Q4 2020 CH Robinson Worldwide Inc Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to the CH Robinson fourth quarter 2020 conference call.

At this time all participants on a listen only mode. Following today's presentation check on us will facilitate a review of previously submitted questions.

If anyone needs assistance at any time during the conference. Please press star followed by the zero on your telephone keypad.

As a reminder, this conference is being recorded Wednesday January 27 2021.

I would now like to turn the conference over to Chuck Ives Director of Investor Relations.

Thank you Donna and good morning, everyone on the call with me today is Bob <unk>, Our Chief Executive Officer, and Mike <unk>, Our Chief Financial Officer.

Bob and Mike will provide a summary of our 2024th quarter results and we will follow their comments with responses to the pre submitted questions. We received after our earnings release yesterday.

Before I turn it over to Bob I want to update you on a couple of financial statement items that have been renamed <unk>.

Beginning with our 2024th quarter results, we have renamed the term net revenue to adjusted gross profit with no change to the composition of what is included in the metric. We believe the term adjusted gross profit is a better descriptor given that this non-GAAP metric includes the netting of significant expenses such as the <unk>.

Cost of purchased transportation on the cost of products sourced for resale.

GAAP to non-GAAP reconciliation is included in both our earnings release and our earnings presentation.

We also renamed the term operating margin to adjusted operating margin again with no change to the composition of what is included in this metric.

Adjusted operating margin is calculated by dividing income from operations by adjusted gross profit.

Our earnings presentation slides are supplemental to our earnings release and today's comments and can be found in the Investor Relations section of our website at CH Robinson Dot com.

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.

I'll turn the call over to Bob.

Thank you Chuck and good morning, everyone. Our fourth quarter was marked by solid performance across our broad service portfolio continued progress on repricing, our truckload business to reflect the changing market conditions and further advancements in our technology and transformation efforts better providing meaningful improvements to our business results.

Our global forwarding business sustained their strong execution on the fourth quarter.

In our ocean business, the contracting number of carriers with meaningful size continue to value working with our global freight forwarder with our scale and reputation and ocean shippers are increasingly coming to Robinson to meet their capacity needs as other providers to be able to do so.

The air market continues to be impacted by reduced cargo capacity.

Eric charters have evolved into a sustainable piece of our procurement strategy and we again augmented our capacity in Q4 with charter flights to support demand from both existing and new customers as a.

<unk>, our shipment sizes have increased and our air tonnage is up year over year. Despite the number of air shipments decreasing.

Shippers continue to rely on Robinson global supply chain expertise and our data and scale advantages to ensure critical goods are moved as quickly and as inexpensively as possible.

Bolstered our global forwarding procurement teams by hiring talent around the globe to focus on getting the capacity and competitive pricing needed to regionally in a very volatile market.

This combined with our balanced portfolio of contractual and spot business enabled us to optimize our adjusted gross profit per transaction, resulting in a 40% year over year growth in our Q for global forwarding adjusted gross profit.

There are several drivers of our recent growth in global forwarding that should continue to contribute to our long term growth. While we continue to grow on our historical Trans Atlantic and Trans Pacific lanes. We've also added new customers in areas such as Europe or.

<unk> Latin America, and South Asia.

This geographical diversification is important in times of volatility across regional economies and trade policy uncertainty.

Over the past five years, we've been building out our global leadership in commercial teams, bringing on new talent to strengthen our customer relationships and ensuring that we have the necessary training and development in place for that talent, we will continue to build out our commercial and strategic sales teams across regions to support emerging vertical strategies and creating sustained high value.

Revenue streams.

We've also created a more centralized global pricing framework that combined with an increased use of data and analytics is enabling us to deploy the right pricing strategies in a format, that's more consistent and easily consumed by our customers and.

And lastly, our enterprise portfolio that allows us to offer end to end solutions for our customers is unique to the logistics industry. We.

We believe these strategies and competitive advantages will enable us to create more value for our customers win more business and sustain the market share gains that we've achieved.

Turning now to our Nast business there.

The global pandemic has had an outsized impact on our small business partners in 2020.

On nearly 12% decline on our customer count during 2020 was driven almost exclusively by small and emerging market customers.

Likewise, our greater than 6% decline in our active carrier count in 2020 occurred solely in the small carrier category and we believe that this is reflecting carriers exiting the marketplace.

Against this backdrop, we were very pleased to add for 100, new carriers to our network during the fourth quarter, which represented an 11, 5% increase year over year.

As we entered fourth quarter, the North America surface transportation market was experiencing substantial capacity tightness.

This was evidenced by our routing guide depth in our managed services business that rose to one eight by the end of third quarter, which was a level that we haven't seen since mid 2018.

This capacity tightness continued throughout the fourth quarter as well with average routing guide depth remaining at one eight in each month of the fourth quarter and contractual routing guidance continuing to operate with first tender acceptance levels that were well below normal.

By reevaluating, our contractual truckload portfolio throughout the quarter, we reduced our percentage of truckload volumes with negative margins are targeted and strategic approach included repricing some business to reflect the rising cost environment exiting other business that did not show a clear path to acceptable profitability.

In honouring contractual commitments, while strengthening our long term relationships to our customers.

We captured more spot market opportunities in the fourth quarter, resulting in an approximate mix of 55% contractual and 45% transactional volume versus a 70 30 mix in the year ago period.

This shift is not a typical on a rising price and cost environment and our efforts to automate how we tackle the spot market opportunities has had a positive impact as well.

With double digit growth on spot market shipments and very strong volume growth on our LCL business Nast overall volume grew eight 5% year over year, excluding prime distributions volume. This outpaced industry volume growth in Q4 of approximately 4% as measured by the cash freight index and this represented our eighth consecutive quarter of market share gains in net.

