Q2 2020 CH Robinson Worldwide Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the CH Robinson second quarter 2020 conference call.
At this time, all participants are in listen only mode.
Following today's presentation, Chuck I suppose facilitate a review of previously submitted questions.
If anyone needs assistance at any time during the conference. Please press the star followed by the zero on your telephone keypad.
As a reminder, this conference is being recorded Wednesday July 29 2020.
I would now like turn the conference over to Chuck <unk> director of Investor Relations.
Thank you Donna and good morning, everyone on the call with me today as Bob <unk>, Our Chief Executive Officer, and my exact Maestro, our Chief Financial Officer, Bob and Mike will provide a summary of work 2022nd quarter results.
Presentation slides that accompany their remarks can be found in the Investor Relations section of our website CH Robinson dotcom.
And we'll follow their comments with responses to the pre submitted questions. We received after our earnings release yesterday.
I'd like to remind you that our remarks today may contain forward looking statements slide two in todays presentation was factors that could cause <unk> actual results to differ from management's expectations.
And with that I'll turn the call over to Bob.
Thank you Chuck and good morning, everyone before we jump into our second quarter results I want to take time to recognize the recent civil unrest, we have seen following the killing of George Floyd in Minneapolis at the end of May.
Hi, and CH Robinson support the movement, calling for social and racial justice that we've seen gained momentum in the wake up is down.
Immediately following Mr. Floyd staff I sent a message to our employees and joined with other Ceos here in our home town in condemning his senseless doubt and calling for changes needed to address racial inequalities and social justice across our nation and around the globe.
At Robinson, our people are at the heart of all that we do and with that we're committed to building a culture inclusivity in belonging were all employees are able to contribute and to thrive.
It's built into our edge values and as part of our DNA.
Recent events of underscored the importance of this work, but we know that in order to truly make lasting change this work needs to be more than just a single initiative or a program and we're committed to ensuring this work is in grain and all that we do in order to perpetuate true and sustained change.
Turning now to our results in the second quarter, we saw unprecedented volatility in the freight industry. Our truckload net revenue per shipment increased substantially early in the quarter. If the cost of purchase transportation fell due to soft demand.
This was followed by a sharp increase in the cost of purchase transportation as businesses reopened demand for freight increased and the number of active carriers declined, causing a significant decrease in our net revenue per shipment as we continue to honor our commitment to our customers through these volatile market changes.
From a net revenue per shipment standpoint, each of these fluctuations on their own would've been the largest intra quarter changes that we've experienced in over a decade.
Despite this volatile environment, we were able to deliver solid performance across our diversified business portfolio due to the tremendous efforts of our CH Robinson team members around the world.
The broadening of our portfolio of services over the past few years is a key piece of the Robinson growth story and I expect that we'll continue to grow and deliver volume's been outpaced the market as we move forward.
During the quarter, we continued to make progress on our strategic long term initiatives around market share gains and productivity improvement.
Our results included a six consecutive quarter of market share gains, a nasty with 45% and 2% volume declines in truckload and LTL compared to a 21% decline in industry volumes on the second quarter as measured by the cast freight index.
Excluding head count from the recent acquisition of Prime distribution services, our productivity metrics continued to be strong as indicated by 1050 basis points favorable spread between the change in truckload volume and the change in full time equivalents in our announced business.
As we said in the past this was an important metric in a key focus of our technology investments and our transformation efforts.
Our technology initiatives also continue to drive increases in automation.
A few examples of this include a 56% increase in fully automated truckload bookings compared to second quarter of last year.
Our digital transactions were up 55% compared to a year ago, and we're now on pace to exceed over a billion transactions for the year.
And traffic continues to grow our freightquote by CH Robinson platform, but digital self serve product offering for small businesses that we introduced late in 2019.
Our global forwarding business was at the forefront of helping them world get personal protective equipment urgently and efficiently.
The air market and second quarter was impacted by reduced cargo capacity increased charter flights and larger than normal shipment sizes, which created an environment with unusually high rates for airfreight.
Shippers increasingly relied on Robinson global supply chain expertise and our data and scale advantages to ensure critical goods were moved as quickly and as inexpensively as possible.
This resulted in a 100% year over year growth in our airfreight net revenue.
As we discussed on last quarter's call. We also took steps across our organization to reduce cost in the short term while industry volumes are down.
These cost reduction efforts include furloughs and workforce reductions elimination of non essential travel a temporary compensation reduction for our company executive officers and board members as well as a temporary suspension of the company matched to retirement plans for our us and Canadian employees.
The short term cost controls were put in place at a time when they were greatly needed and they demonstrate our ability to flex our cost structure as our business cycles change.
We've learned a lot as we've managed through the pandemic about how to be more agile how to working to sell differently, how to collaborate and communicate more effectively and how to serve our customers and carriers and new ways. While we work in these virtual teams.
As a result of this and our ability to harness the benefits of our technology investment in our network transformation approximately one half of the short term furloughs have become permanent head count reductions.
We will continue to evaluate our global business operations to ensure we manage our business and the most efficient manner and continued to deliver superior service to our customers and our carriers.
Our resilient and responsive business model generated $447 million of operating cash flow during the second quarter. Our balance sheet is strong and we exited the second quarter with $1.6 billion and liquidity, we are well positioned to weather the economic uncertainty in the months ahead, and we will emerge stronger from this difficult time.
