Q3 2021 CH Robinson Worldwide Inc Earnings Call
Yes.
[music].
Sure.
Good afternoon, ladies and gentlemen, and welcome to the C. H Robinson third quarter 2021 conference call. At this time all participants are in a listen only mode. Following the company's remarks, we will open the line for a live question and answer session to ask a question. Please.
Thats Star one on your telephone keypad, if anyone needs assistance at any time during the conference. Please press Star Zero as a reminder, this conference is being recorded Tuesday October 26, 2021, I would now like to turn this conference over to Chuck <unk> director of Investor Relations.
Thank you Laura and good afternoon, everyone on the call with me today is Bob Feeser felt our president and Chief Executive Officer, and my exact moisture, our chief Financial Officer.
Bob and Mike will provide a summary of our 2021 third quarter results and then we will open up the call for live questions.
Earnings presentation slides are supplemental to our earnings release and can be found in the investors section of our website at Investor <unk>, CH Robinson Dot com or.
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 two in today's presentation lists factors that could cause our actual results to differ from management's expectations and with that I'll turn the call over to Bob.
Thank you Chuck and good afternoon, everyone and thank you for joining US today, the third quarter was another quarter of progress and strong execution, resulting in record quarterly financial results.
Trajectory of our business is heading in the right direction as we continue to leverage our tax plus strategy to help customers navigate through an extremely challenging a capacity constrained environment, which we expect to continue.
Demand for our global suite of services and for the benefit of our powerful technology platform continues to be strong and the digitization efforts continue to take hold and be ingrained in an increasing percentage of our business.
In our North American truckload business, we've made steady progress in our sustained tight capacity environment through the continued repricing of our contractual portfolio and higher volumes of spot business. Our adjusted gross profit or HCP per truckload returned to our five year average and our AGP per mile in Q3 exceeded both our five year average on your average.
We accomplished this while growing our truckload volume four 5% year over year and three 5% on a sequential basis.
Within the quarter, we saw an acceleration of truckload volume per business day in each month of the quarter with 7% year over year growth in September and that growth trend has continued into October.
For the quarter Nast truckload grew AGP by $83 million or 36% year over year through a four 5% increase in volume and a 30% increase in AGP per load.
Included a 14% increase in spot market volume year over year due in part to an 85% increase in volume that was driven through our proprietary dynamic pricing engine, which is now on pace to generate $1 billion in spot truckload freight for the year.
Nearly half of our spot or transactional business was price via integrations with our client.
Pricing has been in the third quarter, delivering real time pricing capacity assurance from the largest network of truckload capacity in North America.
We closed the quarter with an approximate mix of 60% contractual volume and 40% transactional volume, which is consistent with our mix in the year ago period.
Our average truckload might help cost per mile paid to our carriers, excluding fuel surcharges increased 26% compared to the third quarter of last year. Our average line haul rates billed to our customers again, excluding fuel surcharges increased 27% year over year. This resulted in the highest cost and price per mile and <unk>.
Record and a 33% year over year increase in our Nast truckload adjusted gross profit per mile.
This combined with a 2% decrease in the average length of haul resulted in the 30% increase in AGP per truckload.
During the quarter, we saw routing guide depth of tender in our managed services business increased slightly from one six in June to $1 seven at September, indicating slight deterioration of shipper routing guide performance during the quarter.
Given the current structural constraints around expansion of truckload supply coupled with the continued strong demand as we head into the holiday season, we expect capacity to remain tight and we expect to perform well in that environment with over half of our contractual truckload business data to reprice in the fourth quarter of this year and the first quarter of next.
During the third quarter, we continued our effort to expand our carrier network and we launched an effort to recognize truck drivers for their extraordinary efforts and we had incredible engagement. This led to a new record of 9500, new carrier sign ups and increased utilization of our carrier technology and apps.
Our Napa <unk> business grew adjusted gross profit by $14 million or 12% year over year.
This was delivered through a 1% increase in volume and a kind of 5% increase in adjusted gross profit per order.
This increase in volume was on top of a 13, 5% volume growth in the comparable quarter last year.
Overall demand in the <unk> market remains strong driven by growth in e-commerce, resulting in capacity remaining at a premium or value proposition and LPL continues to resonate with shippers of all sizes across multiple industry verticals.
Turning now to our global forwarding business, the third quarter was our sixth consecutive quarter strong year over year growth in total revenues.
And operating income.
Based on low inventory to sales ratios and the robust pipeline of business from new and existing customers. We believe the strength in this business will continue into 2022.
And our Ocean forwarding business, we grew our adjusted gross profit by $126 million or 142% year over year. This came through a 12% increase in shipments and a 116% increase in adjusted gross profit per shipment.
Demand continues to be stronger than what the overall industry can meet with limited vessel and container capacity.
And although some ports are working to implement expanded operating hours other market constraints, such as the shortage of truck drivers drayage capacity and inland warehouse space continue to be bottlenecks and port congestion is likely to continue into 2022.
<unk> team has done a great job of strengthening our carrier relationships and procuring incremental capacity to best serve our customers as well as working with shippers to better plan their shipping needs and to consider ultimate modes or ports.
Finally, our international Air freight business delivered adjusted gross profit growth of $26 million or 76% year over year.
This was driven by a 51% increase in metric tons shift and a 17% increase in adjusted gross profit per metric ton.
Demand for Airfreight remains incredibly strong partially driven by continued conversions of some ocean freight to air.
