Yeah, I would add on to that that in the global forwarding business, the opportunity for tech enhancements is probably greater. The business is probably further behind truckload in the U.S. for sure and LTL. And so there's more complexity in global forwarding when you get languages, currencies, culture, customs. That makes it a more challenging environment from tech enhancement standpoint. But that being said, the tech enhancements on the Global Forwarding side have been great. They've done some really nice back-house automation. They've got some customer-facing features that have improved services. And they're excited about the tech for 2023. In fact, they've shown the tech to some customers. Nav 2.0 is something that customers are excited about. And it's been a while since our team internally has been excited about the upcoming year with respect to tech and global forwarding certainly is.
spk06: Yeah, this is Scott. I'll just add on just some perspective from the global forwarding team. And, you know, when you have basically a stress test that they've had and the amount of volume they moved and the way they did it over the last two years, they're very open about areas where technology can help them improve. And to echo what Mike just said, you know, we were with Mike Short earlier this week who adds up global forwarding. And, you know, I think he is excited about what's coming, but also excited to drive the change management internally that will get the investment back on the tech investment or the return.
spk03: Okay, great. Thanks for the caller.
spk06: You bet.
spk08: Thank you. The next question is coming from Jeff Kaufman of Vertical Research Partners. Please go ahead.
spk02: Thank you very much. A question for Arun. Arun, when you think of digitalization and digital transactions on the platform, how do you define what's digital versus what's not digital? And thinking about both the forwarding and the NAS businesses separately, where are you in terms of percent of transactions that you consider digital today, and where do you want to be by the time we're finished with this change?
spk01: Yeah, I mean, the way we think about digital versus non-digital is if there's a manual touch, it's generally not digital, right? So you take, you know, in-transit tracking as an example. And I think the way a digital-first company might approach that might be different than a broker's approach for the past couple of decades. And historically, there have been several, you know, lots of touches as it relates to in-transit tracking. And the way I think about it is the less we touch the load as it relates to in-transit tracking, the better it is in terms of both productivity of our internal people, obviously, and equally for our customers, the better experience because you have less variability in service outcomes and it's a more standardized outcome for them. So that's kind of how we think about it across multiple processes in the lifecycle of a load. So think about track and trace, think about document management, payments, appointments, and so on. So it's a matter of driving down the manual touches for each of those processes systematically over time, which drives greater productivity and a better customer experience and carrier experience. That's kind of how we think about it. Scott, go ahead.
spk06: Yeah, I would just add sort of how I talk about it to the employees as sort of an incumbent leader in the space that is using technology to sort of modernize the businesses. Through sort of some business examples, I come from a distribution background, so you look at a company like Grainger and how they've leveraged technology to really drive tasks, but then unleash the expertise their employees have for their customers. That's very similar to, I think, the opportunity we have here is really make our employees who are logistics experts much more productive. and then make technology tools that are sticky to the customer and that they really appreciate in terms of just making us easier to do business with. And I think Arun's product team is absolutely on that track.
spk01: Maybe just to add some color to what Scott said, reducing touches, for sure, along the lines of what I described, but equally amplifying the abilities of our people. An example might be someone in sales. How do we do targeted sales versus targeted? sort of, you know, the approach that we might have taken in the past. The ability to take behavioral data and give them insights to be more targeted in their efforts.
spk02: And then the second part of that question, please, Arun, where are you today in terms of, however you choose to think of it, I was thinking percentage of transactions that are digital. Where do you want to take that in two or three years and where do you want to take that long term?
spk01: I think the lens to look at it is these are all inputs, and the output that we're looking for is effectively greater productivity of our people as we measure by shipments per person per day, and a better customer outcome or carrier outcome. In the case of customers, it's better on-time info performance and greater customer satisfaction. So those are the output metrics we look at. And so as a goal for 2023, we have a productivity improvement expectation from these investments of 15% that we track quarterly. I think it's better for us to look at it that way. And the input metrics might vary because we might see a greater opportunity for productivity in transit tracking versus appointments. And so we'd rather not go there on these calls and just focus on productivity and customer outcomes as the expectations from these investments.
spk02: Okay. Thank you very much.
spk08: Thank you. The next question is coming from Chris Weatherby of Citi. Please go ahead.
spk05: Hey, thanks. Good afternoon. You know, Scott, maybe a question here about global forwarding. So it sounds like this is something you think is key to the portfolio going forward. I think it would be helpful to maybe give a bit of a perspective of where you think we are in sort of the normalization cycle. Obviously, the pandemic boosted rates to extraordinarily elevated levels, and as you noted in the release, we're kind of back down to pre-pandemic levels in some of these end markets. So prior to 2020, this business was generating net revenues north of $500 million. It peaked out, obviously, at multiple of that. What is the right number for global forwarding as we start to go forward? I guess maybe in other words, how much share has been sort of captured there? What's the cross-selling opportunity? If you could give us some perspective of how to think about it in the context of normalization, I think that would be great.
