Q2 2021 CH Robinson Worldwide Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to the CH Robinson of second quarter 2021conference call.
At this time all participants are in a listen only mode.
Following the company's prepared remarks, we will open the line for a live question and answer session.
To ask a question. Please press star 1 on your telephone keypad, if anyone needs assistance at any time during the conference. Please press star.
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As a reminder, this conference is being recorded Tuesday July 27th of 'twenty 'twenty 1.
I would now like to turn the conference over to Chuck Ives Director of Investor Relations.
Thank you Stacey and good afternoon, everyone on the call with me today is Bob the Easter called our President and Chief.
<unk> of officer, and Mike <unk>, our Chief Financial Officer, Bob and Mike will provide a summary of our 2021 second quarter results and then we will open up the call for live questions on.
Our earnings presentation slides are supplemental to our earnings release and can be found in the investors section of our website at investor.
Dot CH Robinson Dotcom. However, our prepared comments are not intended to follow the slides if we do refer to specific information on any of the slides. We will first lets you know which slide we're referencing.
I'd also like to remind you that our remarks today may contain forward looking statements slide 2 in today's presentation lists factors that.
It could cause our actual results to differ from management's expectations and with that I'll turn the call over to Bob.
Thank you Chuck good afternoon, everyone and thank you for joining us today during the second quarter, we delivered record financial results by staying focused on serving the needs of our customers and keeping the global supply chains moving in.
The capacity constrained environment. We're pleased that we returned the truckload volume growth, we delivered record volume in less than truckload Ocean and air and we believe that our tech plus strategy that combines industry, leading technology with great logistics experts and great processes is the right strategy as.
As part of our global suite of services, our largest services delivered.
Both year over year and sequential growth in total volumes revenue and adjusted gross profit or AGP, which resulted in quarterly highs for Robinson and total volumes revenues AGP and operating income.
Excluding the fourth quarter of 2012, when we sold our T Chek business our earnings per share was also.
Our record high.
Talk about how we achieved these results as I walk through my prepared comments on our second quarter results.
And our largest service of Nast truckload, we grew our adjusted gross profit by $34 million or 14% year over year. This came through of 6% increase in volume and a 7% increase in adjusted gross profit.
This included an increase in spot market volume of nearly 30% year over year due in part to an 85% increase in quotes and of 160% increase in volume that was driven through our proprietary real time dynamic pricing engine, 40% of our spot our transactional business was price.
Via integrations with our dynamic pricing engine in the second quarter, delivering real time pricing with capacity assurance from the largest network of truckload capacity in North America.
While our business on the spot market increase significantly our volume in the contractual business declined approximately 10% during the quarter as we continued to reshape our portfolio.
Per load and pursue profitable volume growth this.
This included a balance of 2 things.
Honoring our contractual commitments with strategic customers, which is still resulting in a higher than normal percentage of loans with negative adjusted gross profit margins due to ongoing increases in the cost of purchased transportation and second managing acceptance rates and.
In order to limit negative loads and to manage our business for profitability.
We closed the quarter with an approximate mix of 55% contractual volume and 45% transactional volume versus the 65.35 mix in the year ago period, and this was consistent with our mix in the first quarter of this year.
Our average truck haul line haul cost.
Cost per mile paid to carriers, excluding fuel surcharges increased 47, 5% compared to the second quarter of last year.
Our average line haul rates billed to our customers, excluding fuel surcharges increased 42% year over year.
This resulted in the highest cost and price per mile on record and of 12% year over year increase.
Increase in our Nast truckload adjusted gross profit per mile. This.
This combined with the 4.5% decrease in average length of haul resulted in the 7% increase in adjusted gross profit per truckload.
We continued to reprice, our contractual business in second quarter, including some underperforming contractual positions the bid process continues.
<unk> of dynamic 1 and 40% of our awarded contracts in the second quarter were for terms between 3 and 6 months, having said this greater than 2 thirds of our bid volume of awarded to US in second quarter was still on 12 month contracts.
During the quarter, we saw routing guide depth of tender on our managed services business declined.
Declined slightly from 1 <unk> in March to 1.6 in June However, the average in second quarter of $1.7 was unchanged from the market conditions in first quarter.
In the second quarter, we welcomed an additional 6900 carriers to our network, which represented an 88% increase over the carriers added in the second quarter of last year.
Leveraging the scale and the information advantage that comes from the size of our carrier network is just 1 of the ways that we help customers navigate the capacity constrained marketplace.
Given the current structural constraints around the expansion of truckload supply coupled with the continued reopening of the economy as well as other factors, we do expect the current market conditions.
<unk> will persist through 2021, and as I said last quarter, we expect to grow our truckload volume during the remaining quarters of this year.
In our second largest service line of Ocean forwarding, we grew our adjusted gross profit by $72 million or 92% year over year. This came through of 29% increase in shipments.
And of 49% increase in adjusted gross profit per shipment.
Strong demand continues to outpace supply with container on equipment shortages and other market disruptions continuing to constrained capacity. Our team has done a great job of strengthening our carrier relationships and procuring incremental capacity to better serve our customers.
The forwarding team continues.
To add new commercial relationships with strategic multinational customers that are leading to increase the award sizes, while also ensuring that our existing customers have access to the capacity that they need to meet their needs.
Our customers and our results are benefiting from the investments we've made in Digitization and data and analytics as well as our global network that are supporting our expanded.
Expanded geographical and vertical expertise.
We believe that these strategies and competitive advantages will enable us to create more value for customers and in turn win more business and sustained in the market share gains that we've achieved.
There continues to be a robust pipeline of new business from both new and existing customers and as we move towards the peak holiday.
Shipping season and into next year, we do expect that ocean demand will remain strong into early 2022.
