Q4 2021 CH Robinson Worldwide Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the C. H Robinson fourth quarter 2021 conference call at this time, all participants on a listen only mode. Following the company's prepared remarks, we will open the line for a live question and answer session.
Speaker 1: Good morning ladies and gentlemen and welcome to the CH Robinson 4th quarter 2021 conference fall. At this time, all participants on of this in only mode. Following the company's prepared remarks, we will open a line for a live question and answer session.
Speaker 1: To ask a question, please press star one on your telephone keypad. If anyone needs assistance at any time during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded Wednesday, February 2nd, 2022. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
To ask a question. Please press star one on your telephone keypad, if anyone needs assistance at any time during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded Wednesday February 2nd 2022, I would now like to turn the conference over to Chuck Ives Director of Investor Relations.
Speaker 2: Thank you, Donna, and good morning, everyone. On the call of me today is Bob Beasterfeld, our president and chief executive officer, Arun Raajan, our chief product officer, and Mike Zachmeister, our chief financial officer.
Thank you Donna and good morning, everyone on the call with me today is Bob Easter fell, our president and Chief Executive Officer, and Rune Rosin, our chief product Officer, and Mike <unk>, Our Chief Financial Officer, Bob and Mike will provide a summary of our 2021 fourth quarter results and outlook for 2022.
Speaker 2: Bob and Mike will provide a summary of our 2021 fourth quarter results and outlook for 2022. And Arun will outline the innovation and development occurring across our platform. And then we will open the call up for live questions.
He will outline the innovation and development occurring across our platform and then we will open the call up for live questions.
Speaker 2: Our earnings presentation slides are supplemental to our earnings release and can be found in the investor section of our website at investor.chrobbinson.com Our prepared comments are not intended to follow the slides. If we do refer to specific information on the slides we will let you know which slide we're referencing.
Our 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 dotcom.
Our prepared comments are not intended to follow the slides.
We do refer to specific information on the slides, we will let you know which slide we're referencing.
Speaker 2: I'd also like to remind you that our remarks today may contain forward-looking statements.
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.
Speaker 2: Slide two into 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.
Speaker 3: Thank you, Chuck. Good morning, everyone, and thank you for joining us today. Within our industry, 2021 will be remembered as a year with some of the greatest disruption and tightest capacity ever seen. For me, it will be remembered as a year in which the global supply chain was at the forefront of conversations, and where our organization effectively helped our customers and carriers navigate the unprecedented level of supply chain disruption, allowing us to provide the superior level of service that global customers have come to expect from CH Robin.
Thank you Chuck and good morning, everyone and thank you for joining us today within our industry 2021 will be remembered as a year with some of the greatest disruption and tightest capacity ever seen.
For me it will be remembered as a year in which the global supply chain is at the forefront of conversations and where our organization effectively helped our customers and carriers navigate the unprecedented level of supply chain disruption, allowing us to provide the superior level of service that global customers have come to expect from C. H Robinson.
Speaker 3: The strength and the resilience of our model was evident in the fourth quarter and the full year as we generated record annual financial results in 2021. The positive momentum of our business remains strong as demand for our global suite of services and for our digital freight platform continues to grow. Now let me turn to a high level overview of the result.
The strength and the resilience of our model is evident in the fourth quarter and the full year as we generated record annual financial results and 2021.
The positive momentum of our business remains strong as demand for our global suite of services and for our digital freight platform continues to grow.
Now, let me turn to a high level overview of the results.
Speaker 3: In our NAS truckload business, we saw strong demand for our services with a 6% year over year volume growth in the fourth quarter. Our adjusted gross profit or AGP per load continued to improve in both truckload and LPL as we reprised more of our contractual portfolio and focused on profitable market share. This reprising enabled us to reduce the amount of truckloads with negative margins and Q4, their lowest level since Q2 of 2020.
In our Nast truckload business, we saw strong demand for our services with a 6% year over year volume growth in the fourth quarter. Our adjusted gross profit our AGP per load continued to improve in both truckload and LPL as we repriced more of our contractual portfolio and focused on profitable market share. This repricing enabled us to reduce.
The amount of truckloads with negative margins in Q4 their lowest level since Q2 of 2020.