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Due to continued tightness on capacity the cost of purchase transportation continues to remain elevated.

And the overall market, we observed third party benchmarks, indicating the fourth quarter spot market costs were up approximately 44% compared to Q4 of last year.

Our average truckload line haul cost per mile paid to contract carriers, excluding fuel surcharges increased 35% compared to the fourth quarter of last year and sequentially our cost per mile increased 14% in Q4.

Our average line haul rates billed to our customers, excluding fuel surcharge increased 29% compared to the fourth quarter of last year.

We made further progress in fourth quarter on repricing, our contractual truckload business to reflect the rising cost environment in the fourth quarter average line haul rate per mile billed to our customers excluding fuel surcharges increased 15% sequentially.

Consequently, our fourth quarter truckload adjusted gross profit per load improved approximately 20% sequentially and also improved sequentially in each month of the fourth quarter.

Having said this we also saw instances of shippers implementing shorter bids on many bits and some shippers delaying their annual truckload bids in cases, where annual bids have been delayed we've either implemented short term bridge pricing that was a minimal both parties in exchange for extending the contract or we made decisions on how we manage the acceptance of <unk>.

Tendered volume.

On last quarter's call I commented that about 150 of our top 700 truckload accounts that represent one $3 billion on revenues were scheduled to be re priced in the fourth quarter.

However, about a third of those shippers that planned rfps representing over $300 million in revenues have delayed their pricing events until the first quarter of 2021.

This resulted in us repricing approximately $1 billion of our business during fourth quarter.

We now estimate that will re price around 145 of our top 700 truckload accounts that represents approximately $1 6 billion of revenues in the first quarter.

Because of the efforts of our CH Robinson team members around the World, we were able to deliver solid performance across our broad service portfolio, including year over year growth in adjusted gross profit in our managed services, our Robinson fresh and our European surface transportation businesses.

Our total company adjusted gross profit per business day improved sequentially in Q4 versus Q3 and grew year over year in each month for the quarter.

Continued progress on our strategic technology initiatives on transformation efforts have resulted in meaningful productivity improvements within our business. A couple of these key metrics are displayed on slide four in our earnings presentation.

Excluding volume and head count from our 2020 acquisition of Prime distribution services, our productivity metrics continued to show a significant year over year improvement as indicated by the 2090 basis point favorable spread between the year over year change in Nast volume and the change in full time equivalents Internet business.

As we've said in the past this nast productivity index is an important metric and a key output of our technology investments and our transformation efforts.

Another way to view, our productivity is by looking at shipments per person per day and on the second half of 2020, we improved this metric by 26% over the second half of 2019.

Our tech investments also continue to drive improvements in automation and the number of users on our platforms. One example of this is a 30% increase in fully automated truckload bookings compared to the fourth quarter of last year.

During the fourth quarter, we had 35000 unique carriers utilize our navistar carrier web portal. These carriers executed over $10 million load searches during the quarter and 70% of the time. These carriers were presented with an option to automatically book of loans related to their line search.

We continue to engage with our carriers to build technology that meets their evolving needs and to that end. We've enabled 85% of our single stop non hazmat dry van freight in the U S to be booked by carriers automatically without any human intervention.

The percent of our North American truckload freight available for automated booking will continue to increase during the first quarter as we had temperature controlled freight and other sub modes onto the platform.

With engagement of nearly 200 customers since the launch of our procure IQ tool in September we're experiencing positive early returns we are yielding more volume growth with customers that have taken advantage of procure Ike usability to provide them with tailored recommendations for optimal procurement and capacity strategies.

And lastly through our commercial connectivity efforts, we continue to add Tms and ERP connections to our platform and we've enabled self service access and direct digital connectivity to over 90000 active customers with access to our truckload less than truckload and intermodal services.

As a result of our ability to harness the benefits of our technology investments and our network transformation. We're on track to achieve our target of removing $100 million of long term cost by the middle of 2021 and as we move into 2021, we continue to evaluate our global business operations to ensure that we're managing our business on the most efficient manner invest.

And technology to unlock growth and efficiency and creating better outcomes for our customers and our carriers by utilizing our unmatched combination of experience our global suite of services and our scale and information advantage I'll now turn the call to Mike to review the specifics of our fourth quarter financial performance.

Thanks, Bob and good morning, everyone. Our fourth quarter total revenues increased by 19, 9% compared to Q4, 2019, driven primarily by higher pricing and higher volume across the majority of our transportation service lines.

Total company adjusted gross profit increased 10, 7% in the fourth quarter, primarily due to our global forwarding business delivering a $51 million increase in adjusted gross profit up 39, 6% compared to Q4 of 2019.

As Chuck stated at the beginning of the call we have renamed the term net revenue to adjusted gross profit with no change to the composition for what is included in that metric.

Within global forwarding in Q4, our Ocean business had the largest increase in adjusted gross profit up $39 million or <unk>, 53% versus Q4 of 2019, driven by higher pricing and higher volume.

On a monthly basis compared to 2019, our total company adjusted gross profit per business day was up 8% in October up 7% in November and up 17% in December.

Q for personnel expenses totaled $309 3 million.

Up three 4% versus Q4 of 2019 recall that Q4 last year included a reduction in incentive compensation that aligned with the softer results.

Average head count in Q4 decreased four 8% compared to Q4 of 2019, including the Prime acquisition, which added two percentage points.

Looking forward, we expect our 2021 personnel expenses to be approximately $1 4 billion based on our expectation of improved adjusted gross profit in 2021, and the higher incentive compensation aligned with those results.