Freeing capacity has continued to be strained and we continue to position charter flight capacity to support demand from both new and existing customers.
The <unk> team is continuing to add new commercial relationships with strategic multinational customers that are leading to increased 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 that we've made in digitization and data and analytics as well as our global network that supporting our expanded geographical and vertical presence.
We believe that these strategies and competitive advantages of CH Robinson will enable us to create more value for customers and in turn win more business sustained the market share gains that we've achieved and deliver solid returns for our shareholders.
Our digital investments continue to deliver customer value and unlock growth in new and exciting ways. The latest example of this is our introduction of market rate IQ during the quarter, the spring pricing transparency to shippers by allowing them to compare their rates to the market averages and then using the information advantage of C. H Robinson breakdown.
Their rates to see potential savings opportunities.
When we bring these Robinson labs innovation to the market, we see increased engagement with our customers higher win rates with those customers that are truly realizing the value from these new products.
As I mentioned earlier the amount of volume that's being delivered to a real time dynamic pricing tools has grown significantly.
Enabling these digital connections improves efficiencies for our customers improves our response time for quote requests and improves our win rates.
We also continue to add digital connections with our customers at an accelerated pace with 100, new customers connected via Tms and ERP connections in the third quarter of 2021.
The number of daily and monthly average users across our customer and carrier facing platforms also continues to grow with 24% year over year growth in daily average users of our carrier platforms as we continue to deliver new capabilities and benefits to our carriers through both the web and mobile versions of Nanosphere carrier and driver.
During the quarter, we had over 340000 fully automated bookings in our Nast truckload business, which was an increase of nearly 80% year over year.
And finally as it relates to productivity, we've again highlighted a couple of key metrics for Nash and our earnings presentation.
During the third quarter, we invested in hiring and building our bench to support growth on a year to date basis, we continue to show year over year improvement productivity as indicated by the 880 <unk> favorable spread in our Nast productivity index, which represents the difference between the year over year change in NAFTA volume and the change in Nast head count.
Shipments per person per day is another metric that clearly shows the relationship between the timing of our increased digital investments and the impact to mass productivity with an over 25% increase in productivity since the beginning of the increased investment period.
We are encouraged with the progress that we're making on our digital investments and the impact that these investments are delivering to our customers for our carriers and the impact to our overall results across our global suite of services, we believe that our tax plus strategy that combines our tailored market, leading technology solutions with our global network of logistics experts and in information.
Advantaged created from our scale and our data is the right strategy and one that is aligned to the needs of our shippers and partners as we help them to navigate these highly disrupted markets and deliver for their customers.
I'll now turn the call to Mike to review the specifics of our third quarter financial performance.
Thanks, Bob and good afternoon, everyone as Bob mentioned, we delivered another quarter of record financial results in Q3, driven by strong performance and a favorable market as we continue to execute on our tax plus strategy.
Our total company revenue increased 48% over Q3 last year and our adjusted gross profit or AGP was up 43%.
Increased AGP was driven by both volume and AGP per shipment across Ocean air truckload and <unk>.
Total company, <unk> and 33% over the pre pandemic quarter of Q3 2019.
On a monthly basis compared to 2020, our total company AGP per business day improved in each sequential month of the quarter and was up 51% in July up 39% in August and up 40% in September.
For the fifth consecutive quarter prices and costs rose across our North American truckload business with cost per mile and price per mile each reaching new highs in each month of Q3 due to the persistent.
Supply demand imbalance.
Our Nast team navigated through this environment by continuing to grow spot volume, which was up approximately 14% year over year in Q3, marking the fifth quarter of double digit spot market volume growth.
Within our contractual freight business, where Q3 volume was flat we continue to selectively repriced the portfolio to reflect.
The ever increasing cost of purchase transportation in this market.
As Bob mentioned, our Q3 truckload AGP per mile is now above both our five year and 10 year averages.
Per mile and AGP per load, our key metrics in our truckload business, rather than an AGP margin percentage, which naturally rises or falls with the changing market cycle pricing.
For those following AGP margin percentage, if or when the market loosens within the current cycle with the greater than two thirds of our truckload volume on 12 month contracts, we would expect to see a GP margin.
We continue to focus on overall ADP dollar growth by optimizing volume and <unk> with enhanced customer focus and digital investments, we expect to drive long term growth and efficiency into our model.
Now turning to expenses Q3 personnel expenses were $399 9 million up 32% compared to Q3 of last year, primarily due to higher incentive compensation costs and the impact of short term pandemic related cost reductions in Q3 of last year.
Our Q3 average head count increased seven 1% compared to Q3 last year. Despite the tight labor market. We successfully hired the talent, we need to support our growth expectations, particularly in global forwarding and nest.
Given the increase in incentive.
The compensation, resulting from our profit expectations for 2021, and the additional head count. We now expect 2021 personnel <unk> expenses to be in the one $5 billion to $155 billion range.
Which is up from our prior expectations of $1 42 to 148 billion.
Q3, SG&A expenses of $133 $5 million were up 13% compared to Q3 of 2020, primarily due to the impact of short term pandemic related cost reductions in Q3 of last year.
We continue to expect 2021 total SG&A expenses to be approximately <unk> 5 billion.
Including approximately 90% to $95 million of depreciation and amortization.
Our Q3 income from operations was a quarterly record at $310 $8 million.
Up 85% versus Q3 last year and our adjusted operating margin of 36, 8% was up 800.