Speaker 3: Yet that level does remain above our historical averages, and we remain focused on reducing them further.
You got that level does remain above our historical averages and we remain focused on reducing them further.
Speaker 3: For the quarter, NAST truck load grew AGP by $57 million, or 22% year-over-year. This was driven by a 6% increase in volume and a 15% increase in AGP for loads.
For the quarter Nast truckload grew AGP by $57 million or 22% year over year. This was driven by a 6% increase in volume and a 15% increase in AGP furloughed.
Speaker 3: This was the third consecutive quarter that we delivered year-over-year growth in both NAS truckload volume and NAS truckload AGP. Demonstrating balanced growth in an extremely tight market.
This was the third consecutive quarter that we delivered year over year growth in both Nast truckload volume and Nast truckload AGP demonstrating balanced growth in an extremely tight market.
Speaker 3: Truckload volume growth was driven by a 2% increase in contractual volume and a 12% increase in spot market volume. Due in part to an 85% increase in volume that was driven through our proprietary dynamic pricing engine.
Truckload volume growth was driven by a 2% increase in contractual volume and a 12% increase in spot market volumes due in part to an 85% increase in volume that was driven through our proprietary dynamic pricing engine.
Speaker 3: Nearly half of our spot or transactional business was priced through our dynamic pricing engine in the fourth quarter where we delivered real-time pricing with capacity assurance from the largest network of truckload capacity in North America.
Nearly half of our spot or transactional business was priced through our dynamic pricing engine in the fourth quarter, where we delivered real time pricing with capacity assurance from the largest network of truckload capacity in North America.
Speaker 3: For the full year, approximately $875 million of revenue was recognized through this digital channel, which was a hundred and ninety-three percent increase over 2020.
For the full year approximately $875 million of revenue was recognized through this digital channel, which was 193% increase over 2020.
During the fourth quarter, we had an approximate mix of 55% contractual volume and 45% transactional volume in our truckload business, which is consistent with our mix in the year ago period.
We saw routing guide depth of tender in our managed services business to remain at $1 seven in the fourth quarter as it did for most of 2021.
As a proxy for the industry environment. This occurred despite all of the repricing actions that occurred throughout 2021, reflecting the extended period of market disruption.
In Q4, our average truckload line haul cost per mile paid to carriers, excluding fuel surcharges increased 18% compared to the fourth quarter of last year.
Speaker 3: In Q4, our average truck load line haul cost per mile paid to carriers, excluding fuel surcharges increased 18% compared to the fourth quarter of last year.
Speaker 3: Our average line haul rate build to our customers, excluding fuel surcharges, increased 18.5% year-over-year.
Our average line haul rate billed to our customers excluding fuel surcharge, excluding fuel surcharges increased 18, 5% year over year.
Speaker 3: This again resulted in the highest cost and price per mile on record. And at 19% you're over your increase in our NAST truckload adjusted gross profit per mile.
This is again resulted in the highest cost and price per mile and record and a 19% year over year increase in our Nast truckload adjusted gross profit per mile.
Speaker 3: In the fourth quarter, we continued our efforts to attract carriers to our platform and achieved a new record of over 10,000 carrier sign-up.
In the fourth quarter, we continued our efforts to attract carriers to our platform and achieved a new record of over 10000 carrier sign ups.
Speaker 3: Carrier utilization of our Navosphere platform continued to increase as well, with a 40% year-over-year increase in both daily and monthly average users of our carrier product.
Our utilization of our <unk> platform continued to increase as well with a 40% year over year increase in both daily and monthly average users of our carrier products.
As we continue to introduce enhancements to our digital products, we expect to carry experience to improve and the usage to continue growing.
Looking at the market load to truck ratio still remain at historic highs driven by the structural constraints around the expansion of truckload capacity strong import demand persistent consist congestion at the ports and the impacts of Covid and winter storms, we do expect truckload capacity to remain tight and we expect to further increase the volume we handle message.
Environment in short, we expect stronger for longer as we look at the market into 2022.
In our NAFTA LCL business fourth quarter, AGP grew by $21 million or 18% year over year.
This was delivered through a 23, 5% increase in adjusted gross profit per order that was partially offset by a 4% decline in volume.