As part of our growth strategy Nast less than truckload or <unk> business, which is our third largest service continued its strong momentum by growing adjusted gross profit by $23 million or 22% year over year.
This came through of 23% increase in volume and a slight decline in adjusted gross profit per order.
We're seeing balanced growth across our LPL modes and across customer segments.
Through our strategic focus on the <unk> market, we built the $3 billion LPL business through a blend of organic growth digital investments.
<unk> and strategic acquisitions, such as freight quote in prime distribution, which has made us the largest and most comprehensive provider of retail consolidation services in the industry.
This portfolio expansion as capitalize on the ecommerce growth and combine our full suite of <unk> technology and services, including common carrier warehousing and retail consolidation.
Validation temperature control parcel home delivery and reverse logistics, our value proposition, which includes highly automated systems that are easily scaled for high volume growth continues to resonate with shippers of all sizes and across industry verticals.
This includes small businesses that utilize our freight quote by CH Robinson platform.
As well as large enterprise shippers that look to us as a strategic partner to manage and optimize their LCL freight networks.
In total Nast overall second quarter volume grew approximately 16% year over year compared to a 30% increase in industry volume as measured by the Cass freight index due to a large pandemic related decline in the.
The index in second quarter of last year that we did not experience at the same level.
While our growth for the quarter did not exceed the industry benchmark over a 1 year timeframe, we've outperformed the index for the 234 and 5 year Timeframes.
Finally, our fourth largest service international Airfreight delivered.
Strong results again behind of 43% increase in metric tons shipped adjusted gross profit was up 1% over second quarter of last year, when we delivered 104% adjusted gross profit growth.
Demand has been incredibly strong partially driven by conversions of some ocean freight to air and a recovery of demand in Europe.
Airfreight.
Free capacity has continued to be strained and we continue to position charter flight capacity to support demand from both new and existing customers.
Our global forwarding customers that utilize our air Ocean and customs and project logistics services continue to value working with and relying on Robinson of local experts and offices around the world that can deliver a full suite.
Of global logistics services, and customized solutions, we've built sustainable competitive advantages in our global forwarding business that will continue to deliver solid returns for our shareholders and benefits for our customers in the quarters and the years ahead.
Because of the efforts of our Robinson team members across the globe and our advanced technology, Our total company adjusted gross.
But per business day improved by 5% sequentially in the second quarter, 22% year over year and 8% over the pandemic quarter of second quarter of 2019.
Bolstering our results were continued benefits of our digital investments, which continue to unlock productivity gains and deliver customer value of new and exciting ways.
Our 3 primary areas of investment in Digitization are focused on creating value for customers value for carriers and driving productivity improvement for our teams, which in turn drives improvements to both our top and bottom line results.
Looking at the impacts of Digitization through the lens of the customer and carrier adoption the number of daily.
<unk> and monthly average users across our customer and carrier facing platforms continues to grow with 27% year over year growth in daily average users of our customer platforms. As just 1 example.
As I mentioned earlier the amount of customer quotes on volume that is being delivered through a real time dynamic pricing tools has grown significantly enabling.
Enabling these digital connections improves efficiency for our customers improves our response time per quote requests and improves our win rates.
We also continue to add digital connections with our customers at an accelerated pace during the quarter with over 100, new customers connected via Tms and ERP connections in the second quarter of 2021 or.
Our customer.
Now have access to real time pricing the <unk> of your customer web portal director of their Tms, our ERP integrations as well as via freight quote by C. H Robinson in total we've enabled these dynamic pricing capabilities for over 87000 customers across these points of connection.
On the carrier side, we continued to deliver new.
New capabilities and benefits to our carriers through our web and mobile versions of <unk> carrier and <unk> of your driver during the quarter. We had over 290000 fully automated bookings in our Nast truckload business and finally as it relates to productivity. We've again highlighted a couple of key metrics for Nast on page 5 of our earnings presentation.
We continue to show year over year improvement in productivity as indicated by the <unk> hundred 70, <unk> favorable spread in our Nast productivity index, which represents the difference between our year over year change in Nast volume and the change in fulltime equivalents of Nast.
Another key metric that we review of shipments per person per day and this metric was up 17.
Per cent in second quarter compared to the same quarter last year.
Both of these charts show very clearly the relationship between the timing of our increased digital investments and the impact to these key operational metrics.
We're encouraged with the progress that we're making on our digital and technology journey and the impacts of these investments are delivering for our customers for our carriers.
<unk> to our overall results.
Leading the industry with the most powerful supply chain technology and data platform has been of top strategic priority for Robinson and part of our competitive advantage of the marketplace. We've increased our investments and strengthened our technology and innovation capabilities with our customers' needs and experience in mind.
We constantly listen to the voice.
And the customers and are focused on continually enhancing our customer and carrier experience. We've got bold ambitions to continue to evolve as a platform company, giving our employees customers and carriers of the products and the information needed to succeed our customers rely on us to be an extension of their team able to provide of global suite of services, creating market leading solutions.
<unk> that work and drive smarter solutions through our information advantage.
As we continue to create differentiated value for the nearly 200000 carriers and customers of Robinson I'm excited to have of Rune <unk> join our executive team as Chief product Officer on September 1 reporting directly to me.
The rune will lead our global product strategy.
<unk> solutions organization will sit at the intersection of our business strategy and technology platforms to provide a consistent industry, leading customer experience and to drive our global digital capabilities across our suite of products.
The rune as the season, an inspiring leader, who brings nearly 3 decades of product and technology experience developing and deploying products that enrich the customer.
And experience and create value of the industry, leading companies such as whole foods zappos and Travelocity of.
Our rooms deep product and leadership experience will be invaluable as we drive the next generation of innovation for our industry, while creating sustainable long term value for our customers our carriers and our shareholders I will now turn the call the mic to review the.