Third quarter interest and other expense totaled $16 7 million up approximately $9 2 million versus Q3 last year due primarily to the impact of currency revaluation.
Q3 results included a $3 $8 million loss on currency revaluation compared to a $3.3 million gain in Q3 last year.
Interest expense was also up $1 2 million due.
Due to the higher average debt balance.
Our Q3 tax rate came in our second lowest tax rate.
John record, which was only a clip.
From Q3 last year.
This year's Q3 rate with lower than our expectations primarily.
Earnings in U S tax incentives.
Okay to be 18 to 19.
Estimate of 'twenty to 'twenty two.
Percent.
$47 $1 million up 81% compared to Q3 last year and diluted earnings per share was a quarterly record.
At $1 85.
Up 85% versus Q3 last year.
Turning to cash flow Q.
Q3 cash flow used by operations was approximately $74 million compared to 169 million used in Q3 last year.
Sequentially cash flow from operations declined by $223 million, driven primarily by a $679 million sequential increase in accounts receivable and contract assets and partially offset by a $267 million increase in total accounts payable and the two <unk>.
$47 million and net income.
In Q3 accounts receivable and contract assets were up 19, 6% sequentially. While total revenue was up 13, 2% the resulting three nine day increase in days sales outstanding or DSO was driven primarily by the mix shift associated with higher revenue growth.
Paul runs approximately double that of our Nash business.
While our accounts receivable balances.
Seeing quality issues as our percentage.
<unk> past due and credit losses have both improved compared to our three year averages.
Over the long term, we expect <unk> growth to outpace working capital growth.
Capital expenditures were $22 7 million in Q3 up from $15 2 million in Q3 last year, we now expect our technology driven.
In 2021 capital expenditures to be $70 million to $80 million up from our previous expectation of $55 million to $65 million.
We returned approximately $237 million of cash to shareholders in Q3 through a combination of a $168 million of share repurchases and $69 million of dividends.
That level of cash returned to shareholders represents a 230% increase versus Q3 last year. When we were not repurchasing shares out of an abundance of caution due to the pandemic.
During Q3 this year, we repurchased approximately one 9 million shares at an average price of $90 58.
At the end of Q3, we had approximately $3 2 million shares of capacity remaining on our $15 million share repurchase authorization from may of 2018.
Our cash balance at the end of Q3 was $203 million down $41 million compared to Q3 of 2020, and we continue to work down our cash balance through efficient.
A repatriation of excess cash from foreign entities with the angle of carrying only the cash we need to fund operations.
We ended Q3 with $571 million of liquidity comprised of $368 million of committed funding under our credit facility, which matures in October of 'twenty three.
And our Q3 cash balance.
Our debt balance at quarter end was 173 billion up $633 million versus Q3 last year, driven primarily by increased working capital and share repurchases.
Our net debt to EBITDA leverage at the end of Q3 was 139 times up sequentially from one to five times at the end of Q2.
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 in our total shareholder returns.
Overall, our Nash three to percentage increase in price per mile was higher than the percent increase in cost per mile for the first time in nine quarters. While there is no telling where the market is headed inflections like we saw in Q3 has historically.
Lead to periods with our highest AGP margins.
The global forwarding team continued to generate significant earnings while building on a solid foundation for future growth.
The expanded global team with upgraded tech and more uniform operations across across the globe is now onboarding the strongest pipeline of new customers.
Thank you for listening this afternoon, and I'll turn the call back over to Bob now for his final comments.
Thanks, Mike I'll take a couple of minutes here and wrap up our prepared comments before we turn it back to the operator for our live Q&A.
I believe that our results once again this quarter continue to demonstrate that our model is working and that our strategy is sound.
No question that we're in a time of unprecedented supply chain disruption across the globe that reaches virtually every mode of transportation and I believe at Robinson continues to be uniquely positioned to help customers not only navigate this environment, but to succeed in this environment.
None of us know exactly when the cycle is going to begin to turn or how long it will last but with everything that we see today. We believe this cycle will in fact extend due to the global constraints around adding capacity and labor while demand remains strong.
I certainly don't believe that having 70 ships anchored in Los Angeles was by any stretch the new normal.
But I also don't see it reverting to a market resembling 2019 anytime soon.
As referenced on slide three of our earnings deck, one of the pillars of our tech plus.
Strategy is our people.
Our customers continue to tell us that our team around the globe are the people that they rely on.
As I've said before I believe that the people at Robinson as the most capable team of supply chain experts in the world.
And I'm incredibly proud of how this team has continued to help thousands of customers navigate this environment, while also delivering record financial results for our shareholders.
These past couple of years have been stressful times to work on our supply chain in many parts of the world. We continue to work in a primarily remote environment. We're certainly hopeful to start getting more people back in the office into a hybrid model as soon as we begin to see the delta variant begin to fade.
Youre solving for the complexities of today's supply chain issues is not a nine to five job. It's 20, $473 65, and I want to again recognize and thank our people for the great work that they're doing.
In a time, where labor participation rates are low and companies across the globe. Our challenge to add team members, we were able to grow the size of our team to support our customers and to fuel our future growth people.
People are choosing to join Robinson today, because of the strength of our global brand and the opportunities that we offer for both personal and professional growth.
As I close out my prepared remarks, I would like to reference slide six.
Earnings deck.
For those of you that have been following us for a while.
Decade ago, or so we were primarily known as the North American truckload brokerage company.
