C.H. Robinson Worldwide, Inc.

Good afternoon, ladies and gentlemen, and welcome to the CH Robinson second quarter 2024 conference call. At this time, all participants are on a listen-only mode. Following the company's prepared remarks, we will open the line for a live question and answer session. To ask a question, please press star 1 on your telephone keypad. If anyone needs assistance at any time during the conference, please press star 0. As a reminder, this conference is being recorded Wednesday, July 31st, 2024. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Thank you, Donna, and good afternoon, everyone. On the call with me today is Dave Bozeman, our President and Chief Executive Officer, Arun Rajan, our Chief Strategy and Innovation Officer, Michael Castagnetto, our President of North American Surface Transportation, Mike Zuckmeister, our Chief Financial Officer, and Damon Lee, our incoming chief financial officer. I'd like to remind you that our remarks today may contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. Our earnings presentation slides are supplemental to our earnings release and can be found in the investor section of our website at investor.chrovinson.com. Our prepared comments are not intended to follow the slides, If we do refer to specific information on the slides, we'll let you know which slide we're referencing. Today's remarks also contain certain non-GAAP measures, and reconciliations of those measures to GAAP measures are included in the presentation. And with that, I'll turn the call over to Dave. Thank you, Chuck.

Good afternoon, everyone, and thank you for joining us today. Having been in this seat for a little over a year now, I'm pleased with the progress we've made on evolving our strategy. improving our execution, and evaluating and enhancing the company's four P's, people, products, processes, and portfolio. We've brought in some new leaders, and we're arming our people with better tools to execute on our profitable growth strategies. We're delivering innovative products to provide greater value to our customers and carriers. We're streamlining our processes, applying lean principles, and leveraging generative AI to drive out waste and optimize our cost. And we're making changes to drive focus on the four core modes in our portfolio. All of these changes are aimed at our north star of generating incremental operating income and delivering higher highs and higher lows over the course of freight market cycles. Our second quarter results reflect a higher quality of execution and performance as we continue to implement the new Robinson operating model. And although we continue to fight through an elongated freight recession, we are winning and executing better at this point in the cycle. Our people are delivering exceptional service and enhanced digital experience and differentiated value for our customers and carriers. And I thank the team for their efforts. Our truckload business grew market share for the fourth consecutive quarter. And we took share the right way with margin improvement in mind. and our adjusted income from operations increased 32% year over year for the full enterprise. On our first quarter earnings call, I discussed that we had begun deploying a new operating model that is rooted in lean methodology to improve the level and consistency of our operational execution. Today, I would like to share more about how the Robinson operating model is coming to life, which would hopefully help investors understand how things are evolving. The Robinson Operating Model starts with an enterprise strategy map that lays out the key strategies that we need to execute on to drive profitable growth and improve the operating income of the business. Growth and operating income will come from margin expansion by improving our cost structure and operating leverage, and from market share gains by igniting profitable growth in targeted market segments and industry verticals. Our enterprise strategy map converts to a balanced scorecard for the enterprise and cascades down to strategy maps and scorecards for each division and for the functional support areas. These scorecards include the key metrics that each area of the business needs to deliver on and be accountable to. As examples, these metrics may be related to driving growth, meeting customer expectations, optimizing AGP, optimizing cost, managing our talent, or improving our cash conversion cycle. Through a regular cadence of operating reviews on at least a monthly basis, but in some cases weekly or even daily, scorecard metrics are reviewed and there is a binary view of whether they are on track. The metrics are green if they're on track and red if they're not on track. There is no yellow. We're coaching our people to embrace and attack the red with countermeasures or action plans to solve problems faster, which is driving improvements in execution. This may show up in improvements such as more disciplined pricing, better decisions on the volume that we're seeking, or how we're servicing our customers and carriers. These operating reviews prosecute the problem and not the person, as we want our people to embrace the red as an opportunity for improvement. Since we began implementing the new operating model in Q1, We're getting better at being vocally self-critical and driving transparency and accountability. And we've been able to shine a light on some error states that negatively contributed to our results. We're also getting better at making decisions faster and taking quick action on countermeasures to correct those error states and improve our performance. We are still early in our journey, but the operating model is helping us execute a solid strategy even better. And we expect further improvement as we continue to cascade the new operating model deeper into the organization and as our team continues to embrace it and build operational muscle. I know from my past experiences of implementing lean operating models that improvement isn't always linear. And we still have a lot of grass to cut. I'm confident in the team's willingness and ability to drive a higher level of discipline in our operational execution. As the global and North American freight markets fluctuate due to seasonal, cyclical, and geopolitical factors, we remain focused on what we can control, including deploying our new operating model, providing best in class service to our customers and carriers, gaining profitable share in targeted market segments, and delivering tools that enable our customer and carrier facing employees to allocate their time to relationship building and value-added solutioning. Our continued focus on productivity improvements is one part of our plan to address and optimize our enterprise-wide structural costs. We continue to eliminate or automate certain tasks to enable our teams to handle more volume. In 2024, we expect these initiatives will help drive a 15% increase in shipments per person per day in NAST and a 10% increase in global forwarding. both of which would result in compounded productivity improvements of 32% or better over 23 and 24 combined. We also took an important step yesterday on our journey to get fit, fast, and focused when we announced that we've reached an agreement to sell our European surface transportation business. This move is consistent with our strategy to drive focus on profitable growth in our four core modes of North American truckload and LTL and global ocean and air. Growth needs to be highly scalable within our model to create the most value for our stakeholders. As such, our global forwarding and managed services businesses in Europe will continue to execute on the breadth of global services that we provide to customers and that feed our core modes. With ongoing efforts to improve the customer experience, and our cost to serve, we continue to focus on ensuring that we'll be ready for the eventual freight market rebound with a disciplined operating model that decouples headcount growth from volume growth and drives operating leverage. I'm also excited about the changes that we've made on my senior leadership team. Being able to attract Damon Lee as our new CFO is a big win for Robinson. With his proven track record of financial discipline, while delivering results as an operational leader and a strategist with a lean and continuous improvement mindset. I look forward to Damon's contributions to our strategy and execution. I'm also greatly appreciative that Mike Zegmeister graciously agreed to extend his time with us to facilitate a seamless transition for CH Robinson and for Damon. I thank Mike for his five years of service and dedication to Robinson and wish him the best in his upcoming retirement. We also recently announced that Arun Rajan transitioned from the role of COO to a new role of Chief Strategy and Innovation Officer. This change enables Arun and his team to focus their continued efforts on building our digital and operational capabilities and uphold tight alignment between our business teams and our digital investments. We're at a pivotal point as a company. And with a single-threaded leader at the helm of strategy and innovation, we can accelerate efforts already underway to bring industry-leading products, technology, solutions, and ways of working to our company and the global logistics marketplace. Working closely with the senior leadership team, Arun will oversee our enterprise strategy and innovation process from creation to implementation and measure our performance against our strategic goals. I have high expectations for how this new role will benefit Robinson and all our stakeholders as we continue our transformation. And finally, it's been great to have Michael Castagnetto leading and driving further improvement in our NAS business. He has a proven record of building strong relationships with our people and our customers, driving operational excellence and delivering exceptional results. Michael has joined us on today's call And I'll turn it over to him now to provide more details on our NAS results.