I'll now turn the call the Mike Duck Meister to review, our second quarter financial performance.
Thanks, Bob and good morning, everyone.
I'd like to begin by adding some color to Bob's comments about our solid liquidity position in Q2, we increased the company's liquidity by approximately $390 million to 1.61 billion.
Our liquidity is comprised of $1 billion of committed funding under our credit facility, which is undrawn and matures in October of 2023.
We have $250 million of available credit from our accounts receivable securitization, which has also undrawn matures. It this December.
Finally, we finished Q2 with $362 million in cash.
Our gross debt to EBITDA leverage was 1.48 times.
Our business model continues to deliver solid operating cash flow during periods of significant volatility.
Our second quarter gross revenues decreased 7.2% compared to the same quarter last year, primarily due to lower pricing in our truckload and LTL service lines.
Total company net revenues decreased 11.6% in the quarter, primarily due to lower truckload net revenue per load compared to Q2 last year. This was largely anticipated as second quarter last year benefited from higher net revenue margins in our contractual truckload business due to falling carrier costs.
As Bob mentioned, we experienced significant volatility in truckload net revenue in second quarter.
Q2 total company net revenues per business day were down 13% in April down 2% in May and then down 19% in June compared to the same periods last year.
For reference in the first two quarters of 2019, we experienced relatively high net revenue per shipment across started Nast truckload business.
In 2019 total company net revenues per business day increased 4% in April 6% in May and 1% in June compared to the same periods in the prior year.
Q2 personnel expenses totaled $300.5 million down 11.3% from Q2 of last year, primarily due to our short term cost reductions and poor variable compensation.
Q2, SGN expenses were $125.2 million down 2.8% from Q2 last year, primarily due to the elimination of non essential travel and non critical project spending.
This decrease was partially offset by an 11.5 million dollar loss on the sale and leaseback of a company owned data center.
Overall, our short term cost reduction efforts generated approximately $40 million of savings in the second quarter.
As we communicated previously we've put in place short term cost takeout initiatives to generate savings primarily from personal actions. The elimination of non critical project spending reductions to travel and entertainment and suspensions of our company matched to retirement plans in the U.S and Canada.
As a result of leaning into these initiatives with greater depth, we're increasing our estimate of the short term cost takeout savings to approximately $80 million in 2020 compared to the $60 million a savings we communicated on the Q1 call.
Total second quarter operating income was down 17% versus last year and operating margin declined by approximately 200 basis points compared to Q2 last year, primarily due to the decline in net revenue dollars, partially offset by reductions in personnel to SGN a expenses.
Second quarter interest and other expenses totaled $10.2 million up from 6.6 million in Q2 last year.
Q2 interest expense was $12.4 million, which decreased modestly from 12.8 million in Q2 last year, primarily due to a lower average interest rate.
Our expense in Q2 included a $1.8 million gain from currency revaluation, which was down 1 million compared to the $2.8 million gain in Q2 of last year.
Our second quarter effective tax rate was 19.4% compared to a 23.4% rate in Q2 last year.
Our Q2 effective tax rate included a rate benefit of approximately four percentage points related to the delivery of a large onetime deferred stock award that was granted to our prior CEO in 2000.
We now expect our 2020 full year effective tax rate to be 20% to 22% down from the 20% to 24% range that we communicated previously.
Net income totaled $143.9 million in the second quarter and diluted earnings per share was one dollar and six cents in Q2 down 13.1% from Q2 last year.
Turning now to cash flow Q2 cash flow from operations was approximately $447 million, an increase of 124% versus Q2 last year that 248 million dollar increase was driven primarily by favorable changes in working capital.
Sequentially, our cash flow from operations has also exhibited volatility with low cash generation in the first quarter of this year and high cash generation in the second quarter.
Neither quarter on its own is indicative of our expectations going forward. However, if you look at the past four quarters, we delivered 885 million of operating cash flow, which is more indicative of what we would expect going forward.
Q2 capital expenditures totaled $10.3 million, bringing our year to date capital spending to 25 million.
We now expect our 2020 full year capital expenditures to be on the low end of that $60 million to $70 million range that we communicated in January.
We continue to prioritize the highest returning technology initiatives on a risk adjusted basis, and we remain committed to our 1 billion dollar investment in technology took 2019 to 2023.
We returned approximately $68.4 million to shareholders in Q2, which consisted almost entirely of dividends and represented a 62% decrease versus Q2 last year.
The Q2 decline was driven by the hold we placed on our share repurchase program in March out of an abundance of caution given the uncertainties in the economy posed by the pandemic.
Over the long term, we remain committed to our quarterly dividend and share repurchase to enhance shareholder value.
We expect to resume our opportunistic share repurchase program in the fourth quarter of this year.
Now onto some balance sheet highlights as I mentioned, we finished Q2 with $362 million and cash our cash accumulation resulted from strong operating cash flow in the absence of share repurchases over the long term, we intend to carry only the cash needed to fund operations.
Our debt balance at quarter end was $1.1 billion down approximately a $160 million versus Q2 last year as we paid off our variable rate debt, which represents all of our debt that is prepayable without penalty.
Our Q2 weighted average interest rate was 3.9% in the quarter compared to 4.2% in Q2 last year.