The specifics of our second quarter financial performance.
Bob and good afternoon, everyone as Bob mentioned, we delivered solid quarterly financial results across the variety of topline and bottom line metrics in Q2, driven by a strong performance in a favorable market as we continue to leverage our technology plus strategy in Q2.
Customer established quarterly total company records and volume total revenue adjusted gross profit and operating income are.
Our total company <unk> was up 22% compared to Q2 of 2020, driven by strong performance from Ocean truckload <unk> and air on.
On a sequential basis each.
We have stepped business segments delivered AGP growth compared compared to Q1.
On a monthly basis compared to 2020, our total company AGP per business day was up 21% in April up 12% in May and up 35% in June.
With the cost per mile and price per.
Each of our in our truckload business, reaching all time highs in Q2, our AGP margin percentage declined. This is simply a function of the larger denominator in the AGP margin equation to illustrate debt, let me share some facts about our Q2 AGP per mile versus our AGP margin percentage.
Our Q2 true.
Mile AGP per mile was approximately 3% higher than our 10 year average while the AGP margin percentage was more than 350 basis points below our 10 year average as.
As truckload pricing is predominantly determined by dollars per load as opposed to percentage.
<unk>, having an all time high price results in a compressed margin percentage.
We continue to be focused on growing our overall ADP dollars by optimizing volume growth and 8 AGP per shipment across our service offerings with.
With our customer focus and digital investments continuing to drive growth.
Markup efficiency into our model, we have solid strategies to generate sustainable long term growth.
Turning now to expenses Q2 personnel expenses were $362.9 million.
Up 28% compared to Q2 of last year due to higher incentive compensation.
The <unk> and the impact of short term pandemic related cost reductions in Q2 last year.
Our Q2 average head count increased 0.7% compared to Q2 of last year and our average full time equivalents were up 3.1%.
Head count was added primarily to deliver on our long term growth XP.
<unk> cautions, particularly in our global forwarding business. In addition, the June 3rd acquisition of combination of holdings, BV and our European surface transportation business added approximately 100, new employees to Robinson.
Given our increase in head count and higher incentive compensation associated with our 2021 profit.
<unk>, we now expect our 2021 personnel expenses to be 142 to $1.48 billion, which is up from our prior guidance of $1.4 billion.
Q2, SG&A expenses of $125.7 million were up 0.4% compared to.
<unk> of 2020, we continue to expect 2021 total SG&A expenses to be approximately zero point $5 billion, which includes travel expenses building in the back half of the year.
2021, SG&A is expected to include approximately $90 million to $95 million of debris.
Depreciation and amortization this is up from our prior guidance of $85 million to $90 million, but down from the $102 million in 2020, primarily due to the completion of amortization related to a prior acquisition.
Second quarter interest and other expense totaled $13.5 million up approximately.
<unk> $3.3 million versus Q2 last year due to the impact of currency revaluation.
Q2 results included a $1.9 million loss due to unfavorable currency valuation compared to a $1.8 million gain on FX in Q2 last year.
I am pleased to report that we've completed.
<unk> the work that delivers the $100 million per year of long term cost savings that we committed to a year and a half ago.
Our annualized run rate savings surpassed the $100 million in Q1 of this year going forward. We will continue our efforts to drive efficiency into our business model, primarily through process redesign and automation.
Automation across the enterprise.
Our Q2 income from operations was an all time quarterly high at $266 million and our adjusted operating margin of 34, 8% was up 410 basis points compared to Q2 last year.
Q2 net income.
$193.8 million.
Up 34, 6% compared to Q2 last year and diluted earnings per share finished at $1.44.
Which was up 35, 8% year over year.
Turning to cash flow or our Q2 cash flow from operations was approximately 100.
Was $49 million of.
<unk> of $298 million compared to Q2 last year, driven primarily by the outsized improvement in working capital in Q2 last year.
Sequentially Q2, operating working capital increased by $81.8 million or 5.6% versus.
Wondered fun compared to a sequential increase of 6.7% in AGP over the long term, we expect our working capital to continue to grow at a rate slower than our AGP.
Capital expenditures were $16.3 million in Q2 up from $10.3 million.
Q1, Q2 last year, primarily driven by increased investments in hardware and software year to date through Q2, our capital expenditures were $30 million and we continue to expect 2021 capital expenditures to finish in the range of $55 million to $65 million.
We returned approximately.
$205 million of cash to shareholders in Q2 through a combination of of $135 million of share repurchases and $70 million of dividends that level of cash returned to shareholders represents a 199% increase versus Q2 last year, when we were not repurchasing.
<unk> out of an abundance of caution due to the pandemic.
During Q2 this year, we repurchased approximately 1.4 million shares at an average price of $97.47 per share and at the end of Q2, we had approximately 5 million shares of remaining capacity on our 15 million share repurchase authorization.
And children from May of 2018.
Our cash balance at the end of Q2 was $173 million.
The down $189 million compared to Q2 of 2020, we intend to carry only of the cash needed to fund operations and to efficiently repatriate excess cash from foreign entities.
We ended Q2 with $902 million of liquidity comprised of $729 million of committed funding under our credit facility, which matures in October of 2023, and our Q2 cash balance.
Our debt balance at quarter end was $1.3.7 billion up 200.
Third $74 million versus Q2 last year, driven primarily by share repurchases and increased working capital.
Our net debt to EBITDA leverage at the end of Q2 was 1.2 times down sequentially from 1.3 times at the end of Q1.
From an M&A standpoint, the deal flow.
Slow in the market remains robust and we expect to see more industry consolidation through the end of 2021.
While we don't comment on specific companies of our transactions, we do see the potential for Robinson to play a role we continue to be focused on value creation with our capital allocation and remain disciplined in that regard.