Thanks, Dave, and good afternoon, everyone. It has been extremely energizing to be leading the NAS organization and working with our talented and dedicated team members who are committed to delivering the best solutions and service to our customers and carriers every day. While we're still in the early stages of implementing and adopting the new Robinson operating model, I'm convinced that this approach is just what we need. Our discipline, execution, and accountability has improved more than any other time in my previous 26 years at Robinson and two years in NAST. If it feels different, that's because it is, and it's showing up in our results. Supported by our new operating model and with our product and tech teams delivering new innovative tools, like our recently announced digital matching product, our resilient team of freight experts is responding to the challenging freight environment. and we are reacting quicker and more effectively to provide solutions to our customers and carriers. As a result, our Q2 NAS truckload volume increased approximately 1.5% sequentially and year-over-year, which outpaced the market indices for the fourth quarter in a row. Within Q2, we saw some seasonal volume strength in June, primarily related to produce season, but overall, seasonality was muted in Q2, as shown in the cast freight shipment index increasing only 0.2% sequentially versus the 10-year average of a 6.1% sequential increase excluding the pandemic year of 2020. Looking ahead to Q3, the 10-year average of the cast freight shipment index excluding the pandemic impacted year of 2020 is a 0.4% sequential decline from Q2 to Q3. At this point, it's hard to say whether the muted seasonality that we saw in Q2 will continue into Q3. From a market balance perspective, we continue to be in a drawn-out stage of capacity oversupply. Although carrier attrition is occurring, it remains at a slower pace and not enough to materially impact the overall market. Load-to-truck ratios did increase in June and put upward pressure on spot rates, but it was largely regional and related to produce volumes in the southern half of the US. In July, however, drive and load to truck ratios have retreated to the level seen in April and May. In Q2, we delivered further optimization of volume and adjusted gross profit per truckload, which increased 6.5% sequentially and year over year. The improvement compared to Q2 of last year was driven by improved pricing discipline and revenue management. That led to better AGP yield within our transactional truckload business as our procurement teams combined with the intentional usage of digital brokerage capabilities, delivered a cost of higher advantage versus the market average. These practices are part of our operating structures that are integrated into our operating model and ladder up to the NAS Divisional Scorecard and ultimately into the Enterprise Scorecard. In our LTL business, Q1 shipments were also up 1.5% on a year-over-year basis and 3.5% sequentially. driven primarily by strength in our retail consolidation service offering. By leveraging our vast access to capacity, broad range of services, and our high level of service, our LTL team continues to onboard a solid pipeline of new business and build on our existing $3 billion LTL business. The strength and unmatched expertise of our people enables us to deliver exceptional service and greater value to our customers. We are investing in our sales organization to maximize our growth opportunities. As an example of the operating model at work, we took actions recently to streamline our sales process and reorganize our sales teams. And the result has been a more effective and quicker engagement with our customers and a greater opportunity for our more experienced salespeople to engage with the right customers. We've made net additions to and are actively growing our sales team in line with a disciplined and focused approach to capture growth opportunities in targeted customer segments. Our people are the single greatest differentiator for us versus the competition, and we are going to continue to lean into this. We may have gotten the balance of people versus tech wrong at certain points in our past, but we've learned, and we are getting it right now. We will keep evaluating our results and adjust accordingly going forward. From upskilling our people to providing upward mobility and new opportunities, we will continue to lead with our people first. We will support our people with industry-leading tech and solutions to enhance their capabilities as we continue to focus on people, process, and technology. I'll turn it over to Arun now to write an update on the innovation we're delivering to strengthen our customer and carrier experience, increase AGP yield, and improve operating leverage.