We will continue to seek out and deliver on opportunities to drive efficiency into our business model.
With that we've taken actions to convert some of the short term cost savings into long term cost savings primarily through reductions in force related to process redesign in automation in our Nash business that Bob referred to earlier.
Of the $100 million of long term annual savings expected by the end of 2022, we're confident that we will deliver at least one third of those savings in 2020.
Thanks for listening. This morning, now I'll turn the call back over to Bob to provide some additional context on the business.
Thank you Mike on slide eight of our presentation, the light and dark blue lines represent the percent change in NAFTA truckload rate per mile build to our customers and cost per mile paid to our contract carriers, excluding fuel costs over the current decade.
During the quarter price per mile Bill to our customers declined 5.5% compared to the second quarter of last year, while cost per mile paid to our contract carriers net of fuel declined 2%.
But as I mentioned earlier this quarter was perhaps the most volatile quarter, we've ever seen and the averages do not tell the whole story.
We experienced large swings in year over year changes in truckload volume and demand depending on the industry vertical and how it was impacted by cobot 19.
We experienced volume growth of 10% in the combined verticals of retail food and beverage technology paper and healthcare offset by combined truckload volume declines of over 20% in industries that were more directly impacted by the current environment, such as automotive manufacturing chemicals and energy.
Costs in the spot market quickly declined early in the quarter due to soft demand and then increased sharply this business has reopened and demand for freight increased.
Through all of this disruption we continued to honor our commitments on our contractual pricing agreements with our truckload customers. Despite instances, where the cost of purchase transportation exceeds our customer pricing.
Meeting our commitments is a key component of our brand and is one of the reasons, we have such high retention rate with our customer base, but it also carries a cost at times and it resulted in a higher percentage of truckload files with negative margins as we progressed through the quarter and into July.
As costs rose on the back half of the quarter industry acceptance rates also declined driving route guide.
Began to rise.
Historically prices follow costs in the trucking industry and we expect that rates will begin to adjust to the current environment as we repriced expiring contracts throughout the balance of the year I'll wrap up our prepared remarks. This morning with a few final comments since the beginning of the Cobot 19 pandemic. Our team is focused on three key.
Pillars as guideposts for our decision, making first ensuring the health and safety of our employees second providing supply chain continuity for our customers and our carriers and third protecting the economics security of our people to the greatest extent possible.
We continue to believe that these pillars of the right way to evaluate our decisions and to keep our focus on the long term health of our organization.
Our investments in technology have enabled us to effectively maintain a remote work environment with out disruption to our customers or our carriers, while enabling our employees to work safely from home.
And while there are still uncertainty in the freight market and within the broader global economy, we remain committed to our vital role in the global supply chain by delivering critical and essential goods and services.
As a company will continue to make measured and thoughtful decisions that are in the best interest of our employees, our customers and our carriers and the long term health of the company, while remaining true to our values and the pillars. The guide our business decisions.
Importantly, we'll also continue to act in the best long term interest of our shareholders by balancing prudent short and long term cost reduction efforts with continued investments in technology, driven at maximizing growth and value creation.
As the freight market and broader economy continues to recover we're committed to providing best in class service to our customers continuing to grow market share and driving the transformation of CH Robinson, while we emerged from this time of uncertainty as an even stronger company.
And finally, I'm incredibly proud of the effort in the dedication of our employees around the world in these unprecedented times I. Thank all of that for what they continue to do to deliver excellence to our customers in our carriers and the support that they provided the communities that we all live and work in.
That concludes our prepared comments and with that I'll turn it back to data. So we can answer the submitted questions.
Mr. On the floor is yours for the Q and a question.
Thank you Donna first I would like to thank the many analysts and investors for taking the time to submit questions. After our earnings release yesterday.
For todays QNX session I will frame up the question and then turn it over to Bob or Mike for our response.
Our first question is for Bob from several analysts we haven't heard a number of brokers over the course of this earning season talking about how tight market conditions are in July and Hell truckload brokerage margins are at unsustainably low levels and feels like the truckload market is that a tipping point can you talk about what you are seeing in your business in June.
Slide and is it your sense that the routing guides are beginning to breakdown. If so can you walk us through what that would mean for your business over the course of the next several quarters.
Yes, certainly apartment topic for for the quarter I would say, it's hard to tell where things are going in the next several months given all the uncertainties around the country potential continued stimulus or extended stimulus. The second phase of shutdowns potentially in some states unemployment consumer spending and confidence other coated related challenges, but I'll try to address some of the trends that we.
Our seeing carrying into July operationally in our business.
Regarding routing guides, we have seen a sequential degradation of routing guide performance in our managed services business really over the last 10 weeks or so and as a reminder, that business represents around $4 billion and freight under management. We believe it's a pretty decent proxy to how routing guides are performing for large shippers across the industry. When we look at first 10.
Under acceptance rates, we've seen that trend decline from high in the in the 90% range to close to 70% in the most recent week and when that when you translate that into how routing guides are performing we see that depth of tender number move from about 1.1 to about 1.5 in the most recent week so that.
That encapsulates our managed services business when I look at those data points, coupled with some of the things that we're seeing a nasty around the percentage of loads, resulting in negative margins as well as the aggregate demand from shippers on lane, but we weren't preliminary awarded in past beds. It does feel like we're at a bit of an inflection point in the market in terms of how that.