spk06: Yeah, great, Chris. make a few comments and then turn it over to Mike to dive into a little more granular detail. I would say my statement is global forwarding at Robinson today is a much stronger business than it was pre-pandemic. And I think part of what we owe to you is exactly that question, is what is the run rate of this business on a more normalized rate? I'm super encouraged by Mike Short and his team and what we're doing in the marketplace, knowing that we're you know, up against a backdrop of a tougher marketplace this year. But maybe Mike can give some specifics in terms of some numbers to help you with that question.
spk13: Yeah, Chris, happy to do that for you. So, you know, after running operating income margins of over 50% in global forwarding in Q1 and Q2, obviously we knew that wasn't a sustainable level and the market would come back to us at some point. The normalization, if you call it that, you know, has surprised us a bit. in terms of speed and magnitude of the correction. And so I think in that process, we found ourselves with cost structure that didn't match the business. And so we are in the process of kind of right-sizing that cost structure. During the pandemic and in some of those periods, we were intentionally investing in our business. There was the ability to get the attention of customers to a greater extent. We were improving customer service. We were investing in technology. And the intent all along was to come out of the pandemic in a better place. And we feel like we've done that. But as Q4 demonstrates, when you look at the operating income margin, we've still got a ways to go in right-sizing our cost structure. And Mike and the team have been getting after that. Headcount is down and will be down further as we enter into the new year. We do think that a 30% operating income margin for the long term is still the right number. And, you know, I mentioned the technology and how the technology can help improve the operating margin on a go-forward basis. But I'll mention a few other things that I think are key to success in that global forwarding business too, and things that the team is encouraged for in terms of continuing to gain market share as we go. But, you know, another one I'd mention is operational uniformity. You know, that's really standardizing a lot of the work and activities that are done there. They have a good start on that, but there are still quite a bit more there that generates efficiency. And, you know, the good news is that as they come out of the pandemic here, the customer excellence scores are pretty solid. Team wants to make them better, but they're in pretty good shape from that perspective. Continuing to build scale. So, you know, the pipeline for new customers has been solid. They're looking at new verticals. They're looking at new trade lanes. And building that scale will be important to help us leverage the investments that we're putting in on that business to ensure that they've got a good return. I talked about their intentions and actions around managing expenses and headcount. That did get out of line a little bit here in the back half as rates in ocean and air really came back quite dramatically. And then the last thing I'd mention would be talent acquisition. So there's a lot of talent out in the marketplace. The team has done a pretty good job of bringing in folks that can help us extend into new verticals and extend into new trade lanes and geographies. And so continuation of that also gives us confidence that they can continue to grow market share going forward. And that'll be the key to success and the key to getting that margin to 30% long-term.
spk05: Okay. So the idea is relative to that pre-pandemic era, margins maybe could be double what they were. So there's the ability to absorb some downside shock here or normalization over the course of this year and next year on the net revenue line. I guess that's the way to kind of triangulate to the way you think about profitability of the business.
spk13: I think that's fair. Okay.
spk04: Thank you for the time.
spk08: Thank you. The next question is coming from Jordan Alliger of Goldman Sachs. Please go ahead. Yeah, hi.
spk11: I was wondering if you could talk a little bit to where you think we are from a spot market perspective for truckload pricing and sort of based on where you think maybe that bottoming occurs, you know, how are we in terms of contract timing on your non-renegotiated contracts to this point? Thanks.