The the Q4 decrease in LPL volume was mainly driven by a normalization of business levels as our LCL volumes in the fourth quarter of 2020 were bolstered by a few large customers that benefited significantly from some of the stay at home trends during Covid, which.
<unk> to roughly 20% <unk> volume growth in the comparable quarter last year.
Overall demand in the <unk> market remains strong with capacity remaining at a premium.
Our value proposition and LCL continues to resonate with shippers of all sizes and across industry verticals.
For the full year I am proud to announce that our <unk> adjusted gross profit exceeded $500 million for the first time.
Now transitioning to our forwarding business.
The team here continues to execute well and provide creative solutions in an environment in which demand still exceeds capacity.
This resulted in year over year AGP growth in Q4 of $130 million or 72% and marks the seventh consecutive quarter of year over year growth in total revenues AGP and operating income.
Based on low inventory to sales ratios robust demand expectations and the potential for further disruptions at west coast ports due to upcoming labor negotiations. We believe the current forwarding environment will continue through at least the first half and potentially through a greater portion of 2022.
In our Ocean forwarding business, we grew our <unk> by $97 million or 87% year over year. This was delivered through a 78% increase in AGP per shipment and a 5% increase in shipment volume.
Ocean demand continues to exceed the industry's overall capacity with limited vessel and container availability compounded by continued backlog of ships waiting outside of U S ports to unload cargo.
Strong U S. Import demand is expected to persist as the ports work to Debottleneck, which will likely cause ocean pricing to remain elevated and conversions from ocean to air to continue.
Our team is the existing foundation to continue to provide excellent service to our customers and to work with them to develop flexible multimodal solutions for their shipping needs.
Finally, our international Air freight business delivered AGP growth of $31 million or 92% year over year. This was driven by a 38% increase in metric tons shipped and 40% increase in AGP per metric ton.
Airfreight capacity also remained strained, but robinson has been supporting our customers' needs by leveraging our broad network of air services providers.
Forwarding team continues to have a large backlog of new business to implement for both new and existing customers and expects to continue to grow wallet share.
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, which supports our expansive initiatives in targeted geographies and industry verticals.
Before I transition to Mike to go deeper into the results I would like to welcome Arun Roger <unk>, Our chief product officer to walk you through the innovation and the development occurring across our platform today and into the future.
And we continue to believe that through combining our digital products with our global network of logistics experts in our information advantage driven by our scale and data that we are uniquely positioned in the marketplace to deliver for our shippers and partners regardless of market conditions, We believe our strategies and competitive advantage will enable us to better create value for our customers and in turn win more business.
<unk> and increased market share, while delivering higher profitability and return on invested capital.
A key unlock in our ability to effectively deliver on the strategy at scale, allowing us to lead in a digital environment lies with and how we are reorienting at the intersection of our growth strategy, Our engineering and technology strategy strategy and the needs of our customers and carriers by really evolving to being a more product led organization.
As I searched for the right person to lead this change and to be our chief product officer. It was critical for me to find someone who had experience at leading at leading digital companies that participated in two sided marketplaces are.
Our rooms are seasoned and inspiring leader, who brings nearly three decades of product and technology experience developing and deploying products that enrich the customer experience and creating value and industry, leading companies such as whole foods zappos and travelocity.
Our rooms deep product and leadership experience will be invaluable as we drive the next generation of innovation for our company, while creating sustainable long term value for our customers our carriers and our shareholders with that I'll turn the call briefly to Arun.
Thanks, Bob and good morning, everyone. It's nice to have the opportunity to address all of you today.
Really excited to joined Robinson five months ago as I believe in the mission and see a clear opportunity to help digital transformation at scale within an industry leading company.
My professional background is almost exclusively been in leading product data and engineering teams and digitally native companies, such as Travelocity and zappos.
I've also spent time in product and engineering roles at companies and industries that we are going through a transformation such as whole foods more recently and sabre earlier in my career. This is in addition to serving the CTO and CLO relevant Zappos and my 10 years across the Amazon Enterprise.
I understand the importance of amazing customer experience and service and putting the customer at the center of everything we do something that is core to Robinson.
The product is to relentlessly address customer needs and carrier needs and to go deep with data and research to inform technology investments in service of our customers and our carriers.