Translates to our results and what it means for US. We obviously saw some margin compression in the quarter and in contracts that we price and the third quarter and fourth quarter of last year I'd expect that to continue until we've got that opportunity to reprice that business when those contracts expire in the back half of the year.
Based on where our truckload net revenue per load is today, which is really at the low end of our historical range. We do expect some of those headwinds around margin to carry forward.
The offset to that though is that we continue to see pressure on first tender acceptance and routing guide performance that should open up a more consistent opportunity in the spot market to support our customers where potentially other providers may not be honoring those commitments are choosing to selectively deploy assets to higher margin opportunities and their networks.
From a volume perspective, we are seeing recovery in some of the industry segments that were hardest hit in second quarter, which is a benefit to our overall volume moving forward.
Additionally, as I said and some of the prepared remarks, we can really intense on managing and honoring our commitments in this period, where volumes have outperformed the market on a relative basis I think that were further deepening these relationships that we have with our clients and showing our long term both to their business into our relationship, which I think really sets us up well going into future pricing event. So we're going to continue.
To take that long term view it with our customers in order to maximize our results.
The next question is from Todd Fowler with Keybanc.
Jack Atkins with Stephens, Brandon Oglenski with Barclays and Ken Hoexter with Bank of America asked similar questions.
Mike what structural takeaways, where learn from the current quarter results going forward could personnel expenses be at a lower level of net revenue permanently can travel and entertainment be more permanently curtailed to improve margins are there other more permanent cost reductions that can be implemented based on current quarter results.
Thanks, guys. It sounds like for good questions in one let me tackle them in two parts.
On our structural learnings in Q2 travel and entertainment and more permanent cost reductions I would say that the pandemic related transition to remote work environment has us rethinking a few areas within our business.
First relates to productivity efforts our progress in Q1 in Q2 definitely gave us confidence in our ability to successfully implement process standardization and technology enhancements in a remote work environment you saw the productivity results across Nast, where we had 1050 basis point favorable gap.
Between percent change in volume percent change in head count.
Similarly, we're looking closely at our real estate footprint and our travel and entertainment expenses depend demick has shed light on our ability to leverage technology to work effectively from outside the office and with very limited travel in many cases, the technology for working remote has enhanced our engagement with customers.
While we're not ready to say that a fully remote workforce without travel is a reasonable long term outlook meaningful reductions to both our certainly under consideration.
The next part of the question was around.
Longer term reductions to personnel expenses as a percent of net revenue.
Here I would point to a few forces at work versus productivity, we've talked about our journey, there, which certainly results in a lower personnel expense as a percent of net revenue.
However, we've also a couple of forces working in the opposite direction incentive is one the variable component of our personnel expense related to bonuses in equity compensation has been suppressed as an enterprise in 2019 2020.
While we would expect similar incentive expense in Q3 in Q4 compared to Q2, we expect incentive in incentive expense to be a sizable headwind in 2021, along with other expectations of better business results year over year.
Healthcare is also a component personnel expense that came in lower in Q2 healthcare as a percent of totaled personnel expense saw roughly 200 basis point benefit in Q2 versus Q2 less last year, let me repeat that that was healthcare as a percent of total personnel not net revenue I would now.
I'd expect the levels that we saw in Q2 to continue as employee health care visits and elective procedures get back to a more normal level when the pandemic subsides.
Our next question for Bob is from jet seconds, that's with Stephens Scott Group with Wolfe Research Allison Landry with credit Suisse, and Fadi Chamoun with BMO capital markets as similar questions.
How should we think about the sustainability of the sharp rise in air forwarding net revenue and global forwarding operating margin is this a onetime windfall or should we think about us perhaps driving more demand for your air forwarding services, while we see passenger belly freight capacity return, which could be awhile.
So no question at the Airfreight market is still on a constrained environment relative to clinical normal as largely that passenger belly space has been absent from the market pricing has subsided from the peak that we experienced in Q2, but capacity does remain constrained and we're seeing strong demand for charter service carry into third quarter I, certainly don't expect 100 per se.
An increase in our airfreight net revenue to be the go forward new normal, but we are seeing increased and continued demand and opportunities to provide the service to our clients in a pretty meaningful way on a go forward basis, we feel really good about our service mix and forwarding and our ability to operate in our clients best interests and ensure that we can optimize their supply chain and we've got the capacity that meet.
Their need whether it's the air Gateway, where this will be charters, FCL, LCL or our traditional or expedited Ocean services.
Terms of operating margin in that business, we set of a number of times before but we do believe that we have through through our work and forward image ability to have industry, leading operating margins in that business.
You saw obviously this quarter extremely strong results there.
But we said we think our goal is to be about 30% operating margin range and forwarding is kind of a long term target.
The next question for Bob comes from Brian Ossenbeck with JP Morgan.
Actually Burger with Oppenheimer asked a similar question.
Robinson continues to add new carriers to the brokerage network, how does that capacity look at this point of the year when demand is well above seasonality considering the different dynamics in play around coven 19.
Has there been any meaningful capacity curtailments individually or in the aggregate.
Thanks, Brian as guided it does seem like we're seeing some exit of capacity from the marketplace. We added 3700, new carriers in the quarter, which is obviously a large number of carriers, but it is one of the lowest numbers of new carrier sign ups that we've seen in the past several quarters.