Thanks, Michael, and good afternoon, everyone. I'm excited about my recent transition into the role of Chief Strategy and Innovation Officer. I'm proud of the team's accomplishments over the past couple of years to build a solid foundation for our digital and operational strategy. Since I joined the organization in the fall of 2021, we have taken a surgical, data-driven approach to technology investments to accelerate our digital transformation and deliver financial outcomes. These efforts have now matured into digitally oriented operating structures that power core parts of our business, such as digital brokerage, revenue management, and operational excellence teams. The success of these collective efforts has enabled us to transition some of these digitally oriented operating structures into our core operations, thereby enabling me to shift my focus to accelerating actions in support of our broader enterprise strategy and innovation to drive profitable growth. Strategy process is not static. Leveraging our operating model, we will diligently monitor execution towards strategic outcomes and the constantly evolving external landscape to take advantage of opportunities to accelerate our strategy as we expand our leadership position in the logistics industry. Innovation is at the heart of Robinson's competitive differentiation. We are leading and innovating at scale in our processes and our products for the benefit of both sides of our two-sided marketplace. in alignment with our strategy to drive profitable market share growth. As an example, on the carrier side, we've launched an enhanced load matching platform for carriers called Digital Dispatch. This innovative tool utilizes advanced algorithms to match carriers with loads that best fit their needs and provides real-time, customized load recommendations right to carriers' phones via text or email. In addition to enabling carriers to run fewer empty miles, Digital Dispatch books loads four times faster than traditional methods on average, transforming hours spent searching into valuable hauling time. Digital Dispatch first became available in February to carriers that own one to 10 trucks, and we have plans to expand it to larger carriers in the future. For Robinson, we expect this innovative tool to help with the acquisition, retention, and growth of our carrier base and therefore provide greater access and capacity for our customers, especially when the market turns. On the customer side of the marketplace, we continue to innovate and leverage GenAI to respond faster than ever to dynamic market conditions with the tools and capabilities we've developed. Last quarter, we shared the example of using GenAI to automatically respond to transactional truckload quote emails, which drives faster speed to market, increases our addressable demand, and reduces manual touches. Another touch point where we're leading is using GenAI to translate order emails and generate on-system orders. With GenAI, we've been able to reduce the time to generate an order by more than 80%, thereby enabling us to provide faster service to customers and to effectively scale our operations when the market returns to growth. In addition to improving the customer and carrier experience, innovations such as digital dispatch and products that leverage the power of GenAI are designed to improve the employee experience and improve productivity. These productivity improvements serve as a critical input into creating operating leverage. We also continue to increase the rigor and discipline in our pricing and procurement efforts in Q2, resulting in improved AGP yield across the NAST and global forwarding portfolios. With continued innovation in dynamic pricing and costing, investment in contract management systems, and increasing revenue management rigor, we are responding surgically and faster than ever to dynamic market conditions. Finally, as Michael mentioned, we believe we are getting the balance of people versus tech right. Getting this balance right includes the active role that our people play from a human-in-the-loop perspective to drive continuous feedback and improvements to our algorithms and Gen AI implementations. With that, I'll turn the call over to Mike for a review of our second quarter results.