We continued to prioritize companies that can expand our geographic presence, particularly in global forwarding at or improve our service offerings offer compelling cross selling opportunities help us build scale to leverage our flywheel or to enhance our digitization efforts to deliver growth quality.
We're sort of efficiencies of strong fit with the Robinson Robinson culture is also important in our M&A efforts.
Overall, we're making excellent progress against our strategic initiatives to drive growth and efficiency into our model that said, we have tremendous opportunities for growth and efficiency ahead of us.
City of <unk> is we still represent just a small percentage of the overall addressable market and global logistics landscape.
From a capital allocation standpoint, we continue to be committed to disciplined capital stewardship, maintaining an investment grade credit rating and generating sustainable long term growth to our shareholders.
Thank you for listening this afternoon, and I will turn the call back over to Bob now for his final comments.
Thanks, Mike our record quarterly volumes revenues adjusted gross profit and operating income demonstrated the strength of our non asset based business model that includes a diverse portfolio of services as I said earlier, we have bold ambitions to continue to evolve as the.
The company and we're committed to creating better outcomes for our customers and carriers by delivering industry, leading technology, that's built by and for supply chain experts and by leveraging our unmatched combination of experience scale technology and information advantage.
We'll stay the course with our strategy of pursuing market share gains that align with our.
Platform expectations and will continue to invest back into the business in order to drive innovation improve service to our customers and carriers and drive growth across our global suite of modes and services.
I believe that the team at Robinson of the most capable team of supply chain experts in the world and I'm incredibly proud of how our team has helped thousands of customers.
Profit of agate globally disrupted supply chains, while delivering strong results for our shareholders and as we continue to create differentiated value for the nearly 200000 carriers and customers of Robinson I'm thrilled tab of Rune Ridge on during the Robinson team to drive our next generation of innovation.
I'm also excited by our return to office that our U S employees.
<unk> began this month coming back to a more flexible and hybrid work model and we look forward to seeing more of our people around the world return to the office is appropriate guided by local health guidelines and I'd like to thank the Robinson team members around the world for learning to work and collaborate in new ways for rapidly advancing our digital capabilities for creating a more open.
Open and inclusive environment and for ensuring the health and safety of our people across the globe, while continuing to help us emerge stronger.
This concludes our prepared comments and with that I'll turn it back the Stacy for the live Q&A portion of the call.
Thank you in order to let as many people ask questions on possible, we ask that you limit yourself to.
Question as a reminder to ask the question. Please press star 1 on your telephone keypad for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Jordan <unk> with Goldman Sachs. Please go ahead.
Q1 of high I was wondering if you could.
Talk a little bit further about your thoughts on the truckload markets.
Obviously, I know you're focused more on net revenue dollars, but maybe some of your big picture thoughts on the selling price trends versus the purchase transport.
Do we start seeing.
Some tightening of.
Of that or or or anyway, just your thoughts on those 2 aspects of the net revenue.
Yeah.
Hello.
Can you hear majority of.
Yeah, I hear Ya net.
Sorry, it sounds like we had a technical difficulty there.
Build the 2020, you're on mute I guess.
As we think about the market as we see it right now we continue to see the spot market pulling the contractual market up in truckload I mean, obviously these.
Numbers on a year on year basis on the 40% range are clearly outsized because of the depression that we had in the freight markets.
In the second quarter of of last year, but we do expect to continue to see.
Reising, increasing through the through the balance of the year sequentially were continuing to see continued pressure there.
To your point, we do manage the business really to net revenue dollars on a per truckload basis, we're staying really focused right now Jordan on on growing our overall ADP or net revenue dollars by really optimizing the balance between volume growth.
Per shipment.
We've been working hard to avoid contracts that.
Attribute more loans with negative margins.
As I've said in the last quarter's call. We entered the bid cycle late in 2020 and early into 'twenty..1 you know facing sustained AGP per truckload that was well below the range of acceptable profitability for us and so we really had to take a couple of steps in addressing negative files.
And putting those contracts that proposed that instituted a lot of risk around negatives and then.
Focusing on that balance between both spot and contractual so we had a we had of believed early in this year about where we thought the contract.
Of the contract.
Truckload market was going to move in at this point we appear the.
Of what of that view as was fairly accurate that did cause us to miss some opportunities early in the year, but those are really coming back to us now either in shorter term contractual agreements are more more true spot market.
Thank you.
Your next question Jack Atkins.
Skins with Stephens. Please go ahead.
Great. Good afternoon, and thank you for taking my questions.
I guess Bob.
Just when we kind of take a step back in.
Think about the investments that you all have been making in technology to drive productivity through your business over the course of the last several years and I know it goes back further.
But specifically over the last several years.
It certainly feels like we're at a tipping point here and I'm. Just curious if you could maybe talk about when do you think we're going to start seeing sort of that acceleration and productivity that's going to drive the.
The clear market share gains that the market can sort of view.
You really.
Really get a gauge on the level of of.
You know topline growth and an incremental profitability that can that can come from all of these investments I guess, we're just trying to get a feel for when we're going to hit the hit the tipping point and really see those market share gains accelerate if that question makes sense.
Makes sense Jack.
We're a couple of years and of this increased investment and obviously technology spend and investment in Digitization has been ongoing for us.
As I look at the the operational results on the financial results I believe that we are seeing some of those things today, we're certainly.
Greeting value of new ways for both customers and carriers.
<unk> some of the Nast productivity information that we provide in the deck certainly speaks to the productivity uplift that we've gotten within within Nast, whether it would be shipments per person per day or that NPI, the nast productivity index.
I believe that we've spent the last several quarters really building capabilities and different digital capabilities.
Different digital products and today, we're really pushing for broad adoption of that I mean, I talked in my prepared comments around.