If we look at the total number of carriers utilized in the quarter, we actually saw that number trend down as well with the largest drop in terms of absolute numbers being in the small carrier space or those carriers that have less than 10 trucks on both a sequential and year over year basis, we saw that number of active carriers dropped by around 10% sequentially and closer to 15% year over year.
Sure.
Part of what makes it difficult to read through these numbers. However is that we've made some some pretty meaningful changes during the quarter to what we call our carrier advantage program, which we an act, which we drive which we which we made the changes in order to drive and award freight and opportunity to our highest performing carriers in the network. So that change likely had some impact of the total number of.
Active carriers used by Robinson in the quarter.
Variable, though that we're watching around capacity as related to how the paycheck protection program intersects and maybe buoyed some of the capacity in the marketplace in the second quarter and so some uncertainty I think still remains around how thats going to play out in the coming month in quarters.
The next question for Bob is from Jack Atkins with Stephens to the extent, we see a turn in the truckload cycle here over the next few months how is the organization better prepared to capitalize on this cycle today versus 2017 2018 asked another way if we see a sharp rise in spot market demand and market rates can.
Can you to move higher will your investments in technology and automation over the past five plus years position the company to grow volumes net revenue and ultimately profits any differently than prior cycles.
Thanks, Jack we're not really different place announced today than we were during that inflection point in 2017 2018 was that market was changing really rapidly it really intersected with what I would call. The early stages of our Nast transformation and we're frankly managing through a ton of internal changes while that market was changing dramatically around us.
Structurally today, our footprint has changed pretty significantly since that time, our operations functions have largely been centralized into scaled centers that allow us the ability to scale task oriented work in a more efficient manner and intersect technology more effectively than we were able to do at that time, that's going to drive greater quality for us in greater efficiency and weve since that time.
With completely revamped our salesforce, we've we've re size that team we've introduced new technologies that they can manage their activities opportunities and results more effectively we've aligned that came in at territory. So that can maximize the penetration of those markets.
From a carrier management standpoint, and other important component of our NASS model. We're now operating in a national model across larger scale teams versus our historic distributed local model, but also gives us a scale advantage the ability to leverage technology more effectively.
From an overall investment attacking a capability standpoint, we've got more and better digital tools today that allow us to fill facilitate things like pricing and quoting and low distribution and freight matching and fully digital and automated ways, but didnt exist for us about time.
And from a connectivity standpoint, we're much more connected platform than we were which leads us to much less manual intervention and makes it a lot easier for our customers to engage with us and easier for us to capitalize on spot market opportunity. So I do think these things all conferred converge in a way to position us to to be more effective and demonstrate real progress in.
Transformation.
The next question from Mike is from Todd Fowler with Keybanc, Jack Atkins with Stephens, Brian Ossenbeck with JP, Morgan and Tom Wadewitz with UBI us as similar questions. What color can you provide around expectations for furloughed employees to come back and work hours to normalize longer term do you expect volume growth.
Outpace head count growth in Nast.
Thanks for the question, given our progress and leveraging technology and process improvement investments and as Bob mentioned approximately approximately half of our furloughs were converted to long term worst workforce reductions.
For those employees returning from furlough the vast majority returned to work, albeit remote this week.
Given our ongoing commitment to technology investments, we expect volume growth to continue to outpace headcount growth in nast in a meaningful way.
Our focus is on widening that productivity gap between the percent change in headcount and the percent change in volume by continuing to simplify standardize and automate processes for our customers carriers and employees.
The next question is from Bruce Chan with Stifel, Jack Atkins with Stephens asked a similar question.
Bob what does the most impactful technology initiative that you currently have underway.
I would distinguish your value proposition from customers or make operations more efficient.
And can you give us an update on where you stand relative to some of the CPI as you track to get a sense for the progress you're making.
So there is no one initiative or magic bullet, but I'll try to weve. It together in a way that makes sense here cross our technology roadmap. We've got several initiatives underway in each of them comes in some way with a new digital capability being delivered coupled with a change in our legacy business process. So our transformation isn't just really about tactics about how attack in our people and price.
This has come together to drive better outcomes and more value.
As I've said before our tech input investments are really pointed against three key areas around customer innovation carrier value creation in network efficiency.
Customers are looking for innovative new ways to manage complex global supply chain challenges and to mitigate risks they want connectivity. They want visibility they want predictive analytics that can help identify problems in their supply chains before they need to deal with them and we're delivering most of them today.
Our carriers continue to look for ways to improve efficiency in their networks get more access to freight in a frictionless environment drive deadhead miles out of their models and improve their yields and so our efforts are focused on providing those opportunities to them.
Our employees are looking for ways to drive efficiency into their workflows to focus on the work that matters to have tools to be more effective and selling and pricing and winning business and we're providing those today to them today as well.
Yes, I think about the CPI is the simple math on thus from an internal perspective, our shareholder return perspective is that our tech investments made to fuel topline growth while at the same time, allowing us to be able to do more with less or at a minimum more with the salmon in our case the denominator in that equation typically its head count and numerators, either a task or a business process or a shipment count and so.
That's how we'll drive returns in the model as we said in our prepared comments, we were able to turn about half of those short term furloughs in a permanent cost savings from our investments and tack on those those impacts are having on our workflows.