<unk> 2021 personnel expense also includes the impact of our ongoing long term and short term cost savings efforts, including the reinstatement of the company match on retirement contributions in the U S and Canada as of January one.

Q4, SG&A expenses of $124 $5 million were down $18 6 million or.

Or 13% compared to Q4 of 2019, primarily due to continued reductions in travel expenses.

We expect our 2021 total SG&A expenses will be approximately a half of $1 billion.

With travel expenses building in the back half of 2021 as the impact of the pandemic subsides.

2021, SG&A is expected to include $85 million to $90 million of depreciation and amortization, which is down from $102 million in 2020, primarily due to completing the amortization related to a prior acquisition.

In 2020, we delivered approximately two thirds of the $100 million per year of long term or permanent cost savings as we indicated on our Q3 Q3 earnings call. We expect to deliver the remainder of that $100 million in long term savings by mid 2021.

For 2021 and beyond we will continue to deliver long term cost savings primarily through process redesign and automation across the enterprise.

One example is the continued optimization of our real estate footprint across the network as we expect flexible work arrangements to become more prominent post pandemic.

Total fourth quarter operating income was up 51, 2% versus Q4 2019, and adjusted operating margin increased by 870 basis points, primarily due to the increase in adjusted gross profit and our cost reduction efforts.

Fourth quarter interest and other expenses totaled $12 million up $1 2 million compared to Q4 of 2019.

Our Q4 weighted average interest rate was four 2%, which was flat compared to the Q4 of 2019.

Our other expenses in Q4 also included a $1 1 million gain from currency revaluation compared to a <unk> 9 million loss in Q4 of 2019.

Our fourth quarter effective tax rate was 24, 1% compared to 21, 4% in Q4 of 2019.

For Q4 rate increase was primarily due to one time items related to the tax provision in Mexico, which was favorable in the fourth quarter of 2019 and unfavorable in the fourth quarter of 2020.

We expect our 2021% effective tax rate to be 20% to 22% assuming no changes in the federal state for international tax laws.

As a reminder, our first quarter typically has a lower effective tax rate due to tax benefits related to the delivery of our annual stock based compensation in Q1.

Net income totaled $147 8 million in the fourth quarter and diluted earnings per share was $1 eight up 47, 9% versus Q4 of 2019.

Turning to cash flow Q.

Q4 cash from operations was approximately $162 1 million compared to $211 6 million in Q4 of 2019.

The $49 million decrease in operational cash flow was driven by $112 million sequential increase in accounts receivable and contract assets compared to Q3.

This for 4% sequential increase in accounts receivable and contract assets coincided with a seven 7% sequential increase in total revenue, which was partially offset by a three 1% sequential decrease in day sales outstanding.

Q for capital expenditures totaled $13 $7 million, bringing our full year 2020 capital spending to $54 million.

We expect our 2021 capital expenditures to be $55 million to $65 million, we continue to prioritize the highest returning technology initiatives on a risk adjusted basis, and we remain committed to our $1 billion investment in technology from 2019 to 2023.

We returned approximately $113 million of cash to shareholders in Q4, which consisted almost entirely of share repurchases.

We resumed our opportunistic share repurchase program in Q4 after pausing in Q2 and Q3 of 2020.

The 51 cent quarterly dividend that we declared in the fourth quarter was paid on January 4th of 2021, rather than in December which deferred the tax obligation for our shareholders.

Over the long term, we remain committed to our quarterly dividend and opportunistic share repurchase program as important levers to enhance shareholder value.

Now onto the balance sheet highlights.

We finished Q4 with $244 million on cash and cash equivalents down $204 million compared to Q4 of 2019.

Over the long term, we intend to carry only the cash needed to fund operations.

We also ended Q4 with $1 billion to $4 billion of liquidity comprised of our cash balance and $1 billion of committed funding under our credit facility, which matures in October of 2023.

Given our liquidity position, we chose not to renew our $250 million accounts receivable securitization agreement that matured in December.

Our debt balance at quarter end was $1.09 billion down.

Down $142 million versus Q4 last year and included no variable rate debt and no borrowings on our credit facility.

Our gross debt to EBITDA leverage at the end of Q4 was one four times, which aligns with our intention to maintain an investment grade credit rating.

Thank you for listening this morning, I will turn the call back over to Bob now for his final comments.

Thank you Mike by all accounts 2020 was a most unusual and challenging year, but we are emerging stronger we expect the trends and improving pricing within nast to continue.

We're pleased with the growth on our global forwarding business and we believe that we have a sustainable competitive advantage.

The digitization of our business will continue and we are enabling more and more of our volume to be transacted in a fully automated manner.

As shippers and carriers continue to increase their adoption of these new platform capabilities, we expect to see continued productivity benefits as well as growth with both customers and carriers, but prefer to operate in a truly frictionless environment.

Due to several factors, including the shortages in the number of drivers and available carrier capacity freight markets remained tight and we anticipate that this will continue for much of 2021.

We're committed to creating better outcomes for our customers on our carriers by delivering industry, leading technology, that's built by and for our supply chain experts and by leveraging our global portfolio of services and our unmatched combination of experience scale and information advantage to meet their ever changing needs.

We're also firmly committed to the key interest of our investors, including profitable market share growth investing in technology to unlock both growth and efficiency, while being a responsible corporate citizen and driving the transformation of CH Robinson. So that we can continue to deliver industry, leading margins and enhance shareholder value.

I'm incredibly proud of the resiliency, the compassion and dedication that the Robinson team members around the world have displayed during these unprecedented times and I. Thank them for continuing to drive our company forward. Despite the disruptions caused by COVID-19, and for helping our company to emerge stronger.