In 2012, we had a belief that strategically it would be important for our future to have a more balanced portfolio of services.
And then if we had a strong global forwarding business to complement our industry, leading north American surface transportation business, we could really whole solution to life for our customers, which would in turn drive growth by connecting supply chains across the globe.
We also believe that if we execute that effectively we can create a business with operating margins in line with other industry, leading forwarders that could help us to offset some of the cyclicality in our core truckload brokerage business and we could deliver more consistent results for our shareholders.
At that time prior to the acquisition of Phoenix International forwarding represented around $150 million of our adjusted gross profit I guess at the time, we call. It net revenue and that was less than 10% of our enterprise net revenue and contributed very little to operating income.
Since that time, we've made a string of strategic acquisition of a global operating model supported by our <unk> technology platform today.
Today, we're the number one in VLCC in the Trans Pacific eastbound trade Lane and a top five MB OCC in the entire global and both air and customs.
Our successful execution.
And the marketplace has allowed us to deliver.
However, on a trailing 12 month basis over $944 million in global forwarding, AGP and $422 million in operating income.
Global forwarding now represents.
Since 37% of our total company <unk> for the past quarter, while we delivered 97% growth in AGP and an operating margin of over 53%.
And looking at the left side of the slide we can zero in on masked a little bit. We've stated that we will continue to pursue profitable market share growth within this business, which we achieved again this quarter.
Volumes increased both year over year and sequentially.
Within Nast, we spoken extensively about our investments in technology as we transition to more of a digitally led company and you can see here the multiple proof points of our advances in technology and the evolution of our business process are driving successful outcomes.
Our <unk> business is healthy today and the pace of evolution to our business model continues to accelerate.
In today's environment of global supply chain disruption customers are looking for solutions that span the globe and across all modes and ocean freight solution alone doesn't solve the problem that customers are facing either as a standalone truckload or an LPL solution.
And we continue to be uniquely positioned to serve customers. During this time of disruption and beyond to orchestrate end to end supply chain success for these customers.
So just as we believe in 2012, we continue to believe today, our ability to deliver a global suite of services fueled by great people supported by industry, leading technology $1 billion in freight under management that we have matters and I'm confident that it's going to continue to drive our growth in the future.
Going forward, we're going to continue to leverage the strength of this diversified non asset based business model that delivers strong returns on investment invested capital.
We'll stay the course with our strategy of pursuing market share gains that align with our profitability expectations and will continue to invest back into the business to drive innovation improve service to our customers and carriers and to drive growth across all of our global suite of modes and services. So.
So this concludes our prepared comments.
Comments and with that I'll turn it back to Laura for the live Q&A portion of the call.
Thank you.
Many people ask questions as possible.
That you limit yourself to one question.
To ask a question. Please press star one on your telephone keypad.
Our first question comes from the line of moderates with UBS. You May proceed with your question.
Yes, good afternoon, the great great results in Florida in particular.
It seems like really taking advantage of the market and doing well.
I guess my question is on Nast.
You gave a lot of good stats on technology, and how youre getting traction on that.
It seems like it's not.
Not necessarily translating in terms of.
Net revenue growth through our operating income, but it seems like theres, a little mismatch between how well you're doing.
Doing with the technology and how that's flowing through in terms of just the I guess growth or kind of profitability and Nab as well. So if you have any thoughts on that.
In that relationship in Nast.
And maybe just relative to strong brokerage market. Thank you.
Sure. Thanks for the question Tom.
I guess maybe.
Maybe reiterate my closing comments, there and we tend to look at the sum of the parts here and we feel pretty good about the fact that we just delivered enterprise operating margins that are the highest that we've delivered since the third quarter of 2016 specific.
Specific to Nast Theres really two things at play there the first is Disney.
Due to the increased investment in technology, and the investments that goes with that whether it's expense or capitalized.
Comes prior to some of the benefits that we've gained so we're a couple of years into this journey of increased investments and we haven't fully harnessed the thing that eliminates the friction.
Friction from these transactions and allows us to drive greater efficiency.
When I think about our transactional pricing engine being up to the level. It has some 85% year over year. That's a great example of us taking friction out and.
Still the higher level of negative loads.
Our truckload business.
<unk>.
Year over year basis by about 390.
It was pretty consistent from Q2 into Q3 and so.
Not that you can.
Net out one variable, but if you netted out those negative loads and they look more like historical averages you would see operating margins that look very similar to what we've experienced in the past a mask.
Do you think.
There is an acceleration coming like just when you talk about the traction the spot loads in.
Technology is it reasonable to think that accelerates at some point looking forward or is that the wrong way to look at it.
I would I would believe that we're seeing some of the acceleration right now I mean, when I when I. So.
880 basis point spread between head count and volume growth growth.
That's a real accelerant, when we talk about a 25% increase in shipments per person per day, I think thats, an important proof point of the productivity that we're gaining.
The automated bookings because it's something that we've talked about consistently arguably I.
I would venture to guess the number of automated bookings that we have there 340000 in a quarter likely exceed.
Exceeds any of the quote unquote digital upstart in terms of their total load volume for a quarter and so I do think that we are making progress here the biggest weight and the biggest drag on the operating margins relative to past quarters has been those two factors because of the increased technology investment and.
And the negative loads on truckload and the two things that we anticipate gaining better better value from that technology as time goes on as well as narrowing the scope of those negative loads.
Market's continuing settled we will reprice about half of our contractual truckload base in Q4 and Q1 of this year.