Across the three converging areas of customer carrier and efficiency or workflow focus one of the keys is connectivity and we're rapidly expanding the number of companies in the platforms that were conducting well think about large scale ERP use in CMS is in order to extend the benefits of the navisphere platform for our customers native system. So that they can engage with us where and how.
They want to.
The number of Btv transactions that were processing is up exponentially for the quarter and the spans the gamut from fully automated truckload bookings the real time location updates to low tenders and acceptance.
Run that run rate to far exceed over 1 billion B to B digital transactions. This year, our algorithmic based pricing engines have delivered over a million automated price quotes with capacity assurance to our customers in the first half of the year, just driving tremendous opportunity for efficiency and share gain in the Nast model.
The Jack's earlier question about comparing today to 2018 during that timeframe, we would have had to manually manage and respond to all those quotes and today, we're able to we're able to do that at the speed of thought and do that in seconds without human interaction, which really helps our win rates and drive drive share gain.
Our emerging in small business customers continue to migrate to our freightquote by CH Robinson platform, we feel really good about the average users that we've got on that and we've introduced parcel that solutions are now automatically able to book LTL truckload and parcel on an automated manner. So automation innovation network transformation are those three converging forces that I see.
Coming together here to really drive results and that spread between volume and headcount masks and across the enterprise as one of the core CPI is that we'll continue to Mount monitor and communicate along with the growth in digital transactions and digital bookings and things of that nature in the long term, though our ability to deliver industry, leading operating margins continuing to take market share.
Through cycles, and showing demonstrative and sustained productivity gains that the employee grain are really those key metrics.
The next question is for Mike from Ben Hartford, with Robert W. Baird regarding the decision to resume share repurchases in Q4 of 2020 any reason to not resume them immediately.
Great question. Thanks, Ben.
The short answer is we are treating the current environment with an abundance of caution for another couple of months as we highlighted we have more than ample liquidity low leverage in the ability to generate solid cash flows in the most volatile market conditions. Despite that these are still uncertain times, so we're placing higher value on liquidity and balance sheet.
Strength in the near term and we expect to return to our opportunistic share repurchase program in Q4.
The next question comes from Matt Young with Morningstar, Jordan Alligator with Goldman Sachs asked a similar question.
Could you provide some color on the cadence of year over year contract pricing in the second quarter and what you are seen thus far in July.
I would describe the environment surrounding contract pricing in the second quarter is largely disrupted because markets were moving so quickly throughout the quarter I think it was difficult for shippers and carriers both to navigate those ever changing dynamics, which resulted in several bids with extended rounds of bidding and Rebating resubmission. Some mini bids I'd say for our results.
Aspect of the rate in which we were awarded contract freight in the second quarter basically measured by the number of loads awarded versus the number of loads bid was slightly ahead of both our Q1 win rate as well as our five year trailing average.
The next question for Bob This from Ben Hartford, with Robert W. Baird, Chris Wetherbee from Citi, and Scott Schneeberger with Oppenheimer similar questions.
To what extent did you realize any change in competitive dynamics during Q2 amid the volatility in monthly or even weekly gross margins, particularly within your core Nast truckload segment.
So honestly the market dynamics in the second quarter as we try to describe them or so extreme it within the quarter in terms of the rapid fallen rise of cost of purchase transportation and spot market pricing.
Along with the absence of demand in some industry verticals and a record demand and other industry verticals, it's nearly impossible to identify the impacts of competitive dynamics versus the overall macro environment related to supply and demand.
I would cite an improving demand environment that we're seeing from from the trough and ongoing pressure on running guy performance in depth of tender coupled with increased cost of purchase transportation as the quarter progressed as a real observations related to.
The North American truckload market.
The next question is for Bob from Fadi, Chamoun with BMO capital markets.
Labor productivity trends inside and asked have improved and this quarter performance is better than we've seen in a while to volumes are up 10% in the next 12 months would you need to add headcount are we seeing a transition to a more sustained productivity improvement for us in Nast.
So top of head I think that Q2 represented the third quarter in a row, where we delivered a positive spread between our change in headcount in our change in volume and Nast and I believe that we've got continued opportunity to drive this favorable spread moving forward as more digital products get delivered and reached full adoption across the network. So I do expect these productivity gains.
To be sustained over time.
Specific to the 10% question Theres a lot of variables that go into that answer as not all volume is equal so to speak.
It really is dependent on the efficiency of a particular type of freight customers capabilities are abilities to operate in the digital environment. The freight mix of freight mix really has a lot to deal with answering that question, but I do believe that the productivity gains can be sustained.
The next question for Bob is from Brian Ossenbeck with JP Morgan.
Where do you believe Robinson is taking share in LTL and truckload and how sustainable do you expect the share gains will be in the back half of the year.
Our market share gains are pretty broad based within the quarter. If you compare our blended truckload and LTL volume changes to the Caf index, you see it really meaningful market share gain there.
I've had some conversation with analysts that prefer the U.S. bank volume index as a proxy and even if you use that you see really meaningful market share gains against that index as well. If you look at our LTL volumes versus many of the comparative companies reporting tonnage changes in the LTL space, you see a pretty strong outperformance that improved throughout the quarter and LTL as well. So I believe that are mark.