That concludes our prepared comments and with that I'll turn it back to dawn on us. So we can answer the pre submitted questions.

Mr. <unk> the floor is yours for the question and answer session.

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 today's Q&A session I will frame up for question and then turn it over to Bob or Mike for a response.

Our first question is for Bob from Todd Fowler with Keybanc, Chris Wetherbee from Citi, Jack Atkins from Stephens, Tom <unk> from UBS in Brandon on Glinski from Barclays asked similar questions. How should we think about North American truckload volume growth is this a focus for Robinson for Ken productivity improvements offset more.

Net volumes driving increased profitability what is the right environment for Robinson to increased North American truckload volumes.

Thanks, Chuck and thank you gentlemen for the question so for the year, our truckload volumes in Nast were basically flat, but our combined volumes as I said earlier between both truckload on LCL outpaced the rate of growth on the Cass freight index on each of the past eight quarters as I've said publicly several times two of our primary initiatives are focused on taking share.

Across all of our services, certainly inclusive of truckload and improving our operating margins across the business growing profitable North American truckload volume remains a key focus for our team in Nast and we feel as confident as ever that the strength of our value proposition across the spectrum of our customers that we serve from the largest most complex shippers on the world for.

Thousands of main street businesses. We've also got to be thoughtful about how these two goals around growing market share through volume growth and improving operating margin can sometimes be at odds with.

On a cost increasing in the third quarter at 16% versus last year, and then increasing over 32% in fourth quarter against some contracts that were price towards the tail end of 2019 on a very different marketplace. We had to make some intentional decisions throughout the quarter on how we're going to manage through that environment and evaluate where those critical customers, where we needed to on.

On our commitments and where we're going to seek some pricing relief based on the marketplace and potentially put some some volume at risk and in some cases, where we couldnt reach mutually agreed to plans to move forward, we needed to exit some business if there wasn't a clear path to profitability.

I'd also say to keep in mind that we had about $300 million on business that we were expecting to re price during the fourth quarter that was subsequently pushed out to the first quarter of this year and in cases, where we agreed to short term committed pricing with those customers the manner in which we calculate spot versus contract actually identified these shipments as a spot for the quarter.

So we experienced strong growth on a spot market this quarter, but it wasn't enough to offset some of the declines in our contract portfolio.

So in terms of the conversation about productivity, we continue to see a large profitability on lock there as we said the shipments per person per day were up 26% in the back half of the year and our capabilities to drive frictionless and automated transactions continue to expand and our cost to execute a shipment in that arena is down significantly on a year over year basis.

So regardless of where we are on the cycle. Our focus continues to be on improving our shipments per person per day, and lowering our cost basis per transaction through improvements in our process on automation, while still seeking to gain share.

The next question is from Jack Atkins with Stephens, Todd Fowler with Keybanc and Allison Landry from credit Suisse asked similar questions.

Bob from a bigger picture perspective, what inning do you think you are in terms of your digital transformation and what are some of the major projects you expect to undertake in 2021.

So I guess in fairness to sports analogies I used an innings analogy last quarter when talking about the free cycle. So maybe this quarter given that the superbowl is right around the corner all use a football analogy.

When we initially talked about $1 billion investment in tact with time box that as 2019 through 2023. So if you just think about that we're a couple of years into a five year plan. So maybe not quite at halftime, but midway through the second quarter and push them towards the end zone.

Over the past several quarters, we've announced several strategic partnerships with companies like Microsoft and Intel and most recently SaaS with each of these partnerships, bringing new capabilities to life on our platform ecosystem, we've delivered new products like Freeport by CH Robinson, and procure IQ and a greatly extended the reach of our platform capabilities through our <unk>.

Connectivity initiatives that connect Nab misfire into an industry, leading number of ERP and Tms systems. We've also established and launched our customer R&D incubator, which we call Robinson labs.

We have delivered capabilities, enabling automated pricing for our customers across truckload and LCL as well as automated load booking for our customers and carriers and adoption continues to increase on.

<unk> vision products continues to grow and add users as we add additional industry, leading capabilities for that product that provides global visibility across all modes, and all geographies to inventory in motion on at rest.

In terms of our NAMIC Youre carrier platform, we're meeting carriers, how and where they want to do business, we're developing solutions to improve the business outcomes on the quality of life for owner operators and this is increasingly being executed through our web and mobile platforms and as a form that's clearly a priority investment for US. We do believe that we are providing the best possible opportunities for carriers based on.

On a scale and our ability to optimize and provide personal offerings for each carrier on our platform.

And on the back side of all of these customer and carrier facing products and innovations. We also continued to invest in the scalability the stability on the security of our systems as we transitioned more fully to the Azure cloud.

So we're going to have several more announcements coming in the coming quarters that we're really excited about but I also want to be clear on our strategy that we're not building necessarily a silver bullet or a big reveal on the background. This isn't going to be a big Bang approach, we're taking on an agile approach to all of us and we're continuing to look at prioritizing those projects on the roadmap that we think have the highest return for.

Our shareholders on the greatest value for our customers and carriers. We also have to realize too that most of these technology changes that we're launching are accompanied by changes to our operating model and areas of focus for many of our people. So.

So much of what we talked about as it relates to our digital transformation in the public Forum is surrounded mast, but we also know that opportunities exist across our portfolio and work is underway across the board on each of our business units.

A couple of data points that we shared on the deck on our prepared comments today around the Nast productivity index the improvement in shipments per person per day, and the fact, we had over $7 million load searches last quarter alone returning an opportunity for a carrier to automatically book of truckload are all proof point for the roadmap is moving ahead and delivering strong results part.