And I really see the market growing in a couple of different directions, if take scenario we.
We maintain at this kind of current status of tight markets at elevated prices and if that's the case then we will reprice accordingly, and we should eliminate some of those negative loads and settled out at a certain net revenue our AGP per shipment. The other side of that is that potentially the market.
Market starts to cool down and you'd see margin expansion.
That model I don't anticipate that we're going to continue to see year on year.
On a year increases at the same rate that we have over the past couple of quarters in terms of cost of purchase transportation.
Our next question comes from the line of Jordan <unk> with Goldman Sachs. You May proceed with your question.
Yeah, Hi, just curious.
And on the freight forwarding side of the equation, which obviously continues to do quite well.
There is questions of course that sustainability and just sort of curious if you could talk to your thoughts.
On whether it be.
Operating margin in that segment.
The tightness in the supply chain tightness, how long that did.
Potentially linger and drive.
And then maybe more importantly, once the frenzy does do die down we're not dropping back sort of earlier pre COVID-19 type of levels in terms of base level of profitability.
Yes, I don't see us going back to the base level of profitability that we demonstrated pre COVID-19 done a lot the team at <unk> has done a lot.
The engineered our cost structure in such a way that we can deliver improved operating margins over time, we've cited the target of 30% operating margins.
And that business, we haven't updated our guidance around that around that point, but we've certainly shown that we've got the capability of delivering operating margins well in excess of that.
I won't try to <unk>.
<unk> forecast, how where when the cycle on the forwarding side items, but.
Theres been a lot of conversation here as of late around ports and keeping some select quartz opened 24, seven that as one node within the overall supply chain, but it is not.
While it's an important one doing that alone isn't going to solve for this so I think we I think we have a certainly domestically, but potentially globally, a real challenge with labor participation.
Truck driver shortage warehouse labor shortage port labor shortage rail yard labor shortage.
With Labour issue permeates throughout the entire supply chain, and it's really driving fluidity out which causes many of these backups and so I don't know what the magic bullet so to speak that solves for that Jordan, but I do believe because labor sits at the center of invested in virtually every single node that it's going to be slow to develop.
<unk>.
You look at inventory to sales ratios are clearly theres a lot of demand pent up behind that in order to get to more normalized levels. There. So again I won't try to prognosticate when and how this ends but I do believe that it's going to extend for quite some time.
Thank you.
Our next Stephens you May proceed with your question.
Okay, great. Thank you for taking my question, So I guess, Bob going back to that.
The reference in the slides around the 340000 fully automated.
Bookings in the quarter, one is there a way to kind of quantify what percentage of your truckload shipments that represents and then I guess secondly.
Do you feel like you're at a point, where you can really cant really I think it is fair.
Barely.
It will be fairly labor intensive.
Is there that can allow you to accelerate those fully automated.
Communications and bookings.
If your carrier partners just I'm curious if you can maybe talk about that because it seems like that.
That's an opportunity to really accelerate.
The automation within the system.
Yes, I think how I would quantify that and I won't comment on the percentage.
And as a total but just note on a year on year basis and sequentially. It continues to grow in kind of a hockey stick up into the right, but the good kind of chart right up into the right unless it's expense.
<unk>.
I think that the way that I would quantify where we sit today on its journey as I think we've captured the low hanging fruit.
We captured the early adopters in the carrier community I think we've captured those that more naturally want to interact with us in a fully automated way in.
There is a lot of things coming down the pipe in terms of greater adoption of.
Booking API. This isn't just all about a mobile application rates. This is <unk>.
And meeting our carriers, where and how they want to interact with us and trying to drive friction out of every step of that organization out about out of that profit next six to nine months for us are really really critical in this journey and that I would expect for us to really deliver some strong results related to this carrier.
Procurement automation over that time period.
Thank you.
Our next question comes from the line of Jason Seidl with Cowen You May proceed with your question.
Thanks, operator.
Good evening, gentlemen, I want to stick to the forwarding side of the business here.
Clearly doing a great job youre throwing up some fantastic revenue growth as we look at the back half of the year as we have just.
Unheard of comps right now.
I think the thing that gets me really.
Feeling good about our forwarding business.
Is.
It is so great.
Grounded in really strong volume growth I mean, obviously there is there has been improvement in the adjusted gross profit per shipment, but when I look at our growth this quarter at 12% notion and over 50% in there. We think that there is some season, a very robust customer pipeline of opportunities.
We have yet to implement.
Takeover portions or all of their 40 large large chunks for lack of a better piece.
Near term of business and so we think the pipeline.
Brian's robust again, the macro market conditions are going to dictate some of this.
But the growth trajectory for that business, we feel really strongly about.
So to be clear you do think there are scenarios, where you can greater revenue in the back half of the year.
Jason after the second quarter of last year, we all sat here and so there is no way that we can grow air freight revenue off of 104% growth rate in Q2 of 2020 than we did.
And we continue to grow really strong and deliver strong results on top of some really difficult comps and so based on where we sit today looking into the end of the quarter. We think it's realistic to expect that we can deliver growth. We can continue to deliver growth in that business.
That's great color listen nice quarter I appreciate the time I appreciate it.
Our next question comes from the line of Todd <unk> with Keybanc capital markets. You May proceed with your question.
Great Thanks, and good evening.