Get share gains are really driven by the value that we create for our clients on the supply chain and then how we continue to demonstrate our commitments and honoring those commitments when we make them I think that set us up really favourably from a volume perspective in the back half of the year and into the future.
The next question for Mike is from Jason Seidl with Cowen and company.
Scott Schneeberger from Oppenheimer asked a similar question what are your capital allocation priorities and how does the M&A market look.
Despite the hold into Q until Q4 on our opportunistic share repurchase program our longer term capital allocation priorities remain the same or.
Our top priority for capital allocation remains the closely and investments that we're making to fuel growth and efficiency on our core business, we evaluate those on a risk adjusted basis and you're seeing the results of those investments in the productivity and market share gains that we talked about it nast.
We're also committed to our quarterly dividend and growing it over time.
On the M&A front, we continue to maintain a strong pipeline of opportunities that under the right circumstances could generate compelling risk adjusted returns.
The current environment, certainly favorable from a borrowing standpoint to the extent that financing is needed.
But the pending that pandemic related uncertainties of the market and the outlook on the corporate tax rate create some level of hesitation with that we'll we will continue to maintain our disciplined around value creation with respect to our M&A pipeline.
The next question is from Jason Seidl with Cowen and company, Bob What is your long term NASS. What is your long term view on long term Nast net revenue margins and EBIT margins.
So if we look at net revenue margins for Nast over time, they've averaged 16.4% from 2015 through the most recent quarter. When they were at 15.3, if I think about what the anomalies are over that five and a half year period. It's really Q4 of last year in Q1 of this year when they were at 14% 13.2% respectively.
We've seen that average come down from roughly 17.5% that we experienced in 2015 and 16, but over the longer term I really don't expect those margins to trade down materially as I believe that some of the impact in the most recent short term has been driven by some pricing in the industry led by some companies attempting to take share at all costs with little to no regard to profits.
Realty.
In terms of operating margin in the long term I do believe at the Nath business can achieve operating margins more reflective of that same trailing five and a half year period, which is north of 40% and so there is clearly going to be some puts and takes on a quarter to quarter basis, but achieving operating income over 40% as is the target for that business.
The next question is from Jack Atkins with Stephens.
Bob as you look forward I think in the past you'd have noted that CH Robinson could be a company with 30 billion in revenue at some point, which is roughly double year 2019 revenue base. You have also noted that you wouldn't be surprised if net revenue margins trend down overtime.
Putting those two things together with investments in technology, which are aimed at driving efficiencies. If revenue is doubling what would prevent your profitability from doing the same thing.
As we've talked a lot on the call today about cost containment cost management Super important parts of the story, but Robinson's future is based on on the balance of growth topline growth and getting the right cost structure and so there's no reason, but to think that this shouldn't be the case I think that that 30 $30 billion target as a realistic one for us.
And we've got this huge total addressable market across our global suite of services in our value proposition as compelling and becoming more compelling for the customers that we work with you think about our penetration we're somewhere around 3% of the market in the us or maybe 1% of the market in Europe, and while were the leading NVCC on the transpacific East bound.
And a few other trade lanes, we've got so much room to grow organically and I think there is also going to be some logical M&A opportunities as Mike was talking about in the coming years that theyre going to fit our structure of how we look at companies so far to still our efforts as a management team around enterprise efficiency and cost management I'd characterize it somewhat is preparing for the worst and hoping for the Boston So the thesis.
But margins are going to come down over time, we're looking at a lot of scenarios over the course of the next five years and saying what if margins went to here or what if margins went to hear what our cost structure needed to look likes that we can continue to generate appropriate returns to our shareholders asking the question of how lean can our cost structure really be while still supporting our topline growth aspiration.
Yes, and achieving that $30 billion target and what steps can we take now to test our framing Ida. So I think I've said it before margins likely go down over time, and I thought that for a long time, but as I said with the last question. The reality is that they've stayed really pretty tightly range bound over the past decade.
The next question is from Brian Ossenbeck with JP Morgan for Mike.
How large was the spending on nonessential travel during an average quarter of 2019, what does the expected quarterly spend on SGN a excluding this adjustment.
Has it changed from the 130 million to 135 million rate per quarter.
Yes, as I mentioned earlier, we've learned a lot as we've managed through the pandemic how to work in cell differently and how to serve our customers and carriers in new ways and this has made our travel and non critical projects spending reductions more palatable and we've reduced our spending in Q2 to 114 million dollar.
Excluding the 11 and a half million loss in the data center.
Since some of the Q2 savings were short term in nature, we would expect total SGN expenses to be closer to $120 million per quarter in Q3 in Q4.
The next question is from Ravi Shanker with Morgan Stanley for Mike Jordan, Alexander with Goldman Sachs asked a similar question.
What was the driver of the big year over year increases and other net revenue in Nast and global forwarding is that M&A.
Yes, thanks for giving us the opportunity to clarify those the 141% net revenue increase in Nast. Other is driven by the prime distribution services acquisition and as you recall Prime began contributing to our results in March. So in Q1, we had the benefit of one month in Q2, we saw the benefit for the entire quarter and for.
Clarity. This is the warehousing component of the prime business that has rolled up under other the freight component is rolled up into LTL.