What makes us a top question the answer is that while we time box that $1 billion investment from 2019 to 2023, we know that Theres really no start point for innovation and so as part of our values are evolving constantly we're going to continue to evolve we're going to continue to innovate and as soon as we finish out these for years will be on to getting prepared for for that next inverse.

Net next horizons.

Our next question is for Mike from Scott Schneeberger, with Oppenheimer, and Todd Fowler with Keybanc Bascom majors with Susquehanna asked a similar question.

Adjusted operating margin inflected positive and it was up 870 basis points year over year to 32, 3% in Q4 of 2020.

Do you view the current margin level is sustainable or expandable in coming quarters with mix of business and productivity enhancements can you provide an update to what you view as normalized net operating margin for Nast from a financial standpoint, Besides head count where are how will these surface in reported results.

Thanks for the questions.

I think it's important to note that our long term operating margin targets for adjusted operating margin targets. As we are now calling them have not changed for the enterprise, while our long term target for adjusted operating margin continues to be 30% or better continued productivity improvements will be a tailwind to help us offset some of the expected head.

Wins that we've talked about in 2021 like incentive compensation and the return of some of the short term cost savings from 2020.

For Nast, our long term adjusted operating margin target continues to be 40% with the ongoing expectation to grow volume faster than head count. So shipments per person per day is a good way for you to see our productivity initiatives coming through in our results.

For global forwarding, our long term target continues to be 30%.

While we delivered 32, 5% in Q4, which exceeds our long term target. We would suggest that mid twenties is a better way to think about it is the margin normalizes over the near term.

The next question for Bob comes from Chris Wetherbee of Citi. Please speak to the strength in ocean given congestion and overall robust demand can this last through more than the peak season.

So from where we sit today there is nothing is showing us that demand for Robinson services are necessarily slowing down in the ocean space.

I think it's well known that historically in the winter months carriers are typically instituting more blank sailings and removing double digit percentages of capacity in order to adjust to lower demand and we're just not seeing that manifest itself. This year.

Which tells us that demand is there and things really arent slowing down our bookings are really strong as we look out for the next several weeks to come and as we engage with our clients. Their forecasts are strong and frankly, new customers are coming to us daily for space on that list of new customers is longer today than it's ever been I think our global scale continues to enable us.

To provide capacity solutions in the ocean space, especially on our core trade lanes, where others are not and again I just.

I want to reinforce the strength of the commercial activity and our forwarding business from the amount of new sales and growth with existing customers has just been really really strong on the ocean space.

The next question for Bob is from Jack Atkins with Stephens, Scott Schneeberger with Oppenheimer, Chris Wetherbee with Citi, Brian Us on back of J P. Morgan and Brandon <unk> with Barclays asked similar questions. After such a strong result in global forwarding in 2020, how should we think about your ability to hold on to the gains you have seen over.

For the past 12 months and adjusted gross profit per load and your air freight and Ocean freight operations.

So eventually that balance of supply and demand will come back into more normal cadences as both in both air and Ocean and so as that happens we do anticipate that our adjusted gross profit per shipment could come down from some of the historical high as that we've experienced in different quarters in 2020.

We've evidenced some of that normalization already when we look back at the peaks of air freight in the second quarter on how that's played out through the balance of this year.

It's critical to reinforce so that we believe that we've taken several structural steps in our forwarding business, including our global procurement strategy. The addition of more charters to our air freight mix, which is becoming a more and more part an important part of our of our offering there and the use of more advanced pricing analytics and setting our pricing strategies that we believe we're going to continue to improve results.

<unk> over our historical revenue in past quarters, regardless of those market conditions in both air and Ocean.

Our story in forwarding isn't really just a story of margin expansion we've.

We've had great volume gains in both both air and Ocean in terms of air tonnage in Teus on the water driven by that commercial activity that I just mentioned.

The next question from Mike is from Jack Atkins with Stephens, Chris Wetherbee with Citi, Scott Schneeberger from Oppenheimer, and Allison Landry with credit Suisse asked similar questions given the strong productivity gains you are making in the business. How should we think about head count in 2021 versus the consolidated Q4 level of approximately 14900.

Can you hold it flat in a robust freight year.

Yes.

Solid momentum on productivity initiatives, we delivered the improvements in the Nast productivity index and the shipments per person per day that you saw on the charts in our Q4 presentation. So your question's a good one because we also expect robust freight in 2021.

Taking into account continued progress on productivity initiatives and covering the expected demands of the business. At this point, we would expect average head count for 2021 to be closer to or slightly higher than our Q4, ending head count of 14088.

That said our focus is on driving productivity per person. So we will manage our staff opportunistically to drive overall value for the enterprise by flexing up or down appropriately to capture opportunities for growth and deliver additional efficiencies.

Allison <unk> with Wells Fargo asks the next question for Bob several other analyst asked similar questions.

Are you thinking about managing through the current cost environment, where youll note on your slides that costs are up 32, 5%. If we remain at this elevated level can pricing pushed higher than this quarter's 29, 5% increase to help offset this headwind or is this a phenomenon we should expect throughout 2021.

Thanks, Allison I'm going to try to answer this by putting this quarter into the context of what we've seen broadly over the past decade. So if we think about actual customer rate and carrier cost per mile. Excluding fuel so not rate of change, but actual customer rate per mile on actual carrier rate per mile Q4 represented our highest average.

Rates that we've seen on record over the past decade. Additionally, the year over year change in rate and the change in cost where the highest rate of change that we've seen in both metrics over the past decade as well.

So if we look back a bit the previous peak in terms of the rate of change in price and cost occurred back in the first quarter of 2018 at around 24, and 25% respectively and it wasn't until two quarters after that where we would see a drop <unk> experienced the peak in terms of actual price and actual cost per mile on a.