Robinson exists at the center of a broad two sided marketplace in which we need to provide value to both carriers and customers both.
Both sides of the marketplace are demanding more realtime transparency information and innovation.
In response, we will be more intentionally connecting our business data science digital marketing and technology teams to bring meaningful products features and insights to both sides of the marketplace and to our employees.
We will also be taking a lean approach to delivering products and digital features.
Our hypotheses and integrating our way to deliver the outcomes we seek.
As one example of this we will soon launch enhancements toward an atmosphere carrier product that our focus on improving the digital experience with carriers, including features that personalize the carriers' experience bring more liquidity to the marketplace provides the ability to digitally place offers of nodes.
And deliver personalized recommendations based on the unique behaviors of carriers on our platform.
We will rapidly test and evolve our digital offerings as we iterate on features and functionality.
Providing a strong self service solution for our carriers will give us access to additional carriers and create great greater loyalty, which is critical to our ability to continue growing while volume.
Access to more capacity gives us the opportunity to cover more freight on behalf of our customers by leading carriers, where and how they want to engage with us in our cap and a truck stop or in the office.
Looking backwards from a carrier's needs, we will apply the appropriate rigor ticket restaurant tests and investments towards products that drive off the acquisition retention and growth of carrier sure.
I believe that positive impacted these metrics will be the clear signal that we are making the right investment decisions in the context of carrier facing products.
The digital investments, we're making and the rigorous test and learn approach. We are taking to inform these investments are essential to our continued and future success.
The products, we develop we will aim to strengthen relationships with customers and carriers by delivering value on their terms.
The couple of innovation and value with high performance and excellent service, we create customers and carriers will return again and again because they trust us.
The success of every new product feature or insight that we deliver to either side of our marketplace will be evaluated on its efficacy to increase the rate at which we acquire retain and grow share of customers and carriers, which in turn serve as a primary input metrics to power our future growth.
I'll now turn the call to Mike to re discuss specifics of our fourth quarter financial performance and outlook for 2022.
Thanks, Arun and good morning, everyone as Bob mentioned Q4 was another solid quarter of year over year growth and record annual financial results as we continued to execute on our tax plus strategy.
Our total company revenue increased 43% over Q4 last year and our adjusted gross profit our AGP was up 34%, reaching another record high at $856 million.
<unk> increased <unk> across each of our segments on a year over year basis, and compared to the pre pandemic quarter of Q4 2019.
Note that Q4 of 2021 had one less business day than Q4 of 2020 and 2019.
On a per day basis, Q4, total company AGP improved by 3% sequentially to 36% year over year and 50% over the pre pandemic quarter of Q4 2019.
The AGP increases year over year were driven by both higher volumes and higher AGP per shipment in ocean truckload and air as we pursue profitable market share gains.
On a monthly basis compared to 2020, our total company AGP per business day was up 44% in October up 32% in November and up 31% in December .
For the sixth consecutive quarter prices and cost rose across our North American truckload business and for the fifth consecutive quarter. They reached all time highs in October and November cost per mile and price per mile were relatively flat sequentially before rising in December due to increases in load to truck ratios and.
<unk> Route guide depth.
Our das team navigated through this environment in Q4 by growing spot truckload volume approximately 12% year over year, which marked the sixth quarter in a row of double digit spot market volume growth. We also grew our Q4.
<unk> truckload volume by approximately 2% year over year, despite the rising cost environment.
We continued to manage our load acceptance rates to optimize contractual volume returns as we do each quarter. We also repriced a portion of our contract portfolio to risk to reflect the updated cost of purchase transportation.
As we repriced the contract portfolio and captured more spot volume, our truckload AGP per mile continued to improve.
Q4 marked the fifth consecutive quarter of flat to increasing AGP per mile which remains above both our five year and 10 year averages.
Truckload AGP per shipment improved by 6% sequentially and by 15% compared to Q4 of 2020.
In our <unk> business Q4, AGP per order also improved by 23, 5% compared to Q4 of 2020.
AGP per mile and AGP per shipment are key metrics that we use to run our <unk> business, rather than AGP margin percentage, which naturally rises or falls with changing market cycle pricing.