Bob I wanted to ask on slide nine I think that Mike made the comment we've got the center model. This is the first time in nine quarters win year sell rate exceeded your cost of higher can you just talk to what you've done here. This year is that a greater ability to pass through some of the higher spot rates that youre seeing just because we've been in this market and as we.
About.
Okay.
This chart and this curve what would be the reason why this this isn't sustained going forward, which as you pointed out is typically a good environment for you on the <unk> side.
Yes.
Look at if you look at the actual cost of higher within our business and you look at it sequentially week by week and the actual customer pricing. We have started to see that flatten out right in terms of dollars per mile that we're billing dollars per mile that work that we're paying and so.
We're not experiencing the week to week volatility of these increases the decrease we do seem to have found things kind of flattening out at a much higher level and we've delivered that the.
The change there based on just the opportunities that we've taken in the spot market and also the selected repricing activities that we've that we've done within our contractual portfolio.
We've continued to take the long game.
On our contractual strategic customers right and so.
We lost maybe on 20% of their loans are 25% of their loads, but they're really important customers for us that have been with us for 20 years with them in the fourth quarter and so.
So.
Some might say we should.
Whack those losses in order to drive that those losses out the short term, but we believe that that would have a very negative implication for us in the fourth quarter and moving forward for the next four quarters and so we continue to take the long game with those customers and so I do expect to see this type of trend continuing in that in that difference.
Year over year change in rate and cost and if we can get to.
A more stable tight market I think we have that opportunity.
Yeah, Okay that makes sense, thanks for the time Tonight.
Yes, Thanks Scott.
Our next question comes from the line of Chris Wetherbee with Citi. You May proceed with your question.
Hey, Thanks, good afternoon.
Maybe I wanted to zero in a little bit on SaaS operating expenses, and maybe just get a sense I guess.
Theres, probably some some incentive comp that's in there based on the.
The business that youre doing in the quarter, but wanted to get a sense of how to.
Think about that going forward. It was a nice step up from the second quarter to the third quarter.
And I guess.
I think John.
But at a high level I think is above your longer term averages, but when you look at.
From an operating income on a per load basis.
Does that compare I, just want to get a sense of whether youre actually.
No heads are growing slower than volume, so I would expect that that relationship.
A little bit more favorable so just want to make sure I'm not missing something there.
Yes, Chris let me take that so on.
But our Nast business, we have increased heads are slightly.
In that business and Thats really.
Carrying capacity and making sure that we're taken bottlenecks out of the system, we've taken our pads to get ourselves aligned with where we feel like long term growth is there. So that's a little bit of the increase but we're also.
Seeing any.
Increases because of personnel expense and that is on the back of incentives for the most part.
And Thats.
Where our folks are paid an incentive on enterprise results were.
We're seeing a pretty significant increase overall, if you take that question to the enterprise level. We showed you the.
Personnel expense up $97 million over.
And second any insight incentives.
And then probably also should note true to Nast and to.
Enterprise.
Other quarter of that increase year over year and personnel expense is.
The result of short term savings that we had a year ago and so obviously, we didn't expect those to continue and so getting back to more of a normalized level.
Little over a quarter of that increase and then head count makes it makes up the difference there and the personnel side. So.
So we think we're in better position now going forward, but as we roll into <unk>.
Targets.
Okay. So the operating profit per load can probably start to wrap ramp up in that scenario yes.
Yes, it really depends on what happens on ACP.
Thank you.
Our next question comes from the line of Scott Group with Wolfe Research You May proceed with your question.
Hey, Thanks, guys. So.
Just wanted to pop there.
Make sure Im understanding so.
Third quarter Nast net revenues up sequentially, but Didnt asked earnings were down sequentially.
It sounds like you think that thats more of a one off and going forward. If nast net revenues growing earnings should be growing is that do you think we start to see that normalize.
Yes over time, we would expect we would expect.
The growth.
Operating income for <unk> to grow at a rate ahead of net revenue our agent fee growth.
Okay, and then if I can just ask a strategic one like I'm just not sure you guys are getting much credit for your forwarding business.
And I guess.
Although we've been talking about it more what you do about it we've also got a really active.
In a market how do you think about either.
Good evening and acquire maybe selling businesses I don't know if any thoughts you may have there.
Yes, I appreciate that I appreciate that question I mean, clearly we're we're continuing to look at company is in the marketplace from an acquisition perspective.
As I alluded to in the past they've got they've got to meet some certain criteria right. We wanted to fit into our culture.
We really like the business that we built in forwarding through through organic and inorganic growth and so.
And our geographic presence in that business.
Plains any way that we can build scale.
We're committed to looking at those opportunities.
In terms of some of the other strategic alternatives that you mentioned I'm not in a position today to comment on on some of those but.
Our goal today has been about growing that business versus any of the other alternatives that you brought up.
Okay. Thank you guys I appreciate it.
Our next question comes from the line of Bascom layers with Susquehanna. You May proceed with your question taking my question just a follow up.
Follow up on Scott's question.
Sure.
No.
As an acquirer could you discuss whether or not.
Buying a U S centric truck brokerage makes more sense today for some reason.
Compare to in prior years.
And I know you can't comment on specific M&A speculation, but if you could give us some.
So target that would be helpful. Thank you.
Yes, bathroom ill touch on I'll do my best to try to answer your question, but I won't I won't go real deep into it and I'll address the first part of it in terms of what we consider the acquisition of a domestic brokerage.
The term domestic brokerage I think has evolved a lot over the course of the last decade, or so certainly since 2014 and 15.