Rate per mile basis.

So if we compare the average truckload price in fourth quarter of 2020 to the previous peak in customer pricing in Q3 of 2018.

Customer pricing has only increased by an absolute value of 7% over that time period peak to peak.

So when we make that same that same comparison on cost per mile costs were up about 13% again, making that peak to peak comparison.

So in terms of the rate of change I, certainly don't expect costs for customer pricing to continue to increase on such a high rate that we experienced in the fourth quarter. As we know contracts are going to continue to re price spot market demand will soften as because of that on the cycle will play out as it largely normally does but in terms of actual price on actual cost.

Per mile on the customer side, a 7% increase over the time horizon greater than a couple of years really isn't outside of the ordinary and so we see pricing on the customer side likely kind of maintaining and potentially gravitating higher throughout the course of the year in terms of cost per mile as more freight moves out of the spot market and in the contracts we would expect.

To see some moderation in cost relative to what we saw on fourth quarter.

So if we if we look within the fourth quarter. We did see this start to play out and that trend is now carrying into January.

To go a little deeper in October the rate of change in price exceeded the rate of change in costs by about 400 basis points in.

In November that came down about 300 basis points and in December that rate of change in cost and rate was basically moving at the same at equilibrium and in January we have seen this inflect with the change in customer pricing being around 100 basis points above the change in carrier cost.

On a sequential basis, both cost per mile and customer rate per mile are moderating some in January when compared to December but they are still up on a year over year basis.

It's probably also worth noting that in the fourth quarter with such a robot robust peak season, it isn't necessarily out of character for our cost to increase faster than price on that environment, given that we purchased transportation largely on the spot market, while more than half of our customer pricing is tied to contracts that are typically extend out a year in line.

The next question is for Bob from Jordan, <unk> with Goldman Sachs, Matt Young with Morningstar, Bruce Chan with Stifel and Allison Landry from Credit Suisse asked a similar question what are your thoughts on the air freight forwarding markets, specifically the capacity situation and how it relates to air cargo rates as we move into the <unk>.

For comparisons of Q2 of 2021.

So there is no doubt that the second quarter of 2020 was was the peak in terms of air cargo pricing and we will definitely represent a tough comparable for us in the macro freight environment, though there really hasnt been much indication of adding meaningful capacity outside of charters in the foreseeable future and as we see additional lockdowns occur.

During in different countries, we are hearing more and more of that it's becoming difficult to staff.

Some of these flights, which could could add a constraint as well we're expecting that spice space will remain tight and demand will remain strong with the vaccine rollout and with all the supporting products PPE et cetera, along with continued low inventory levels. So available capacity is likely to continue to be an issue until such a point that.

Passenger flights really start coming back to more normal levels on an international air travel.

The next question comes from Jack Atkins with Stephens, Chris Wetherbee from Citi and Todd Fowler from Keybanc asked similar questions, Mike given all the puts and takes around expenses in 2020, and the return on a temporary costs and incentive compensation in 2021 could you provide us with some insight into how we should think about personnel cost inflation.

<unk> per employee in 2021 versus a similar point in the last trade cycle in 2018, a good question as I mentioned in the prepared remarks, we expect our 2021 personnel expenses to be approximately $1 4 billion.

Which is based on our expectation of improved adjusted gross profit in 2021 and higher incentive compensation in line with those results.

Regarding the return of temporary cost savings from 2020.

The most significant within personnel expense would be the return of the company match on retirement contributions for employees in the U S and Canada, which came back on January one.

You mentioned 2018, I do think 2018 provides a meaningful point of comparison for personnel expense expectations in 2021.

As you recall 2018 was a year of strong performance were up for Robinson, which led to higher incentive costs, including bonuses equity and commissions. So given where we are on the freight cycle. It would be reasonable to think about 2021 in comparison to 2018, specifically if you look at total personnel cost per <unk>.

<unk> in 2018, we were a little over $88000 per employee if you add 2% inflation per year to get from 2018 to 2021. It gives you a decent outlook relative to our expectations for 2021.

Net outlook combined with the staffing expectations that I talked about earlier gets you to our overall personnel expense expectations at $1 4 billion for 2021.

The next question for Bob is from Brandon on Lenski without with Barclays, Brian <unk> with Jpmorgan and Ravi Shanker with Morgan Stanley asked similar questions was the decline in truckload contractual mix to 55% on strategic decision or more are the result of capitalizing in the near term our record spot rates understanding that manage.

<unk> is expecting a continuation of market tightness for much of the year, one would be a good time in the cycle to seek higher contractual mix exposure.

So theres a couple of questions there I'd start with saying that it's.

The 50 545 mix is really a blend of some intentional choices and manage on the yield within our portfolio as well as just market driven factors.

Simply as more freight most of the spot market as routing guidance fall.

Fail on the industry and repricing occurs with higher frequency our mix tends to shift in that in that direction as well as you've seen through time, our spot and contract mix over the past couple of quarters closely mirrors that of really third quarter of 2017 through maybe the third quarter of 2018 call. It the past peak cycle, where our mix range from 50 50 to $60 for.

<unk> leaned more heavily to contract and looking through the past several years 50 50. It was really the lowest percentage of contractual freight and that happened in fourth quarter of 2017, and then we kind of Max out if you will around 70% contracted more balanced markets such as what we saw on the back half of 2019, as we start to implement the pricing changes.

That occurred during the fourth quarter as well as book business that we intend to re price in the first quarter I would anticipate that that mix starts to shift back closer to the 60% range.

On an heavier towards contract in the next couple of quarters, I think thats kind of the best way that I would think about it right now.