The the ability to leverage our.
Proprietary pricing engine, that's driven by algorithms and models against our customers I mean today virtually almost every single customer of Robinson can now access.
US that pricing engine either through the web portal, whether through free quota director of their Tms or ERP the.
The fully automated bookings the digital freight matching that's occurring on the carrier side well over 290000 fully automotive automated truckload bookings that's not only a big.
Productivity lift for us, but it's also a new.
For us to attract and engage with carriers on a different way that may that may prefer that the method of bookings so.
Again I go back to we're not at the finish line of of either introducing new capabilities or getting those out into the wild but I do think we're starting to see some really early stage results and impacts into the business.
New ways.
Just in the spot market alone with the roughly 30% volume growth that we had this quarter a lot of that was driven through those digital pricing engines and connection. So I think we're in a good place Jack.
Again as I said in the prepared remarks, adding of rune rosin of really strong product leader with a.
<unk> experience of true digital native platform companies I look at I look at that as of really strategic move for us to help accelerate and to help us be even better there.
Okay. Thank you.
Your next question Todd Fowler with Keybanc capital markets. Please go ahead.
Hey, great Thanks, and good day.
A lot of it so I appreciate Mike.
The commentary on the impact at the higher.
Rate per mile has on the reported.
Gross profit percentage here in the quarter, but how should we think about the widening of the spread that we saw between buy and sell rates during the quarter I think it's a little bit unusual to kind of see that GAAP start to widen.
<unk> maybe at this point in the cycle. So how do we think about.
Gross profit should trend into the back half of the year based on that dynamic. Thanks.
Yes, Thanks, Todd that's a great question.
For Robinson.
Price always follows cost and Thats, particularly exam.
Indicated in our contract business and so with respect to our AGP margins.
The margins are best at Robinson, when the cost of purchase transportation is coming down and so when you look at our business now it's still going up it's been going up here for quite some time in the <unk> reached an all time high we think that there is.
<unk> array of the tightness in this market that may sustain.
Through the end of the year of potentially but at some point if the costs start coming back to 5 year averages of 10 year averages.
<unk> win.
Those margins start widening for Robinson, and that's when you start comparing.
Pairing of us back to what happened in Q3 of <unk> 18 of Q4.18, when the pricing starts when the cost started coming down.
That's the widening of the margin.
Got it that makes a ton of sense of if were looking at slide 9 we need to think about that line coming down versus going up.
Yeah.
That's right.
Thanks for the times of that guidance.
Thanks, Bob Youre on.
Next question Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, and good afternoon, everyone.
So it was of Bob.
Some of your legacy broker peers not digitally.
Like I say you guys are talking about 10.
10% gross margins being the new normal for the foreseeable future.
And talking about trying to scale up.
With that level do you do you see it the same way and kind of a bit of how do you.
About the the current kind of 12, 13% level over time.
Even the tax when the cycle a little bit.
Yeah, I don't subscribe to the 8% you know average adjusted gross profit margins over time.
You know what I would what I would tell you and again I'm on I'm going to flip Robbie back to adjusted gross for.
The thing just net revenue of our AGP dollars per load and I would tell you in second quarter. Our net revenue per load is basically right at the midpoint of our 5 and 10 year trailing averages right now clearly back half of 2018 front half of 19, we saw outsized margins when cost started the drop against our contract business. We've got we've got a whole.
Whole bunch of customers that are at those 8% to 10% margins today and they're highly profitable relationship for us because they are highly digitized highly connected highly automated on both the front end with the customer on the back end of the carrier. So I really think that that 8% to 10% margin range that you talk about is so dependent upon mix right because if I can if I.
Actually the highly effective highly efficient customer relationship that's integrated via API on the customer side and integrated with carriers on the backs backside you can run that business profitably all day long at the mid.
The mid single digit high single digit margins, but if you've got a lot of labor a lot of work that needs to go into carrier procurement of lot of issues with shipping and receiving.
That's not 8% to 10% business in my imagination, I think theres. So many variables that go into that it's not going to be now clearly, we're taking steps to digitize both on the front end on the backend front end of the customer backend with the carrier that drive greater efficiency and allow us to.
Think differently about that but ultimately as we think about our operating expenses.
<unk> and our cost to serve.
We are sitting here running a whole bunch of what if scenarios of what if it's 8 what if it's 10, what if it stays at <unk>, but we want to ensure that we've got the right operating model that we can survive and thrive regardless of what happens because of lot of that is outside of our control as witnessed this quarter just by the rapid run up in cost in.
And sales.
Great. Thank you.
Your next question, Tom 1 of which with UBS. Please go ahead.
Yes.
Good afternoon.
I wanted to.
Get your thoughts on maybe.
The American seems to be changing I guess.
Look at it a little bit with the 2018 free.
But the cycle seems meaningfully different so I'm just wondering if the way you manage nast and the mix of business.
Do you want to target debt differently in the future of it seems like the contract business has been.
Our struggle.
Struggled the last couple of years.
So does it make sense to consider instead of trying to be 65% to 70%.
Contracting I know you were less than that in the quarter does it make sense to potentially target.
You know more of a 50.50 mix or just.
Just wanted to offer that as the.
And given it seems the market has changed and then I guess the if you'll allow me a second 1 in in terms of what she went to per 1 but.
In the forwarding I don't think you get a lot of credit for the strong results importing because I think people don't believe it's going to persist do you of any thoughts on the on the sustainability of that.
The strong results importing maybe I don't know if you've looked at 'twenty 'twenty 2 or just you know out of couple of quarters. Thank you.
Sure that was technically 2 Tom but we'll just we'll Doc you 1 next quarter, but we'll take the bulk of their gotcha.
Thanks.