For those following AGP margin percentage is important to factor in that contractual price changes lag cost changes and purchase transportation that is if or when the market loosens on the backside of the current cycle with greater than half of our truckload volume on fixed price contracts, we would expect to see.
Expansion of AGP margin percent and dollars as we typically have in past cycles.
We continue to focus on overall AGP dollar growth by optimizing volume and AGP per shipment across our service offerings.
With our customer centric focus strong team and our digital investments, we expect to drive long term growth and efficiency into our model.
Now turning to expenses.
Q4 personnel expenses were $420 million up 35, 8% compared to Q4 of last year, primarily due to higher incentive compensation costs higher head count.
And the impact of short term pandemic related cost reductions in Q4 of last year.
On a sequential basis Q4 personnel expenses were up 5% versus Q3 with ending head count up 4%.
Our Q4 average head count increased 11, 9% compared to Q4 of 2020, despite the tight labor market, we are able to attract the talent we needed to support continued growth, particularly in global forwarding and Nast.
Looking back at 2021 in Q2, we began responding to demand that was stronger than expected by adding personnel to support the business.
With annual Enterprise transportation volume growth of seven 9% versus average head count growth of four 2% we delivered on our goal of growing volume faster than head count in 2021.
In Nast, despite an increased level of hiring in the second half of 2021 to support our future growth expectations. We delivered a 620 basis point favorable spread in our 2021 Nash productivity index, which measures measures the difference between the year over year change in Nast volume compared.
The head count.
Before I get into our guidance for 2022 personnel expenses, let me provide some perspective on our expectations for the year ahead.
Similar to the way 2021 played out from Q2 forward, we plan to add more people to support growth opportunities across the business. We expect these additions to be weighted more heavily in the front half of 2022, but still result in growing volume at a greater rate than head count for the full year.
If growth opportunities in the market play out different than we expect we will adjust accordingly.
We're also prioritizing the importance of retaining our talent by increasing based compensation in line with the market in order to maintain high levels of service to our customers and carriers as we value the plus part of our tech plus strategy.
In 2022, we expect a year over year decrease in our incentive compensation expenses to partially offset the increased head count and wage pressures.
We call that in 2021, our enterprise performance led to significant equity vesting due to the 70% year over year growth in our.
Annual earnings per share and above target bonus and commissions payouts driven by the 63% increase in pre tax income and 31% growth in ADP.
Taking all these factors into account and assuming current marketing market conditions, we expect our 2022 personnel expenses to be approximately one six to $1 7 billion.
Up approximately 7% at the midpoint compared to our 2021 total of 154 billion.
Moving on to SG&A expenses in Q4 was approximately $149 million.
Up 19, 6% compared to Q4 of 2020, primarily due to higher technology related purchases.
<unk> services and travel expenses.
For 2022, we expect total SG&A expenses to be $550 million to.
To $600 million compared to $526 million for 2021.
The approximately 9% increase at the midpoint is primarily due to a higher level of spending on technology initiatives and travel.
We expect travel spending to return to approximately half of our pre pandemic levels.
2022, SG&A expenses are expected to include approximately $100 million.
Of depreciation and amortization compared to $91 million in 2021.
Fourth quarter interest and other expense totaled $18 4 million up approximately $6 4 million versus Q4 last year due primarily to the impact of currency revaluation Q.
Q4 results included a $6 $5 million loss on currency revaluation compared to a $1 $1 million gain in Q4 last year. As a reminder, these are non cash gains and losses.
Interest expense was up $1 $8 million due to higher level of average debt.
Our Q4 tax rate came in at 14, 5%, making our 2021 annual tax rate 17, 4%, which was lower than our expectations, primarily due to a favorable mix of foreign earnings and U S tax incentives and credits.
We expect to receive less benefit from these items in 2022, resulting in an expected 2022 full year effective tax rate of 19% to 21% assuming no meaningful changes to federal state or international tax policy.
Q4, net income was $230 1 million up 56% compared to Q4 of 2020 and diluted earnings per share was $1 74.
Up 61%.
Turning to cash flow.
Q4 cash flow generated by operations was approximately $76 million compared to $162 million in Q4 of 2020.
The $86 million year over year decline was primarily due to a $200 million increase in net operating working capital in Q4 compared to a $92 million increase in Q4 of 2020.