So I don't know there isn't really a one size fits all I'd go back to kind of the same the same I.
I guess guidelines that I've shared with the previous question, which is one it's got to be a strategic fit.
Culturally fit nicely within Robinson.
There are opportunities to potentially enhanced technology to drive growth or think differently about how we transform ourselves through acquisition. So the great thing about.
Look at virtually everything that's in the market at least at a cursory level. When we can determine what level of interest that we want to that we want to display in those assets, but I think strategically.
<unk>.
Not going to be driven by what's readily available in the market. It will be driven by the strategic needs of our business and we will go out.
All of them and seek those opportunities inorganically, if we choose for that to be the right path.
And we will control that process.
The question.
Briefly answer that.
That's to say assume that we have the appropriate governance mechanisms in place.
Assessing which we would work through in order.
To maximize the value for our shareholders.
Thank you.
Our next question comes from the line of David <unk> with Barclays. You May proceed with your question.
Okay.
Thanks for taking my question I.
I guess, Bob do you have a number of competitors that are part of that success and the power only brokerage line.
Do you feel this offering is impacting your business in any way at all.
How are you.
I think the business accordingly.
Yes, it's a great part of our business, we launched our Robinson power plus program I think probably five years ago.
And it's been a really fast growing part of our business. We've taken a very customer centric approach to where we are.
About 10% of the business that Robinson manages the math today, a little bit north of 10% as drop trailer, where we're doing drop trailer loading.
Kind of taken two approaches to that one being kind of the Rainbow fleet, where we aggregate trailer pools on behalf of a bunch of smaller carriers and established interchange agreements between them and the second probably more fast growing is that power piece, where we've got trailers that we're leasing directly or that carrier, we have leasing agreements with carriers and were moving those trailers.
<unk> is around specific corridors between specific customers and so it allows us.
Another opportunity to look and feel like an asset for some of our customers who have very specific needs.
Trailer pools, and it's a fast growing piece of our overall business.
Our next question comes from the line of Glenn Mattson with Bank of America. You May proceed with your question.
Hey, good afternoon.
Solid job on the quarter, but I guess, maybe just two small questions. One is the capex that youre spending just want to understand is that targeted to scaling the take rate on on the digital brokerage in other words does that.
Looking to regain.
Market.
In terms of share gains and then on the ocean side, a smaller one just given rates have scaled so much on the ocean side.
It's actually collapsed it looks like the differentials between Ocean and air from maybe 10 to 15 times to five times does that are you starting to see scaling on the air side or does that gap may be bringing more of that swapping into the equation that you talked about.
I'll take I'll take the airfreight question I'll throw it to Mike to talk about Capex.
We have seen tremendous growth in our charter business, Kevin I think it's to your point when you've got container rates that go as high as they have all of a sudden charter charter's starts to look a little bit more feasible and so I do think some of that spillover from ocean and air is what's driving some of the growth certainly that we're seeing on the airfreight side at all.
I'll, let Mike talk about the Capex, yes, Ken on Capex, we took our guidance for 2000.
Okay.
Our capex spend is almost entirely a tech spend and we've got money to deploy there when risk adjusted returns are high and so we like when we're seeing a better flow of great projects and we certainly.
Prioritize those amongst our capital allocation plans when we see them so.
In my book, a higher Capex spend is encouraging because it means that the pipeline that we have projects with nice returns out into the future stronger and then.
Maybe just to add on.
Maybe more directly to your question, yes, a lot of that is directed towards scaling the digital platform for truckload and the truckload freight exchange, but there are a lot of other high returning projects that we've got in flight there whether that be in our <unk> business to enhance and manage yield better connect with some of the capabilities of our carriers too.
Continuing to strengthen our global platform and global forwarding to drive operational.
<unk>. So there are a number of things in flight there that brings benefits to different parts of the business.
Thanks, Paul Thanks, Mike I appreciate the time, thanks again.
Our next question comes from the line of Charlie Yogurts with Evercore ISI.
Good evening and thank you for taking my question and congratulations on the great results I wanted to just talk.
How should we be thinking about this partnership with them.
The nation and incremental volumes within LPL, and then from a broader perspective for the holiday season will touch on.
Hi, Brian that would be appreciated thank you.
Yes, Thanks, Charlie and welcome to the call.
So we're early early innings, obviously with the launch of the Sps Commerce partnerships I think we just launched that early last week and kind of looking at Chuck here seven to 10 days ago, and so I wish I had a whole bunch of revenue results that I can share with you, but incentives within the quarter I wasn't sure if even if I could but I think the really neat thing about this partnership as Sps Commerce is a leader.
And their space I mean, they've got over 95000 customers that are on their platform that they're connecting directly into the retail ecosystem and managing the flow of information, it's such a natural merits on a natural partnership given our strength in retail and food and beverage and having.
Having such a deep knowledge of that space, so our ability to.
Veeva LCL provider and health.
The customers the shipper customers of Sps commerce access that LCL marketplace in a fully automated way I think is a real win for the customers of Sps, it's an incremental opportunity for us.
And it helps them to strengthen their product portfolio and allows us to tap into an entire group of customers that are new and exciting way and we continue to look at alliances and partnerships across the supply chain landscape for opportunities such as those which is just another example of us extending the ecosystem.
In pursuing some of these digital initiatives to drive growth.
Terms of positioning for the peak season, it feels as though we've been in the peak season here quite frankly and so.