Thanks, Arun, and good afternoon, everyone. Disciplined revenue management in the face of continued soft freight market conditions resulted in second quarter total revenues of $4.5 billion and adjusted gross profit, or AGP, of $687 million, which was up 3% year over year, driven by a 5% increase in NAST and a 3% increase in global forwarding. On a monthly basis compared to Q2 of last year, our total company AGP per business day was down 5% in April, up 1% in May, and up 15% in June. Overall Q2 AGP results reflect progress on the revenue management initiatives that were referenced earlier. The AGP per business day improvement through the quarter also reflects both seasonal increases in freight demand and easier year-over-year comparisons as the quarter progressed. Michael covered the details of our Q2 NAS performance. I'll cover the performance of our global forwarding business, where the team has had success growing the business profitably and been highly engaged with our customers to help them navigate the ongoing conflicts in the Red Sea. The transit interruptions in the Red Sea have resulted in vessel reroutings that have extended transit times. In Q2, this put a strain on global ocean capacity and created varying levels of port congestion and container shortages. While the Asia to Europe trade lane has been most affected, the impact has also extended to other trade lanes as carriers adjust the geographic placement of vessel capacity based on shipping demand. As we mentioned on our first quarter earnings call, ocean rates had come down from the February peak as capacity was repositioned and new vessel capacity entered the market. In May and June, however, ocean rates rose again as capacity tightened. Given our mix of contractual and transactional business, the impact of changing market rates generally takes one to two months to flow through to our profit per shipment. So even though rates came down from the February peak, our profit per shipment held up through March and into April as we started realizing the declines in May and the first half of June. When the ocean markets rose in May and June, our same one to two month lag meant we started realizing the positive impact to our profit per shipment in the second half of June and now into July. While the Red Sea disruption continues without any clear timeline of when it will be resolved, ocean rates have declined slightly in July, but remained elevated compared to 2023. Our team performed well in Q2, with our ocean forwarding AGP increasing 8.6% year-over-year, driven by a 4% increase in shipments and a 4.5% increase in AGP per shipment. Sequentially, shipments increased 6%, while AGP per shipment declined 2.5%. There are some indications that customers may be pulling forward some of their peak season ocean freight due to ongoing concerns about geopolitical issues and capacity disruptions, as well as the potential for labor issues on the East Coast ports of the United States. One measure of this is that our ocean volume per business day grew 8% sequentially in June versus May, compared to a 2% sequential decline over the same period last year. Time will tell as to whether this pulls from the normal July to September peak season in ocean. Turning now to enterprise expenses. Q2 personnel expense was $361.2 million, including $9.4 million of restructuring charges related to workforce reductions, excluding restructuring charges this year and last year, Our Q2 personnel expenses were $351.8 million, down $12.4 million, or 3.4% year over year, driven by our continued productivity efforts and partially offset by higher incentive compensation. Our average Q2 headcount was down 10% compared to Q2 last year. We continue to expect our 2024 personnel expenses to be in the range of $1.4 to $1.5 billion, excluding restructuring, but likely below the midpoint of that range. With that, we expect a slower pace of net headcount reductions in the second half of 2024 compared to the first half. Moving to SG&A, Q2 expenses were $148.1 million, including $5.7 million of restructuring charges which were driven by reducing our office footprint. Excluding restructuring charges this year and last year, SG&A expenses were $142.4 million, down $12.2 million, or 7.9% year-over-year. The expense reduction was across several expense categories as we continued to eliminate non-value-added spending. We continue to expect SG&A expenses for the full year to be in the range of $575 to $625 million, excluding restructuring charges, but likely below the midpoint of that range too. SG&A includes depreciation and amortization expense, which we still expect to be $90 to $100 million in 2024. Our effective tax rate in Q2 was 19.4%, compared to 14.9% in Q2 last year and was in line with our expectations. We continue to expect our 2024 full-year effective tax rate to be in the range of 17 to 19%. In Q2, our capital expenditures were $19.3 million, down 20.6% year-over-year on more focused technology spending. We now expect 2024 capital expenditures to be toward the lower end of the previously provided range of $85 to $95 million. Now on to the balance sheet. We ended Q2 with approximately $925 million of liquidity comprised of $812 million of committed funding under our credit facilities and a cash balance of $113 million. One key differentiator for Robinson is our financial strength. This allows us to continue investing and improving our capabilities even through this prolonged freight recession. As a result, we expect to emerge stronger when the market tightens. Our debt balance at the end of Q2 was $1.6 billion, which was down $127 million from Q2 of last year. Our net debt to EBITDA leverage at the end of Q2 was 2.4 times, down from 2.73 times at the end of Q1. primarily driven by the performance of the business and the resulting decrease in our net debt balance and increase in our trailing 12-month EBITDA. As I depart Robinson for retirement, I'd just like to add that I couldn't be more proud of the accomplishments of the team and I couldn't be more excited about the direction of the company. It feels terrific to be leaving the company in such great hands with a sound strategy and solid momentum on the business. From the deployment of the new operating model to the growth potential from the market segment and vertical focus to the incredible upside of generative AI to enhance the capabilities of our industry-leading people, the future looks incredibly bright. I will miss working with the best logistics experts in the business, but we'll be cheering for Robinson as a shareholder. Best wishes to the entire Robinson team. And with that, I'll turn it over to Damon for a few comments.

Thanks, Mike, and good afternoon, everyone. I'm excited about joining CH Robinson and partnering with the rest of the senior leadership team as we execute on a strong strategic plan. I'm eager to leverage my past experiences and a focus on operational excellence to drive improved results and deliver more value for Robinson shareholders. I'd also like to reiterate Dave's comments and thank Mike Zuckmeister for his collaboration and partnership to ensure a seamless transition. The first three weeks of my tenure have been great, And I look forward to talking with all of you as we continue on this exciting journey. I'll turn the call back to Dave now for his final comments. Dave.