spk13: Yeah, Jordan, let me take that. So, first of all, you know, the The demand has really pulled back here. That's pretty clear. And as a result, the spot market has really dried up. There's not a ton of opportunity there. In the prepared comments, we talked about we're sitting at a contract business that the commitments from the customers to be able to deliver the volumes that were inside of those contract agreements are being pressured. because of the overall demand. So the business right now, we were 65-35 contract to spot. The spot opportunities are not there to a great extent. And so we would expect that that eventually flattens out here as we go through the year. Not sure if you follow the projections that we have in the marketplace around pricing. But we're anticipating a 16% year-over-year decline in truckload spot cost per mile in 2023, most of that coming early in 2023. And then the contract pricing generally follows where the spot market is on a lag basis. And so inside the contract business, maybe I'll take you back to the beginning of 2022. As we were entering into a new contract business and bidding on contracts that were available, we were looking at the potential in the back half of 22 with COVID shutdowns, the holiday season, Chinese New Year coming, that prices would hold up more than they did. As things played out, there really wasn't a key season. The demand was soft. The prices came down. And so as we were bidding on contracts in Q1 and Q2, you know, we weren't as successful on a win percentage as we probably would have liked to have been. And certainly we would have been better had we known the drop-off that was coming. So then you kind of get us to real-time here, Q4 and into Q1. You know, we're out there in the market on these contracts. We're bidding. competitively and we're feeling pretty good about the win rates. But the demand and the volume there from the customer just isn't as strong. So even with our higher win rate, from a bid standpoint, the volumes that are materializing are still challenged. We talked about kind of in Q4, the decline in truckload volume that we had seen and obviously delivered a minus 4%. in the quarter, it is not our intention to have negative numbers on our truckload volume. We certainly expect to grow, but it was a soft market. And the good news, I think, for us is if we've come into the new year, we've seen a better performance on the truckload volume side into January here. When you talk about the contracts themselves and what's coming, You know, one of the things I think over the past few years during the pandemic that we observed was that, you know, what was largely a 12-month bid contract had transitioned to contracts that were of lesser duration. And, you know, what I can tell you in Q4 is that that continued in that about half, roughly half of the contracts that we bid on were 12 months, and the other half were something less than that. So even as the market has come down, that mix has remained in the contracts that are less than 12-month duration. So I covered a few of the parts of your question. Anything that I missed?
spk11: No, I appreciate the answer. Thank you.
spk08: Thank you. The next question is coming from John Chappelle of Evercore ISI. Please go ahead.
spk04: Thank you. Good afternoon. Scott, in answer to an earlier question, you'd mentioned kind of no change in strategic direction, however, maybe greater sense of urgency and timing. You talked about the annualized savings by the end of 23, but as you've been in this new role, have you found either new opportunities or ways to kind of front-end load some of the cost alignment that you have planned for the year? So therefore, you're kind of timing that more with the macro headwinds or some of the volume headwinds you see and aren't still cutting in the back half of the year when conceivably things may be getting better?
spk06: Yeah, no, thanks, John. You know, there's no doubt, you know, it's a tough back half of the year. And that being said, you know, I do see a palpable excitement about the future here. But in the short term, I think one of the things I'm trying to do with the management team, and I talked about empowering them, was also simplifying the message, aligning focus on customers and leveraging Arun and his team to show customer benefit. We talked about the amplification of our people's expertise in the field, but we're very focused on expense. We're focused on headcount. We're focused on really tightly managing this business through the first half of the year. But also, as I've said to the senior leadership team, making no assumptions that the wind will be at our back throughout 2023. I think there's additional opportunity for us to get sort of more precise in how we go to market and find efficiencies throughout the company. I'm really proud of the team. It's never easy to do what happened back in November. but the spirit of the folks in the field and the ability to want to get better, faster, stronger is absolutely here at Robinson.
spk13: I can add a little color to just on the cost savings front. So we did make some progress against that expense reduction target here in Q4, particularly on the personnel side. And just as a reminder, back to the commitment. So we were taking the run rate of Q3 and annualizing it And the commitment was that we would get to a net cost reduction of at least $158 million by Q4 of 2023. And if you look at what we delivered in Q4, you take out the restructuring expense and annualize where we're at, you get to a number that's about $2.27 billion. So the run rate that we were if you take the Q3 and the annualized run rate of that, that was about $2.4 billion. So that implies that we've already, are already at about $130 million savings versus that original commitment. Now, you can't read into that too much because in Q4, as I had spoke to earlier, we did have a benefit to our equity compensation that reduced the overall expense in Q4, and we wouldn't expect that to continue into 2023. But the net of that is we have made some decent progress. We are, I think, much better focused going forward on headcount, and that will be a key since that's such a big part of our cost structure as we roll through 2023.
spk04: Understood. Thanks, Mike. Thanks, Scott. Thank you.
spk08: Thank you. The next question is coming from Brian Ossenbeck of J.P. Morgan. Please go ahead.
spk03: Hey, afternoon. Thanks for taking the question. Maybe just two quick follow-ups then. Just on the expense reduction, it's obviously announced a little while ago and implemented in the fourth quarter, but it still seems like things maybe got worse a little bit faster than you initially thought in forwarding. So you can just clarify if there are additional opportunities on the horizon or you're sort of sticking with the 150 for the time being and implementing that. And then just, Mike, I think you mentioned on January a little bit in terms of things stabilized. So I wanted to see if you could put some numbers behind that in terms of the truckload market, AGP per day, volume or anything like that will be helpful as you start the first third of this first quarter. Thank you.