The next question is for Bob from Brian <unk> from Jpmorgan, what is the strategy to improve and deliver industry, leading margins in a cyclical business with secular concerns regarding new competition.

Could robinson become more multimodal overtime and build out other service lines and geographies.

Thanks, Brian so.

The past two years, we've experienced both are record high quarterly adjusted gross profit per load and our record low quarterly adjusted gross profit per load that we've seen over the past decade. So to your point there is definitely some volatility in some cyclicality that we need to control for and our largest service line of truckload and we're doing this through our efforts to <unk>.

Lower our cost to serve through the Digitization and the automation of the business that we've talked about working on appropriately balancing that portfolio between spot and contractual business and by continuing to redesign and reorganize our network to maximize our commercial effectiveness in order to both take share and drive top line growth.

Our investments in technology are broad and global suite of services on our development of innovative new capabilities are going to continue to fuel that top line growth of our diversified business, which as we see it as one way to combat that cyclicality.

I feel better I can say confidently I feel better today than I have at any point in the past about the focus that we have on cost management within the organization and we'll deliver on that $100 million cost reduction in half. The time, we originally planned through and we're going to remain focused on finding additional opportunities to reduce our operating expenses as we move forward.

In terms of diversification on clearly this has been part of our strategy over the past several years and you look at our <unk> business on the growth of that is taken on that is a critical part of our overall business mix and the growth and returns have frankly been industry, leading our investments in diversifying and expanding into our global forwarding network, adding talent.

<unk> our capabilities has also helped to balance the overall portfolio and its maybe never been more clear than it was in the fourth quarter with the outperformance of our Florida group.

And it continues to provide us a combined commercial value proposition that is resonating in the market.

Across the rest of the portfolio. Our managed services business continues to grow freight under management and provides a really unique solution blending both technology and supply chain expertise to some of the largest and most complex customers in the world and that creates a really sticky relationship with a high rate of recurring revenue and creates a lot of connectivity between Robinson on the client over time.

And the results on our Robinson fresh business units have stabilized and continue to improve over the course of the last couple of years and they are providing strong returns in our Europe surface Trans business continues to take share well ahead on the marketplace in Europe. So we feel like we've been on this path of diversification, Brian for a while both it makes sense.

From a commercial standpoint helps us to sell a really unique value proposition on the market and it's helping us to kind of balance out the portfolio in terms of revenues and returns to our shareholders.

The next question from Mike is from Chris Wetherbee with Citi.

How are you going to direct free cash flow in 2021, where do buybacks fit in the hierarchy, how about M&A any areas of interest. Thanks.

Thanks for the question, Chris in terms of capital allocation, our top priority continues to be the close on investments primarily related to technology and process redesign that fuel growth and efficiency in our core business.

We are also committed to continuing our dividend without decline.

Next would be M&A, where we continue to maintain a strong pipeline of opportunities to the extent that we have capital available while maintaining an investment grade credit rating our share repurchase program offers an excellent lever to return value to shareholders.

We continue to see M&A as a lever that can potentially help us expand our geographic presence add or improve services build scale or enhance our technology platform. We will continue to look for well run businesses that also fit nicely in the Robinson culture.

The next question is from Brian Us on Beckwith Jpmorgan, Bob Robinson as recent efforts to connect with multiple Tms and ERP platforms progressed relative to expectations as it generated an increase in net new business activity.

What does further adoption of digital interfaces with customers mean for operating leverage in the future.

Thanks, Brian multiple questions, there and I'll try to tackle them one at a time our progress in connecting with Tms and Erp's has been on pace with our expectations and we've got long standing relationships and connections with these companies and connecting our real time pricing engines through modern API has been really successful in fast paced. Some of these connections are fab.

And smoother than others as you might expect.

For the question of hazard increased business activity, we are experiencing significant growth on our quoting activity and tendered volume through these digital connections to our pricing services and other functionality like in transit visibility and other operational and analytical insights the obvious benefit of these connections is the availability for quoting and committing.

$24 seven 365, we're also able to respond to opportunities much faster in these forums than relying on older more manual processes. So we've seen significant productivity uplift on our transactional business and we do expect the share of our automated transactional business to continue to grow which will yield positive productivity impacts.

To your final question on around the competitive landscape. It is quite active in all parts of our business, including this space and I would say that our win percentage on our adjusted gross profit per shipment in these automated pricing Apis are on par with our traditional transactional margins, but we're capturing those adjusted gross profit dollars.

A lower per unit cost to serve.

The next question for Bob is from Brian <unk> with Jpmorgan how.

<unk> Robinson, becoming more ingrained in supply chains and driving visibility for customers.

Many shippers can take advantage of a program similar to the one you just announced with SaaS.

Bryan in my 22 years with Robinson, our ambition to solve our customers' toughest problems has always been central to our approach as a result, we've got the opportunity to get involved and really exciting and challenging arenas within the supply chain that extend well beyond just the pickup and drop off on the transportation and freight.

Our investments through these years have taken us deeper into new modes and services.

Deep vertical expertise expertise in geographies and industry segments with many unique characteristics and supply chain attributes that we can bring to bear for our customers.

SaaS relationship is a great example of an opportunity to partner with another industry leader to extend our collective value for new unique and exciting ways to shippers on receivers we're on.

Obviously in the early stages of our work together and the initial engagements are now underway. We believe that this work together with <unk> has the potential to unlock values in many areas of our business and across our share customer base. This collaboration is going to facilitate visibility to the entire inventory lifecycle in a way that no. Other companies can do from planning the cash settlement and.

It's going to require the best of each of our companies technology and our expertise in order to Ideate and innovate together to bring real value to our customers.