Thanks, Damon. I want to commend our people for continuing to embrace the changes that we're making to deliver a higher and more consistent level of performance and for the high quality Q2 results that they delivered in what continues to be a challenging market. As I mentioned earlier, All the changes that we're making are aimed at our north star of generating incremental operating income and delivering higher highs and higher lows over the course of freight market cycles. We will do this by focusing on two main fronts, growing market share and expanding our operating income margins. We'll continue to grow market share by leveraging our robust capabilities to power vertical-centric solutions by reclaiming share in targeted segments and by expanding our addressable market through value-added services and solutions for our customers and carriers that drive new volume to our four core modes. We'll also be more intentional with our go-to-market strategy to drive additional synergies and cross-selling across our portfolio. We'll expand our operating income margins by embedding lean practices, removing waste, and expanding our digital capabilities. This will enable us to strengthen our productivity and optimize our organization structure in order to be the most efficient operator in addition to the highest value provider. We'll optimize our gross profit by monitoring key input metrics and responding faster to error states and changing market conditions with countermeasures and innovative technology that improves our execution. As we take action on all of these fronts, I'm excited about the work that we're doing to reinvigorate Robinson's winning culture and to instill discipline with our new operating model. We're moving with greater clock speed and urgency to seize opportunities and solve problems in order to win now and to be ready for the eventual freight market rebound. And we now have a plan to share more about our strategy, how we'll execute that strategy, and the resulting financial targets at a 2024 investor day that is scheduled for December 12th in New York City. While there is a lot more work to do, I continue to see an opportunity for the company to reach its full potential and create more shareholder value by improving our value proposition, increasing our market share, accelerating growth, further reducing our structural costs, and improving our efficiency operating margins, and profitability. Together, we will win for our customers, carriers, employees, and shareholders. This concludes our prepared remarks. I'll turn it back to Donna now for the Q&A portion of the call.

Thank you. In order to let as many callers ask questions as possible, we ask that you limit yourself to one question. As a reminder, to ask a question, please press star 1 on your telephone keypad. Your first question is from Jonathan Chappell with Evercore ISI. Please proceed.

Thank you. Good afternoon. If I look at page 17 in the presentation, the first page of the appendix, when you have this elongated history of the transportation AGP margin, it's obviously taken two pretty big step-ups sequentially in the last two quarters. When you think about the path forward on the market, it sounds like it's still pretty volatile with July weaker than June. Is this something that's kind of market independent right now where you can see the AGP continue to move higher based on the initiatives that you put in place and the digital processes? Or at this point, do you really need a kind of a market tailwind to help you kind of drive it higher above 16 and beyond?

Hey, John, Vince, Dave, good to hear from you. Hey, listen, I'm going to – it's Michael's first call. He's going to jump in and add some more color to this. But I really wanted to start and say, number one, happy to see Michael and team drive the effects of the operating model, which is some of the things that you're seeing with the discipline within the business. and we expect to continue to drive that discipline. And, you know, as we said on our comments, there's more grass to cut on this, but we're off to a pretty good start on that. But we'll give you some more color around history-wise and where we're going. Michael.

Yeah, thanks, Dave. And again, thanks for the question. You know, as a As we mentioned in some of our earlier comments, we're really starting to see the leverage of the tools related to our dynamic pricing and costing come to life over the last couple quarters. Certainly, the team has battled through what has been, as we mentioned, a continued elongated freight recession. And despite that, we're starting to see the efforts come to life. Really, when you take the ability to combine those technologically and product advancements with our operating model disciplines that we've been able to enact, we're really starting to be able to respond quicker and more surgically to our customers and really meet the dynamic market conditions more effectively. You know, as we think about how we'll continue to do that forward, we still have opportunities to continue to improve as we implement our discipline pricing strategy throughout the business. But I think I'd put it most simply in that I think we're making more deliberate and more informed decisions on the freight that we pursue, the manner in which we pursue it, and then also just as importantly, how we match the right carriers to that freight to create the best transaction for both parties and obviously an improved result for C.A. Robinson.

Okay. Thank you, Mike. Thanks, Dave.

Thank you. Our next question is coming from Jeff Kaufman with Vertical Research Partners. Please proceed with your questions.

Thank you, and thank you for taking my question. And congratulations. Just a terrific quarter in a difficult environment. It's great to see some of these changes kicking in. Question for Michael. It's your first conference call. You know, there were comments on how capacity hasn't really come out in the brokerage space the way it normally would, a little leniency. I'm just kind of curious. When you're out there talking to your customers, Are the customer questions changing given some of the financial strain that some of these smaller competitors of yours have been facing? And do you see any changes in the competitive dynamic of the marketplace?