The Q4 2021 increase resulted from a $279 million sequential increase in accounts receivable and contract assets minus $79 million increase in total accounts payable compared to Q3.
At some point in the cycle when the cost of purchased transportation and subsequent pricing come down to their from their current all time highs, we would expect to commensurate benefit to working capital and operating cash flow.
Accounts receivable and contract assets were up six 7% sequentially. While total revenue was up three 8%.
The resulting $1 seven day increase in days sales outstanding or DSO was driven primarily by the mix shift associated with higher revenue growth in global forwarding, where our DSO runs at approximately double that of our Nash business.
From a quality of receivables standpoint, our percent past due and our credit losses, both improved compared to Q4 a year ago.
Over the long term, we expect <unk> growth to outpace working capital growth.
Capital expenditures were $18 4 million in Q4, bringing our full year capital spending to $70 9 million.
For 2022, we expect our capital expenditures to be 90 to 100 million pre.
Primarily driven by technology investments.
We continued to return a significant amount of capital to shareholders, including approximately $223 million in Q4 through a combination of $154 4 million.
Dollars of share repurchases and $68 $4 million of dividends, we repurchased approximately one 6 million shares at an average price of $96 90 per share in Q4.
The board of Directors also increased our share repurchase authorization by an additional 20 million shares in December resulting in approximately $21 6 million shares of repurchase capacity remaining at year end.
For the full year, we returned $886 million to shareholders, which equates to 105% of our 2021 net income and was up 119%.
Compared to 2020, when we paused our share repurchase program out of an abundance of caution due to the pandemic.
In December our board authorized and declared a seven 8% increase to our regular quarterly cash dividend, taking it to 55 per share from <unk> 51.
Beginning with the quarterly dividend that was paid in January of 2022.
We have now distributed uninterrupted dividends without decline for more than 20 years over the long term, we remain committed to our quarterly cash dividend and opportunistic share repurchase program as important levers to enhance shareholder value.
Now onto the balance sheet highlights at the end of Q4, our cash balance was $257 million up $14 million compared to Q4 of 2020.
Over the long term, we will continue to look for ways to efficiently repatriate excess cash from foreign entities with the intent of only carrying the cash needed to fund operations.
We ended Q4 with $732 million of liquidity comprised of $475 million of committed committed funding under our credit facility, which matures in October of 2023, and our Q4 cash balance.
Our debt balance at year end was $1 92 billion up $825 million versus Q4 last year, driven primarily by increases in working capital and share repurchases.
Our net debt to EBITDA leverage at the end of Q4 was 142 times compared to $1 three nine times at the end of Q3.
From a capital allocation standpoint, we continue to be diligent and thoughtful about high return investments on a risk adjusted basis as we drive further growth and efficiencies into our model.
We remain committed to disciplined capital stewardship, maintaining an investment grade credit rating and generating sustainable long term growth in our total shareholder returns.
Overall 2021 was a year of record financial results for Robinson, we look forward to building off of our strong foundation for long term growth.
Thank you for listening this morning, and now I'll turn it back over to Bob for his final comments.
Thank you Mike So while global Commerce continues to face supply chain disruption at C. H Robinson, our integrated non asset based business model has demonstrated resilience growth and profitability through the cycle. We will continue to benefit from our investments while delivering on opportunities to integrate our services to help our customers solve their.
Complex supply chain issues, and our Robinson team their responsiveness and their ability to provide true value continues to be a key differentiator in our ability to win in the market.
Im energized by the positive momentum that we're carrying into 2022, our company is differentiated by our ability to deliver diversified growth across our intentional combination of modes services and geographies.
As I've said before our customers are looking for solutions that span the globe across all modes and ocean freight solution alone doesn't solve the problems that our customers are facing nor does the standalone truckload Raphael solution.
One relevant data point that illustrates best is that over half of our 2021 total revenues and approximately half of our 2021 transportation adjusted gross profits came from customers, where we provide both surface transportation and global forwarding services.
And these top customers keep coming back to us as evidenced by a 99, 6% retention rate in our top 500 customers. We are uniquely positioned to orchestrate them end to end supply chain success for these customers and help them not only navigate these markets but to succeed in these markets.