The next question for Mike is from Brian <unk> with JP Morgan.

Working capital appears to have moved with revenue growth have there been any changes in days sales outstanding or bad debt from any of your customers. Thanks, Brian you are correct in Q4 accounts receivable plus contract assets increased sequentially by four 4% over Q3, while total revenues increased seven seven.

Percentage, driven by higher pricing and volume.

The result in Q4 was a sequential improvement in day sales outstanding of $1 seven days compared to Q3, when using ending AR balances that said over the past two quarters DSO has been running a couple of days higher than last year and I'll talk about the ways, we have been addressing that in a minute.

Our bad debt expense was notably higher in 2020 compared to 2019, driven primarily by increased reserves as we monitor the impact of the pandemic on certain categories and customers.

While our bad debt expense in 2020 was approximately $6 million higher than our prior three year average we did see a reduction in bad debt expense of approximately $600000 in Q4 compared to Q4 of 2019.

We continue to closely monitor our receivables by customer by category and across a variety of key metrics, we utilize internal and external credit risk data to enhance our credit and collections results and we've tightened credit limits enhanced electronic invoicing and maintained greater focus on higher risk categories with additional safeguards.

All of which led to sequential improvement in the Q4 results.

The next question for Bob is from Brian <unk> from Jpmorgan, you are almost at the one year Mark for the Prime acquisition, how has that opportunity developed compared to expectations and has driven any synergies across the robinson portfolio or with customers, what other industrial verticals or logistics capabilities are attractive at this point.

We are really happy with the acquisition of Prime I mean truly a great team with great leadership, and we're really proud of the work that that team did this year the prime team exceeded their full year profitability expectations against some really challenging hurdles throughout the year driven by costs associated with increased costs in labor safety protocols that we've undertaken for our frontline workers.

And the rising cost of purchase transportation.

Terms of synergies part of what really attracted us to prime at the time of acquisition was the opportunity to bring together their expertise in retail consolidation on warehousing with the Robinson expertise in transportation and distribution. So we've got these several shared customers and the combination of the two companies' capabilities made for an even stronger value proposition.

<unk> for for our customers and for the industries that we serve.

Some retailers over the course of the last year have evolved and tightened their supply chain performance metrics. This has driven a lot of interest and demand for many new shippers that serve these retailers achieving some of these new on time in full or supply chain reliability requirements are really difficult without a partner like Robinson that has the capabilities to bring to life between Robbie.

And on prime, especially if youre, not typically shipping and full truckload quantities.

So we're seeing several other retailers now piloting programs with us with opportunities for large national Rollouts, and we're seeing great opportunities to cross sell forwarding and inland transportation services to many of <unk> legacy customers.

From a cost perspective, there was some redundancy in several markets for both Robinson on Prime maintained warehouse facilities and we're on the process today of bringing those together under a shared shared facilities in order to capture some some cost and efficiency synergies as we move to a common network. We also see opportunities moving forward to leverage that network to augment our large for.

Net home delivery network as well as providing other retail services.

The next question is from Brian <unk> from Jpmorgan for Bob.

What is the interest what.

What is the strategic rationale behind launching the Robinson fresh produce offering are there any startup costs equal you will incur how have your retail and foodservice customers viewed the announcement.

As our role with our retail partners has evolved and for us over the last decade, our integrated supply chain solutions have really expanded and penetrated right into the actual product itself, but it's no longer about selling just a product it's really about providing the complex supply chain solutions that go with it. So we felt like this was really the right time to consolidate our brand story and allow us to.

Take advantage of our 115 year history, and the produce supply chain and can really connect the dots between our services our products and the consumer growing demand for healthy and high quality fresh produce in <unk>.

Terms of startup costs were rolling the brand out over the first half of 2021 to align with the primary growing seasons of the products that will market under the Robinson fresh label in order to maximize the use of existing packaging disruption et cetera. So there really won't be any material costs due to the brand launch.

Initial feedback in terms of our retail and food customers has been really positive both from the look and feel of the brand the quality of the product and the packaging, but they're also supportive of the overall strategic rationale for making the change.

The last question is from Garrett Holland with RW Baird LTM volume was clearly very strong in Q4 of 2020 talk about the expectations for the drivers of LCL freight demand and your ability to continue gaining market share.

Yep. Thanks, Garrett <unk> service continues to deliver strong results as you saw again in fourth quarter and we're really proud of our we're really proud of the unique service offering that we have on the marketplace. We really think that we've got probably the most comprehensive offering of LCL services in the industry at scale, including our common carrier programs, our consolidation programs that I just.

Talked about for retail and other industries as well as our temperature controlled programs that cover the spectrum from fresh products through frozen goods.

Our market share gains in 2020 have been fueled by some tailwind, but many companies felt.

<unk> E commerce and home delivery, but they've really been across the board.

As I mentioned earlier, the combination of Prime and Robinson and retail Consol has proved to be a winning formula on the marketplace and we expect to continue to realize growth in <unk> as we've built out customized solutions across industry verticals and solutions for customers of all sizes from those main street businesses that are engaged with our freight quote by CH Robinson platform.

Form to large enterprise shippers that value our ability to consolidate capacity optimize their network demands and leverage our NAV is for your order on planning capabilities to avoid costs and to improve service.

That concludes the Q&A portion of today's earnings call. A replay of today's call will be available in the Investor Relations section of our website at CH Robinson Dot com at approximately 11 30, a M. Eastern time today. If you have any additional questions I can be reached by phone or email. Thank you again for participating in our fourth quarter 2020 conference call.

And have a great day.

Ladies and gentlemen, thank you for your participation you may disconnect your lines or log off the webcast at this time and have a wonderful day.

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