Hey, thanks, Jeff. Really good question. And I think you asked really two things, right? So what are we seeing from in terms of a carrier exits related to the marketplace and then how are customers reacting to that? You know, we have seen some acceleration of carrier exits throughout Q2, but as we said, not enough to materially impact the market. And really, we're not seeing a change even throughout the quarter that we would see that to start impacting us in the near future. As we talk to customers, it's really twofold, and it's around what is their look at the health of their long-term supply chain and how do they want to set that up and whether they're really looking at more of a short-term or a long-term perspective. I think customers looking for a more long-term solution and long-term supply chain solution are certainly asking, you know, what are we predicting in terms of when the market would change and when does that inflection come? And then how do we set up a supply chain solution that allows them to have a healthy supply route guide when the market does come back when you think about it more transactionally or in a more shorter term customers are being very aggressive and they're continuing to challenge us to meet them whether it's in short-term rfps or in the transactional space with aggressive pricing okay thank you very much that's my one thank you our next question is coming from chris weatherby with wells fargo please proceed with your question

Yeah. Hey, thanks. Good afternoon, guys. Maybe wanted to come at the NAST business a little bit differently and think about profitability through the cycle. So Dave, you talked about higher highs and higher lows. So as we've been in better freight environments, NAST has been able to generate 40% plus type of operating margins. I'm just curious. We obviously saw a nice step forward in the second quarter, but we're in still, I guess, an uneven freight environment. So are those the right type

the color on it. It is higher highs, higher lows. And I definitely would agree with you that it's still a tough freight market out there, as we stated in our comments. But long term, that's still the right way to look at the business. We feel really good about it, especially with the things that we're doing and enacting. Long term, 40% for NAST. 30% for GF. And that's what we still hold on to. And it's the right way to look at it. And again, we feel we've got confidence about that and what we're doing. But the market is the market right now. And we're going to continue to do the things that we're doing in the tough market right now and be prepared for this change in the market when it comes.

Okay. That's helpful. Thanks very much. Appreciate it. You're welcome.

Thank you. Our next question is from the line of Tom Wadowitz with UBS. Please proceed with your question.

Yeah, good afternoon. And yeah, I would also certainly say, you know, congratulations on the good results. How do you think about the progression? I think, Mike, you mentioned the buy month and the net revenue growth was a lot stronger in June. should we think of that as a better representation of, you know, the growth as you look at July and as you look forward? Or is there something we should be mindful of that would have made June a lot stronger? I think you mentioned a little easier comp, but just some more thoughts on kind of, you know, that greater strength in June and whether that gives us, you know, a look forward or if we should be more cautious. Thank you.

Yeah, thanks, Tom. You know, I did make a comment on AGP per day for the enterprise, and you're right, we were down 5% in April, up one in May, and then up 15% in June. Probably I would point to three things that were helping us in that regard. Number one, obviously our operating model is still coming into its own, and I would expect that as time passes, we get better, and the performance should reflect that. We also had some seasonal elements. We talked about them last quarter. You know, it wasn't a huge seasonal quarter, but we did see some strength in the backside of the quarter in June, particularly when you think about produce in the southern part of the United States, you know, so there's a seasonal element there too, but of course the comparison was year over year. And then, you know, there were a little bit easier comps coming into June, the end of the quarter as well. So as you go forward from there, you know, the business continues. I think, you know, you see a little bit of difference going on in NAST versus GF. You know, on the ocean side of the world, you've got, you know, it looks like there might be some pull forward of TCs in there. And we saw some additional demand. But pricing has come down a little bit, too. You know, and I think a lot of the pricing that we've seen in ocean is attributable to the issues in the Red Sea and, you know, presumably over some period of time, those will right themselves and the capacity that exists in the market will kind of stabilize and it'll be back to a normal supply-demand dynamic. But, you know, as we've gone into the quarter, you know, nothing significantly different, and we certainly haven't seen enough to call any definitive inflection in the marketplace.

Does the read on July look kind of similar to June? Any thoughts on July?

Yeah, you know, we've tried to get away from commenting on the first month of the quarter or specific months because, as you know, we've got to play the full quarter out. We've got to see how the quarter comes in, and we'll certainly give you all the color on the next call.

Okay, thank you.

Thank you. The next question is from Scott Group with Wolf Research. Please proceed with your question.

Hey, thanks. Good afternoon. So just following up there, I know there's obviously some noise in the forwarding results right now. Just directionally, did NAST see a similar trend in that monthly net revenue in terms of a big acceleration throughout the quarter? And then separately, just the headcount overall down 10% year over year, down another 3.5% sequentially. How much more is there to go on headcount here? Can we get, I know you've been talking about it, but is there a lot more in terms of volume growth and headcount down 10%? Can that persist for a while?

Thanks, Scott. This is Michael. I'll start. You asked a direct question about NAST and our quarterly results and And we really saw a much more evened-out quarter than maybe the folks in global forwarding. Certainly, you know, as the quarter went on, we saw, as we mentioned in our comments, muted seasonality to the business. And so while there were some events related to road check or the holidays and we saw some short-term upticks in spot market pricing, the team did a really nice job of managing through that and, as we mentioned, implementing our revenue management rigor and operating model. And so I think the team did a really nice job of driving real positive results in all three months of the quarter. In terms of headcount, you know, I'll probably pass it over to Mike and maybe Arun. You know, from a NAS perspective, we continue to see the benefits of the investments we've made both in AI and our overall technology. And certainly, you know, we're confident in our, you know, efficiency metrics that we've committed to for 2024. And we believe there is still, I like the saying Dave had, there's still some more grass to cut when it comes to our ability to drive out additional operational effectiveness and efficiency.