spk06: Yeah, I'll kick off on global forwarding and toss it over to Mike. The global forwarding team has a history of managing expenses really well through cycles. you know, obviously the last 18 to 24 months was very unique. So I'm confident that they're on point and where they can find expense reduction that makes sense, they're absolutely going to do it. And then maybe Mike can give some color to that.
spk13: Yeah, so try to make sure I get to each part of your question. So first of all, on the cost savings part, we continue with the commitment to the $150 million and dollar net cost reduction by Q4 on a run rate basis annualized. And I'll just point out maybe the obvious there that the inflationary environment that we're in is as high as it's been in 40 years. So the net cost reduction is offsetting our inflation and delivering the savings there too. But we will stick with that. I will also add that if you did the math on the midpoint of the expense guidance that we just provided, you'd get to $2.2 billion for the year. And again, the base run rate that we're going off of is $2.4 billion. So we're guiding to a midpoint of $2.2, which is $200 million worth of savings. So let me address that for a second. We are committed to the net cost reduction. That is what we would consider to be more permanent cost reduction, more structural in nature. We will likely deliver more savings than just that. But the second part of the savings is more what I would say transitory related to the softness in the market. And as we've talked about, we've got a history of adjusting our cost structure with the market. And because we are seeing some softness there, there is some additional savings that comes along with that. I think another part of your question was about AGP trends. We did give you AGP per business day on an enterprise basis in Q4, where we were down 10% in October, down 7% in November, and down 14% in December. That softness has continued into January. But as I mentioned, the truckload volume that we delivered in Q4, we have seen improvements on that going into the new year.
spk03: All right. Thanks for all that, Mike. So I guess the difference between the 150 and the 200 you guided to, that would be basically the transitory, the market-based impact. Is that what you would call out there?
spk13: Yep, absolutely. Okay.
spk03: All right. Thank you for the time.
spk08: Thank you. We're showing time for one final question. The final question today is coming from Stephanie Moore of Jefferies. Please go ahead.
spk09: Hi. Good afternoon. Thank you. You know, I want to touch on with this change in strategic direction, I want to know how this change is being reflected in your capital allocation plan. You called out, you know, wanting to deliver on certain leverage targets, but maybe you could speak to how or it could make sense to maybe adjust your capital allocation plans as you look to kind of change the strategic direction of the company. Thanks.
spk06: Yeah, thanks, Stephanie. I'll have Mike start, and then I'll wrap up and maybe talk about our capital allocation committee a little bit as well.
spk13: Yeah, so from a capital allocation standpoint, I think one of the major differences here as of late has been the amount of free cash flow that we've had really resulting from the working capital dollars coming back to us. And, you know, we had been pointing to the idea that when the price and cost of purchased transportation in ocean air and truckload would come back down off of the record all-time highs, that that, you know, billion and a half dollars of absorbed working capital that we experienced from the end of 2019 to earlier in 22 would start coming back. And of course, in Q3 and Q4, we saw over a billion dollars of that tied up working capital come back to us and therefore began to deploy that in alignment with our capital allocation strategy. And so, of course, we covered our commitments, our investments, our dividend, and our policy after that is to, as we are managing our leverage to maintain our investment grade credit rating, any money that's left over after that goes to share repurchase. So you saw our share repurchase pick up quite a bit in Q3 and Q4. And then what we experienced after that was observing those prices coming down across ocean air and truckload, which informs our forward-looking view on EBITDA and therefore informs our forward-looking view on the level of debt that we need to maintain the leverage ratio as appropriate to maintaining investment-grade credit rating. And so that's a long way of describing a pullback on share repurchase to make sure that we maintain that targeted leverage. But in terms of the overall capital allocation strategy, while there were some differences in activities as a result of the a record-free cash flow. We haven't changed our philosophy at all on how we are planning to deploy our capital going forward.
spk06: Yeah, and Stephanie, I would just add from a board perspective, we're making our capital allocation committee a permanent committee, and we're also going to be soon adding additional members to that. And I think this is really going to serve as a great partner to the management team. in terms of looking at areas that we can drive value across the organization for both customers and shareholders.
spk09: Great. Well, I appreciate the time. Thank you.
spk13: Thanks, Stephanie.
spk08: Thank you. At this time, I'd like to turn the floor back over to Mr. Ives for closing comments.
spk12: Thank you, everyone. That concludes today's earnings call. Thanks for joining us today, and we look forward to talking to you again. Have a great evening.
spk08: 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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