The 64.5% net revenue increasing global forwarding other was driven primarily by some large projects within our project logistics business, which specializes in moving heavier oversized freight on flat bed at comes in via Air Ocean.
The next question is from Brian Ossenbeck with JP Morgan for Bob Allison Landry with credit Suisse asked a similar question.
Have you noticed an appreciable difference in the behavior of digital brokers over the last few quarters during a period of heightened volatility for the financial and freight markets would you consider acquiring a digital broker to further the tech investments at Robinson or do you prefer internal development.
So anecdotally we've heard some stories from shippers that some of the new entrants have become less aggressive in pricing, but that's really pretty situation on it and it really shouldn't be construed as an overall change in strategy and frankly I'm not comfortable commenting on the strategy of any of our competitors and I'm not sure. It's the highest and best use of time, one observation that I would share in the quarter, though is that.
Our margins in the spot truckload market on a per load basis were lower than we would normally expect to see in a period of market dislocation. So it's still clearly a really competitive truckload marketplace out there.
In terms of M&A work, we're always going to look at like Mike said at looking at the best way to deploy our capital to drive long term shareholder value through a risk adjusted return basis.
In a characterizing M&A for us any deal that we do we expected to be accretive to EPS and long term and for us to consider M&A, we need to be adding either new capabilities, expanding our global footprint, making improvements to our technology or adding scale to our network that we think is actually sustainable and the culture of the company's that we'd look at us.
Really important and needs to fit with the culture of Robinson. So when I look at that question through that lens and we look across the landscape of digital brokers based on what we know today Im not sure that Thats, an investment that would be in the best interest of Robinson our shareholders.
The next question is from Chris Wetherbee with city for Mike, which segment was the data center loss accounted for in Nast Global forwarding or other thanks, Chris the 11, and a half million loss on the sale leaseback of our datacenter was included in our all other in corporate segment.
The next question is from Brian Ossenbeck with JP Morgan for Bob Bruce Chan with Stifel asked a similar question.
Ocean rates have held in fairly well over the last several months as carriers rationalize capacity can Robinson continue resetting or passing through rates ahead of the market.
The steamship lines have done a really effective job of aligning their available capacity to the overall demand in the marketplace, whether through managing plant like sailings and other initiatives as you've seen in past cycles within our forwarding business. Our procurement strategy, that's really blended in our ocean business allows our margins to say pretty tightly bound while we're still.
Still able to procure the appropriate container capacity in service levels that our customers need with the pricing model, that's appropriate for them and for our partners on the Steamship line side, we don't see any meaningful change to our ocean margins really moving forward given the current dynamics that we're seeing today in the marketplace I will say our pipeline for growth in the ocean product as Rick.
The strong and we continue to take share in our core lanes, and we're winning allocations from new and existing customers at record rates.
The next question is from Brian Ossenbeck with JP Morgan for Bob have shippers increasingly released many bids to secure additional capacity.
We have seen some occurrence of many bids and extended rounds of biddings with some of the shipper procurement exercises over the past few months I think that's natural and I've attributed to the rapidly shifting movement of the marketplaces and in some cases, the deterioration of routing guides. So good wafer shippers and mitigate risks within their supply chain Robinson, we're working.
Looking at new ways to help shippers to collaborate during this unprecedented time leveraging some of the new technology tools that we have delivered driven by data science and order identified new ways to deal with some of these unplanned changes in customer supply chains were proactively developing plans with our customers that are really granular level for the upcoming quarters anticipated some continued.
Volatility in the need for adaptability and flexibility.
Our final question for Bob is from Brian Ossenbeck with JP Morgan Bruce Chan with Stifel asked a similar question.
RPN truckload net revenue increased noticeably during the quarter have the entrance of new competitors made a noticeable difference what does this strategic focus for this business line over the next year and does it represent a potential growth opportunity within Robinson.
We're really excited about our business in European surface transportation right now and quietly those results have continued to improve over the past several years and the second quarter was particularly strong.
While we havent seen any impact of new competitors in the European marketplace that marketplace, while roughly equal to the size about in the us in terms of trucking really doesn't have the proliferation of Threepl is like we do here in the U.S. and so our asset free model is pretty unique in Europe, and it's really gaining traction in terms of scale strategically over the past few years.
I've been shifting our focus to being more of a core provide to being more of a core provider of contractual truckload services to large European shippers versus our maybe legacy approach of playing more of a backup role for surge capacity our business mix on the trucking side in Europe as a nice blend between cross border business as well as having a lot of local intercompany.
Or intra country, rather line haul business.
We're winning business in Europe, right now at record levels and I've got a number of tenders that are and implementation.
And we expect that to continue to fuel growth through through this year and into next much like our Nast team, our EFT team or European surface transportation team as we call them are actively looking at capturing the benefits of digitalization in their business in order to drive improved productivity and returns back to the bottom line.
While there is unique differences between the business models between continents and the needs of customers, there's a pretty high level of collaboration in terms of the technology development and deployment between STN mast. So that both business units are able to capitalize on the investments made in the Navisphere platform.
That concludes the Q and a portion of today's earnings call. A replay of todays call will be available in the Investor Relations section of our web site at CH Robinson Dotcom at approximately 11 30 am eastern time today.
If you have additional questions I can be reached by phone or E. Mail. Thank you again for participating in our second quarter 2020 conference call have a good day.
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