Yeah, just maybe an additional comment on the headcount part of your question. So you know we're going to continue our productivity initiatives you know continue to be committed to getting work out and therefore not needing folks to do that work and really helping our folks focus on the value added things that they do and. So far, year to date, you know as you saw we're down 10% headcount year over year. And so we've done quite a bit there. And what we've talked about and what our plan is for the back half is really a slower pace of net headcount reduction than you saw in the first half. And our guidance, you can read through our headcount into our expense guidance, and you can see that stabilization in the back half, particularly in personnel.

Thank you, guys. Appreciate it.

Thank you. Our next question is coming from Ken Hexter with Bank of America. Please proceed with your question.

Hey, great. Good afternoon, Dave and team. Congrats on the new plan and the margin gains. And Mike Z, good luck as you move on. Mike, I guess just following up on that headcount commentary there, we've heard a lot in the press about significant sales layoffs. Is that kind of really changing how you're selling or how you're organizing the business? And is this I guess now is there a difference in terms of how much is now automated start to finish? I don't know if you can give numbers on that. And then, Mike, can you also talk about the market? The truckload you mentioned was up 1.5% on tonnage, pricing down only 2%. Are we starting to see that pricing leveling off? Is that kind of flattening out in terms of the market, the state of the market?

Yeah, thank you again for those questions. You know, first from a sales perspective, I think it's really important, and we said it earlier, we are actively growing our sales team. What we did during the quarter was really changed the methodology and the process through our operating model to make sure that we're putting the right sales process in place and doing it with the right folks with the right customers. And so while we had some changes in how we manage that group, our overall sales team throughout the quarter and for year-to-date and throughout the rest of the year, our anticipation is that we're going to continue to add to that group and pursue growth opportunities where we have those opportunities. From a pricing perspective, we've said we're in an elongated freight recession. Pricing has certainly been pretty low, and it has been pretty relatively inactive for the quarter. And while we think we saw some spot market movement during events or specific weeks during the quarter, nothing that would stick and really nothing that would say there's a market inflection going on and that we think there's an immediate and consistent change to the marketplace.

Thanks, Mike. Thanks, Tim.

Thank you. Our next question is coming from the line of Daniel Imbrow with Stevens. Please proceed with your questions.

Yeah, hey, good evening, guys. Thanks for taking our questions. Dave, if I can follow up on that last question just about the overall state of the market. You know, we've heard anecdotes of shippers preferring maybe locking in asset-based capacity at this point in the cycle. I'm curious how you've seen that progressing into the back half. Volume was up nicely in 2Q, but I think you mentioned routing depth fell in July. So, I'm curious if that's any softening in the trends and then just how you're thinking about overall spot activity and underlying demand as we head into the back half from what you're seeing. Thanks.

Hey, Daniel. This is Michael. Thanks again. Good question. You know, as Dave mentioned, route guide, they're holding, right? We're not seeing a lot of freight fall out of those route guides and into the transactional space. And you saw that even in our own ratio as we moved from a 65-35 contractual transactional mix to a 70-30. You know, really, I think what we're seeing is customers are being aggressive in how they're planning their route guides. So far, the market, you know, has continued to be oversupplied, so we're seeing those route guides hold. But really, I think it's – and we've mentioned this – it's about long-term health of those route guides, and that's where we're going to have to lean into our operating model and revenue management rigor once the market does inflect. But as we mentioned, you know, at least for the foreseeable, you know, future, we're not seeing any shoots that would say that –

that we're in the middle of that right now. Thanks for the call.

Thank you. The next question is from Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hey, thanks for the afternoon. Appreciate you taking the question. I wanted to ask the headcount question maybe a little bit differently, maybe to Arun or Dave, but do you think you're at the point where you've decoupled headcount From volume growth, obviously headcount's been coming down, volume's up. But looking beyond where you are right now, have you reached that point? Do you have line of sight to it? Because typically the model gets a bit margin squeezed on an upturn, so that might help. And then, Dave, you can give us some quick thoughts just on portfolio, obviously the sale of the service transportation in Europe. But what do you think – what are you and the board discussing from here on out in regards to the portfolio? Thanks.

Yeah. Thanks a lot for the question. I'll go ahead and start and answer your tech question and productivity. So as it relates to productivity, our tech investments are very well lined up. We've delivered 17% productivity improvements in 23, another 15% targeted for this year. Combined, those investments give us very high confidence that we've decoupled headcount and volume growth. you know, in terms of our continued investments, we think there's still opportunity and we will continue to go after that opportunity in 24 and 25. But we feel very confident with our investments and the takeout as it relates to touches, which is the most important measure in that context.