Our job is to be really agile to work with our customers to help them navigate the unknowns to be mode agnostic to help them move.
Whether it be moving parts moving modes.
Collaborating with other shipper customers to drive.
We worked really really closely with our <unk>.
Our super customers to help them be successful in this environment in a number of different ways, but as I said it.
And our team around the globe.
Is doing their best to help navigate us.
Okay, Great. That's very helpful. Thanks for the clarity.
Our next question comes from the line of Jeff Kauffman with vertical Research partners. You May proceed with your question.
Thank you very much and congratulations on a very strong quarter I wanted to focus a little bit on the forwarding.
This morning, <unk> reported and they had discussed about how procedures related to Delta Varian out of Asia.
Impacted shipments coming out of that region.
I was just wondering.
Did this impact your forwarding business and it was the net of that impact positive or was the net of that impact.
So the net to service just overall a negative I mean, if you think about that.
The current environment and Ocean freight right now there is one.
About two 5% of the active fleet that.
The Ocean rig fleet that isn't active right now and so it is literally at full capacity.
Service reliability on the water has.
Never been lower than it is today and that's to no fault of the steamship lines. It's clearly just an amalgamation of all these supply chain issues as we saw issues in Asia related to Covid, what you're starting to see with either plant shutting down port shutting down ports being not called on for a period of time, because the ships would go to another.
And so it just further exacerbated the delays that were occurring.
And the global freight cycle, so I can't put it I can't quantify a number in terms of very strong for us sequentially and year over year, but clearly it caused additional disruptions and delays in the supply chain.
Okay, and you would benefit from that I guess in some ways, where customers would need solutions on the other hand, youre, probably moving a little less.
Volume across the ocean than would otherwise be.
But no view of whether that was net positive or negative to the company not not in a not in a meaningful way in a somewhat volatile result, thanks.
Your line of Bryan I'll come back with.
Hey, good evening, Thanks for getting me on the call here I appreciate it.
So Bob just wanted to come back to maybe get your closing thoughts on balancing volume market share and in.
Margin, However, you want to.
Measure that AGP precluded I assume.
I would've thought we would've seen the negative files, maybe at least improve sequentially or maybe.
Not altogether just gone at this point given just how strong the market is so.
So I appreciate the comments that these are good customers, but wont be sharing some of the disruption and the costs that you are seeing here.
So maybe you can just address that one more time for me and then Q&A.
We then some comments on how you think this is going to I think.
This cycle is going to change.
Nation ships going forward, maybe more shorter contracts.
Sure.
Stability in pricing and indices that you kind of mentioned already but it sounds like despite all this youre still looking at two thirds of your book annual So I appreciate any thoughts there.
Yes.
So, let's let's talk about the we'll start with the negative files and here's here's how I think about this.
I think our managed services business makes us a great proxy for kind of what happens on the contractual marketplace, where we've got six or $7 billion in freight under management today in that managed services business is just a great proxy for the.
For the contractual marketplace, if I go back to fourth quarter of last year and call. It October.
October September of last year, all the way through today, we've been in this extended tight trucking environment and presumably there's been all sorts of bids many bids repricing reshuffling of routing guide.
Not just with Robinson or other brokers, but all the asset guys everybody. That's involved in the domestic surface transportation trucking business has had some sort of movement in in their pricing and their commitment to all of those things and contracts there.
There has been virtually no improvement in routing guide depth of tender over that 15 months its been 171617.
So I think.
Our kind of consistent negative files is somewhat analogous to that and the phone. It is flattening out but we've been on this consistent year over year increase.
Our model good or bad as that we typically we.
We sell long and we buy short and so when we consistently see that upward pressure on cost of buyer, we're going to have a higher currency negative filed now clearly this is the highest it's been and we expect that will we will draw it down.
But I think Thats, where we are I would be very disappointed if.
After the fourth quarter or into the first quarter of next year. Once we start repricing. If we're still having this conversation about negative files being being at the same level I expect that they will come down both sequentially and year over year.
In terms of some of the contract terms, yes, I think two thirds of our business is still on 12 months 12 month terms, which is kind of is what it is but a third of our contractual business being on.
Something other than 12 month terms is new to us and I think it's relatively new to the industry and so pricing transparency continues to be an important thing that we focus on so whether it be the <unk>.
Right IQ product that we launched during the quarter to give shippers visibility to how they're performing compared to industry benchmarks, but also visibility to some of their behaviors and how their behaviors are impacting the rates that they pay is probably is an important exercise for us to be consultative and help them too.
Realize their behaviors and how they can be more effective right because rate per mile youre not going to build the negotiated down per se very easily today.
Our dynamic pricing engine that we've talked a lot about is another way for us to provide real time.
Real time pricing to customers that keep them out of the kind of the dog eat dog spot market and we provide kind of an intermediate step between the guaranteed committed contractual business.
And not allowing them to fall all the way through their routing guide. So we're spending a lot of time on trying to deliver innovative pricing solutions that are good for us and good for the customers, but that annual contract still has held up to be the main mechanism for us to price contractual freight and the main mechanism in which customers are requesting.
Yes.
And do you think that would hold pretty much day next year as well based on what your conversations are right now looking into 'twenty two.
I don't know that I have got a clear view I mean looking into looking out beyond that would be would be making at this point.
Alright, Thank you Bob I appreciate it.
Great.
Thank you everyone for joining us today and we.
We look forward to talking to you again have a good evening.
Yeah.
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Okay.
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Okay.