On the contract side on on the truckload piece.
Quest working the shape that portfolio today, right and that we shape that portfolio based on how we go to market, how we respond on pricing to those goods as I said in my prepared comments I think it's 40% of our awards during the quarter were for those shorter term 3 and 6 months agreement, we're doing a lot of things with customers.
The world today, where we're not on the spot or contract per se, but kind of on that in between the space, where we're keeping the customer out of the spot it slightly beneficial to us the risks.
Things for the customer it de risks things for us as well. So we are getting pretty creative around around pricing because to your point the volatility that has existed in the in the market from 17 to today is.
As unprecedented certainly but the more.
Moving to a true 50, 50, I think disadvantages us because really 85% of truckload freight in a typical market is moving in the under contract terms and so we really want access to that we think that we're really good at serving customers in that contractual arrangement, we can look and.
<unk> like a large asset in aggregate all of the independent owner operators under a single technology umbrella and bring to life. The capacity there that most customers wouldn't theyre not built to access on their own. So I don't know that we'll ever get to 50.50 on a sustained level, but we do consistently work to shape that shaped the kind of the makeup of the contract versus spot.
Feel on the forwarding side, you know I think it was at this point last year that everyone was kind of saying Theres no way that Robinson is going to comp of 104% growth on airfreight in the future of this must be transitory and we just did.
So we don't see anything fundamentally changing in the air and Ocean markets between now and Chinese.
These new year at a minimum but what I would just really reinforces there is so much work that Mike short and his leadership team and forwarding of done over the course of the last couple of years.
We've challenged our own internal beliefs of how we can scale of that business of what the the returns can be in that business and modest I would call modest head count increases.
So over the course of the last couple of years, we've increased volume significantly and certainly increased the revenue significantly. So theres been a lot of commercial activity. That's occurred we've added a lot of new logos to that business.
We're a better forward of today I believe than we were 2 years ago based on the scale that we've that we've created and that market does just.
On the <unk> going to be so dislocated that shippers that were typically <unk> that weren't working with <unk> are now, bringing <unk> into the mix to manage through that so you know.
I'm not a prognosticator of exactly what the.
The size of that business is 24 months from now on 36 months from now, but but I really believe that there is a lot of sustainability.
3 of the results that we're delivering in forwarding.
On because of the cycle and also the work Thats been done there on the investments around technology and investments in talent on a global basis.
Great. Thanks for the time.
Your next question, Brian I'll sit back with Jpmorgan. Please go ahead.
Ed.
Hey, good evening, thanks for taking the question.
Maybe another 1 on on the contract is the.
Expand on your previous answer a bit.
Do you think the behavior, we things have changed enough to kind of keep this hybrid mix of shorter term contracts something that's more out of the market like it just something you would look to.
Adapt to and offer more in the future or is this just kind of the signs of the market and you're just kind of roll with what's what's given to you.
Just wanted to see how you're addressing that and if customers are giving anything of any indication that the would be moving.
Moving more so in that direction of what that might mean for your mix going forward. Thanks.
No I think it's I think it's a mix.
Ryan in terms of how we're going to market in different pricing options that were putting in front of customers and also of realisation by shippers that there's a ton of work that goes into an annual bid and a lot of cost associated with that and between 2017 and today. They are just been too many instances.
Yep.
30 days after implementation.
Routing guides are failing.
Acceptance levels are low or the inverse of that like happened.
On 18 into 19, you end up disadvantages of shipper on your paying.
Mark raised well over the market and so I do think that there is going to continue to be an adjustment.
We're in a derisking on both sides, because it's with the volatility thats been there it's on.
Unrealistic for of shipper to think that they're going to <unk>.
Handover of 12 month contract at a price when you've got this much volatility and transfer that risk and likewise, a carrier is simply not going to take that amount of risk on when the markets are moving.
<unk> as quickly as they are so I.
I do think that we're finding different ways to approach pricing and to get pretty creative to find solutions that are winning in the market for large blocks of freight that are that are helping the ship, helping shippers to deal with the volatility.
Okay, great. Thank you.
Your next question, Chris Wetherbee with Citi. Please go ahead.
Yes, Hi, I wanted to kind of cut back of the comment that you made before about sort of the direction of margins in sort of either of the level that we're at now and obviously the the apps.
Absolute dollars of rate has an impact on where those percentages of kind of shake outs of looking at gross profit.
The per load certainly makes sense.
Guess I Bill I wanted to understand sort of the ability for the direction. The change in the back half of the year. So we've been sort of stuck between 12 and 13% understandably, so but as you start to see the potential for rate level off potentially in the back half of the year of the sort of shorter term approach to pricing.
Rising the better contract versus spot mix, it would seem that you'd be able to see some sequential improvement in margins I want to make sure I'm understanding of the comments you made before were you, saying that you don't expect necessarily to see that until you see rates down on a year over year basis or or is there. Some other factors that kind of play into your thoughts around nast margins on the back half of the year.
Yes.
I made mentioned earlier, Chris Let me know if this hits on your question if not we can pivot.
Made comments that we've been in this process of repricing, we've been focused on taking the negative loads out.
I will tell you we are still on an elevated level of around around negative loads on our contract business.
On a quarter.
Quarterly basis.
Look 2012 to today, we normally average I don't know of $20 million $20 million roughly of negative files on a quarterly basis, we were at about $60 million. This quarter. So theres, a theres of $40 million Delta between what normal looks like in second quarter of this year, just in our contractual business and so.
That is the the opportunity that we continue to pursue.
You start taking that over the course of the year and you start to get some big numbers pretty quickly.
So we continue to work on that opportunity to pursue the way to improve the profitability in that in that contractual business that I would tell you is probably the biggest difference if you can take.