Yeah, Brian, I think on the other part of your question, first of all, thanks for the question. On the portfolio, If you recall, one of the things in my diagnosis is to really look at the company under the auspice of 4Ps, people, product, process, and portfolio. And in doing that diagnosis, that's actually how we executed on it is to really look and drive for focus. We told you guys that we're going to be fit, fast, focused. And this is really just driving focus within the portfolio. And that focuses on our four core modes, and we're getting to what we do well, and that is truckload, LTL, ocean, and air. This allows us to really drive that focus for the company going forward, and that's what you're seeing in that. So I think that was the essence of the question.

Yeah, maybe I'll just add a couple more points on that, the sale of EST, since you asked about it. But, you know, Over time, we hadn't proven that we could scale or be consistently profitable when you consider covering the portion of allocated corporate overhead that goes to the business on EST, which is one of the reasons for the sale. Secondly, I would just make a couple comments about the size of the business. You know that EST had a minor impact on our enterprise results, and just to put some numbers to that, it know in q2 it was about two percent of our enterprise agp and um you know it uh it's in the other all other segment it's the smallest business unit within that all other segment great that's all very helpful thanks guys thank you our next question is from christopher coon with benchmark company please proceed with your question

Yeah, hi, good afternoon. Thanks for taking my question. Dave, can you maybe just again talk about the incentive compensation structure? Has that changed under the new model? And how should we think about going forward when sort of the freight market starts to improve?

Yeah, hey, Christopher, good question. Yeah, the short answer is yeah, it has changed, but I would call it modified as part of the way that we're operating. And And I will tell you that we will continue to tweak our operations to make sure that we're driving and doing the things that we're getting from an efficiency perspective. Right now, I would say we feel really good about how we've got that lined up on our overall incentives. And really, if you think about it, I don't look at it as if, hey, when the market changes, and then your incentive has to change. You really should be fixing those things now, which is what we're doing. That's part of the operating model. So we feel pretty good about the elements of the business that we're doing now that when the market inflects, that we're already set and ready to go. And so when it comes to the alignment of the organization, we feel pretty good. That doesn't say that we won't continue to tweak some things if we see it, But that's discovery, and that's part of the discipline of the operating model. Michael, anything you would add to that?

No, I think through the work that Arun mentioned, our ability to disconnect volume growth from headcount growth really gives us that flexibility that, from a leader's perspective, I'm hoping that our incentive compensation does increase with the return of the market. and we get an opportunity to reward our team of who, you know, obviously we think are the best people in the industry, but we've done it in a way that allows us to continue to grow operating leverage throughout each part of the cycle.

Yeah, and just to put a period on that, I mean, at the end of the day, you know, all of that is going to support, you know, our two key themes, and that is, you know, growing market share and expanding margins. That's ultimately what All of this is setting up to do, and I think what you're seeing is some of that operational discipline, and we've got a lot more to go and do, and that's what we're going to go out and do.

That's helpful. Thank you very much.

Thank you. Our next question is from Stephanie Moore with Jefferies. Please proceed with your question.

Hi, good afternoon. Thank you. First question is more of a follow-up of just the kind of the questions that kind of the last couple on AGP. If you could just talk a little bit if it would be helpful on just how NASP to AGP typically looks 2Q to 3Q in this environment. I know that's very challenging given the environment we're in, but any kind of typical color would be helpful just to kind of round out the really strong performance in 2Q and then, you know, kind of our thoughts going into 3Q. And then secondly, more strategic question, with the sales ESP business, we'd love to get your thoughts and appetite to explore maybe other strategic sales of other businesses within the enterprise. Thanks.

Sure, Stephanie, and thanks again for the questions. I'll start and then hand it over to Dave. From a NAS perspective, I think I'd point you back to the comments we made about the CAS shipment index. And, you know, normally we do see a slight decline from Q2 to Q3 from a seasonality perspective. But overall, I'd say, you know, we've seen muted seasonality throughout Q2. We're continuing to see that, or it's, you know, really hard to say whether how far that'll head into Q3. And then, you know, as Mike mentioned, it's pretty rare that the first month of the quarter gives a great predictor. And so, We really won't comment on it much further, but I'll hand it over to Dave to talk about the Europe question.

Yeah, hey, Stephanie, good to hear from you. Just to, again, look at portfolio, we're going to always look at our portfolio, I mean, like any company would do, but again, we feel really good about where we are. We like our four core modes, truckload, LTL, ocean, and air. Feel good about those businesses, feel good about what they're doing, and More importantly, where they're going to go and continue to go. So right now, I would say what you saw was something that we were doing to drive focus. And Mike gave color on a little bit of the technicalities of the EST business. But that's just that's the step we took for that. And I think that moves us closer to those four core modes. And right now, that's what we feel pretty good about.

Thank you, guys. Appreciate it.

Thank you. That does conclude our question and answer session. I'll now pass the floor back over to Mr. Ives for closing remarks.

That concludes today's earnings call. Thank you for joining us today, and we look forward to talking to you again. Have a great evening.

Thank you, ladies and gentlemen. This does conclude today's event. We thank you for your participation. You may disconnect your lines at this time.