And on to operating margin you can take that down to net revenue margin, but that's probably the biggest difference between the front and the front end of 2018 and today is just the existence of the spot market margins are roughly the same but the the contractual margins are far lower right now than they were then just because of the existence of those of those negative load. So we got to keep.
Chipping away at that.
Got it that's very helpful. And then that the does help me with the answer of pursue presumably.
That's the sort of quarter by quarter of type of progression that should move you on the right direction, assuming rates don't take a further step spike up I would guess range. So just so I understand sort of the duration, we're talking about here, yes, youre absolutely right Youre on.
Also taking the time a lot of its 2 questions on instead of 1 but but the Chris.
You're absolutely right in the fact that.
If you assume that the market is going to at some point reach some sort of equilibrium of them at a higher price point, that's really when you can start to mine those negative those negative loads out certainly we're taking steps.
Along the way but.
If you're constantly chasing of rising cost of hire.
Through the course of the contract it gets harder to take those out if you reach some stasis or equilibrium, even if that's a.
Year over year of 30% increases or whatever then you can really start to plan to take that out and improve profitability.
Understood.
Thank you.
Thank you. Your next question comes from basketball majors with Susquehanna. Please go ahead.
Yeah, Good evening and thanks for taking my questions you talked about the long term stickiness of some of what you've done in forwarding.
But looking at the Ocean business specifically.
It looks like it's risen double digits of net revenue sequentially for 5 straight quarters here can you talk a little bit about the momentum in that improvement and if it's continuing I don't know if you can give us that trend by month or some thoughts on how the early third quarter is going but just trying to get a sense for where that's headed in the short.
The term to think about where it can go long term. Thank you.
Yes, you are right on on the.
The Ocean AGP has increased each of the last <unk>.
5 quarters in and.
Trying to look of C. Sorry of interest, but I got the ocean on front of me here.
And volume as well so.
I would say it's kind of.
It's overused the put the flywheel I believe continues to feed that business right and so we're continuing to bring on new new logos.
Continuing to build.
New logos that are larger shippers and so.
Part of award sizes.
Are like 3.5 times today, what they were 5 years ago and so as we continue to build more trade lane density as we continue to be able to do more consolidations, we really see that.
That just continues to grow exponentially over time.
In the short term as it is that momentum still consider continuing month after month any thoughts on the sequential dream within the quarter would be helpful.
Yeah, I mean in general what I would say about about July Bascom is that July for us really it looks a lot like June right in terms of in terms of adjusted gross profit per day.
The performance of of each of the underlying.
The services.
They really carryforward pretty cleanly from June to July.
Thank you.
Your next question Allison Landry with credit Suisse. Please go ahead.
Thanks, Tom Good afternoon.
And really taking my question.
I was hoping you guys, maybe talk a little more detail about hiring.
John at the Chief product Officer seems like on a pretty strategic hire I think inappropriate recommended but what are the what are the key initiatives our product offerings that we should expect them to focus.
On I'd imagine the track aspect.
I'll stick to that but I'll sort of should we maybe read this.
No that you're potentially looking at entering other markets, whether organically or through M&A.
And if so might that include something that is.
The somewhat more asset intensive debt than your current guidance.
Thank you.
Sure so.
Hiring of Rune is really part of our long term commitment to bring our customers on our carriers of the best products for their businesses supported by global network of experts on the people that they can rely on most of the things that tell us the matter and in the context of that when I talk about products I'm really talking about customer and carrier facing technology.
Right the extension of the NAV of your platform and how that intersects with with our customers on our carriers.
Arun has got extremely deep product knowledge and his leadership experience is going to be invaluable for us as we drive really that next generation of innovation here at Robinson and throughout throughout the industry. The chief product officer position is 1 that I have been.
The ring for quite some time and have been looking for the right talent to add to our team, but it was really critical that I found the right person because I really see this as a fairly transformational step for our organization and of Rune and me getting to know him.
Over the course of this process of really found to be quite of transformational leader.
He's got this.
This long history of developing and deploying products that really enrich customer experience and create value at industry, leading digital first platform companies. So in his role here at Robinson. He will lead all of our global product development and innovation across the entire NAV of your platform and how that intersects with with again our customers and.
Considers in terms of it being a signal to adjacencies or looking at M&A in other areas I certainly wouldn't read through it and that in that respect. So it's really about creating the product organization and organizing ourselves effectively around those products as we were in the market.
Kerry next question Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon, so any thoughts on sequential net revenue in the third quarter, sometimes it's up sometimes it's down and then <unk>.
Longer term maybe.
Maybe just some thoughts on the the net operating margins.
4 of Nast in forwarding.
Forwarding has never been higher nast sort of towards the low end of the range.
Or do you think these margins can go over time.
Yes. So Q3 net revenue again July looks a lot like June and that's kind of as far as I would as deep as I would go.
<unk> for the net revenue per business day of the numbers are pretty similar of the growth rates are probably a little bit higher in July than they were in June just given the comparisons.
So let's talk about the operating margin.
You know.
As I was thinking we might get this question I was trying to think about.
I think I get the question of how does the compare to.
Obvious times on the cycle and so just as a point of comparison I'd pick second quarter of 2018, and the second quarter of this year and if you go back in time at that time for.
For the second quarter of <unk> Nast was like 41% forward moving is at 27 on overall, we're at $32.6 today Nasser.
Masters of 34, 6 sporting at $45, 3 and breadth of 34, 8 so our operating margin.
On enterprise today is actually better today than it was in what I would consider kind of a similar similar time on the cycle.
In terms of where we can go I still believe that upper $30.40, as an opportunity for Nast we're.
To prudently engineering, our cost structure to be able to get there and the biggest factor. There is net revenue dollars per per truckload rate that's what moves.
Going to be the biggest mover of that but we're certainly doing a lot of things on the cost structure to try to get back to close to 40% operating margins of Nast, We said for a long time that our goal is.
Were moved to forwarding business to 30% operating margins and now all of a sudden we've shown ourselves that we can do 45 right and so.
I would say, we'll still guide towards that 30% range for forwarding, but.
On the sustainability of our current margins, we'll continue to look at.
As to.
Reserve the right to revisit the kind of the guidance. If you will for that forwarding business, but if we can keep the enterprise in that mid <unk> range, we think that thats.
Consistent with past quarters, and certainly very feasible for us.
Thank you guys appreciate it.
And your next question, David Missoula with Barclays. Please go ahead.
Hey, Thanks for taking the question.
Just you had mentioned.
The truckload I believe the truckload length of haul down 4.5% I was just wondering how that is trending sequentially.
You think the the trend is really just due to kind of pandemic comps or.
Yep.
Some sort of change in either business mix or mix of free within your current customer base the.
The study that's really been on ongoing macro trend over the course of the past several years.
E Commerce becomes more prevalent as inventory gets placed closer to consumers that we've continued to see that trend down.
Or several years.
Great. Thanks.
Next question Bruce Chan with Stifel. Please go ahead.
Great. Thanks for the question and congrats to you Arun.
This is probably a similar question to what some of the others have been getting to you, but if I could just maybe.
Over the past blunt about it I guess.
I still don't understand why we still have so much contractual business thats running underwater I mean, I get that you run your business very collaboratively with your customers in the management of long term in and out of your contracts, but you.
Market volatility is theoretically a good thing for brokers over the cycle and if I look back over the previous cycle.
Be a little bit like we've really seen that so we've got a market that's really tight the cycle probably longer than the normal 1 you are providing a ton of value to your customer.
The thing is just that competitive right now that you can't move faster here or is there something else that's going on.
Well, Bruce we just delivered a quarter with.
Just as the revenues record volumes across the suite of our entire services.
And on the spot market grew our truckload volume by over 30%, which is really in line with what I've seen a lot of other companies that are more focused on the on the spot market brokerage of have delivered very similar results.
Our focus on on the contractual business.
<unk> as I said earlier I think the 85 per cent of the freight that moves on the contracts is a market that we want to be and we want to participate on that through cycles.
Why is it why is it that we're still having a high degree of negative loads in that business, but we forecasted where we thought this year was going to go but we.
Didn't expect 42% increased 47% increase in carrier cost of higher than in the second quarter and so we've got we've got a.
Deliver results for multiple stakeholders, our shareholders certainly, but our customers are what ultimately create the value for our shareholders.
I'm a firm believer that we need to do our best to manage our commitments to those to those relationships.
Through cycles, because it pays dividends in the long term when I look at our top 500 customers that make up close to 50% of our revenue and see the retention rates that we have with those customers of 99% to 100% in any given year I think that.
And some of it as to why we take the positions we do with those customers.
Because we try to take the long term view.
Okay, No that's great that's a fair point and I appreciate the color.
Thanks, Bruce next.
The next question Ari Rosa with Bank of America. Please go ahead.
Hey, good afternoon, guys. Thanks for squeezing me in Bob So I wanted to get your thoughts on 1 of the.
The large startup competitors digital competitors.
Yes.
Announced that the requiring translates in kind of.
Ensing their offerings in <unk>, So I wanted to get your thoughts there, but I.
Wanted to kind of contextualize it in.
Thinking about CH Robinson for a long time has said that your competitive advantage of your moat.
It is kind of your scale and the ability that you have to provide kind of comprehensive solutions and really tight freight market. So maybe you could talk about.
Kind of thoughts on thoughts on the kind of competitive landscape and also maybe how CH Robinson has been able to differentiate itself kind of given the real tightness in capacity that we've seen over the last couple of months.
Yeah absolutely.
Wont comment on competitors' strategies or Theyre.
Our moves, but I certainly will speak to our competitive advantages in those things that you cited I still believe to be to be the case right. We are highly focused on ensuring our customers are successful navigating challenging freight markets. We continue to have the largest network of carriers in North America, which were now more and more often.
Digitizing those those relationships with those carriers, which allow us to move faster, we signed up 6900, new carriers in the quarter last quarter.
Those are all new carriers that we can bring to life to help serve our customers.
I'd go back to the last question that was asked our word matters to our customers our commitment to our customers matters, we continue to differentiate on.
On the on that customer promise so the the blend between technology, plus having a global global suite of services, our ability to go into a customer and offer them, a leading global forwarding product of leading surface transportation product the <unk>.
I believe our <unk> business would be equivalent to the fifth or sixth largest asset base.
LDL carrier and we don't on a trucker of warehouse.
That's a $3 billion business, we're the largest non asset based LCL provider by.
By multiples of the next closest competitor and so those things of scale of service excellence of commitment of technology and investment those are continuing to resin.
Donate with customers and continuing to help us to win in the marketplace and I believe that to be true today, and I believe it that'll be true on the future.
But does that manifest itself in the form of kind of better margins or kind of.
Better growth rates over time.
I believe that it does again I believe that if you want to talk about operating margins I believe.
Believe that we have a path to 40% operating margins on that something in excess of 30% in forwarding, 35% operating mid Thirty's operating margins for the business.
And we are investing back into the business, we are investing and building capabilities. We're investing in building better technology that our customers will will use on love. We're building technology other carriers will use and love.
And we're hiring really great people across the globe with with.
With great experience to bring these services the life.
Okay, great. Thanks for the time.
Thank you I would like to turn the floor over to Chuck for closing remarks.
That concludes today's earnings call. Thank you everyone for joining us today and we look for.
Talking to you again have a good evening.
Okay.
Yeah.
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