We're continuing to invest in smart customer and carrier focused products and we're excited about the talent that we've added to the team and the runway that we have to launch several new products that we believe will benefit both our customers and carriers as we continue to build out the most connected supply chain platform.
So that concludes our prepared comments this morning, and with that I'll turn it back to Dana for the live Q&A portion of the call.
Thank you ladies and gentlemen, the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Yes.
In order to let as many people ask questions as possible. We do ask that you. Please limit yourself to one question. Once again that is star one to register a question at this time.
First question today is coming from Todd Fowler of Keybanc capital markets. Please go ahead.
Great Thanks, and good morning.
So I appreciate the comments on thinking about the difference between looking at adjusted gross profit as a percent and then looking at it on a dollar basis, but Bob can you share with us any thoughts on how youre expecting adjusted gross profit margins to trend as we move into 2022 given kind of the spread that we're seeing with buy.
By rates and sell rates and then also your expectations for contract renewals as we move into two this year. Thanks.
Thanks, Todd and good morning, good morning.
Our our overall adjusted gross profit dollars either if you look at a per load or per mile are now kind of above our trailing 10 year and five year averages. If you Peel that back, though our contractual portfolio is still underperforming our expectations weighed down by the continued increases in.
Cost of purchase transportation over the course of the past several quarters and while we.
Continuously been repricing week over week month over month quarter over quarter.
With the with the rapid ramp up in costs over the course of the past few quarters, we simply just haven't been able to catch up to that and the contractual portfolio. So as we entered the year. This year. The markets remained tight in North American surface transportation in January the first couple of weeks, where a lot of things out of out of the <unk>.
<unk>.
All time high load to truck ratios in the first couple of weeks moderating a bit in the past few weeks, but still at high levels. Our anticipation is that this market.
If it doesn't cool it should at least level off as we think about pricing in the contract market. In 2022, we think it's kind of a low single digit inflationary environment, but still remaining tight so we see that as a positive for us we will be aggressively repricing through the cycle here in the first quarter and beyond.
And once we start to get some moderation in the increases of cost of purchase transportation that should really help the profitability of our overall contract portfolio. While also continuing to allow us to participate and win in the spot market and a continued tightening environment. So we see very favorable conditions moving forward.
Great. Thanks for the color.
Thank you. Our next question is coming from Chris Wetherbee of Citi. Please go ahead.
Hey, great. Thanks, good morning.
Wanted to touch on the operating cost probably in both segments Nast and global forwarding, but maybe zeroing in on next year, just wanted to get a sense of maybe how we see this trending out I know, there's a goal to grow volume more than heads it looks like at least on the Nash side that maybe that wasn't accomplished in the fourth quarter can you talk a little bit about kind of what happened from a cost perspective in the quarter.
And then maybe how we see that progressing I know you've given full year guidance, but maybe if you can kind of think about the first half that would be helpful.
Yes, let me take that so obviously, an operating expense personnel as the primary driver when you look at Nast as 2021 unfolded, we saw opportunity for growth it probably starting in Q2 that was greater than our expectations going into the year and began to stack.
<unk> app to help support that growth primarily operations related roles.
And that was really to aid the business and you should expect to see us continue to do that where we see opportunities for growth.
Will.
Commit resources and head count to deliver on that growth and Conversely, if the growth opportunities don't pan out well, we'll adjust accordingly when.
When you look at NASS personnel expense in Q4.
We grew about 300 basis points more than the enterprise grew in Nast and the drivers are really three so incentive costs were high for 'twenty one.
<unk> equity for example was about three times the expense in 'twenty one for the year that it was in 2020 now represents about 10% to 15% of the total comp, but it's averaged quite a bit lower and that was really driven by enterprise results, which were driven by Jeff. So as you can imagine.
<unk>.
The enterprise is performing on an EPS growth basis.
The costs that come in equity are also allocated back to our Nast business bonus expenses and asked were up about 75% to 80% and those are driven by the performance.
Pre tax operating income.
On the business for the year and also for for the for the enterprise to some extent and then commissions were up about 20% or a little more than 20% and that goes along.
With the AGP growth that you saw on the business. The second primary driver is head count talked about that a little bit for Q4 of Nash. The average head count was up about seven 5% to a little over 7000 employees.
And for the year.
Let's say for the quarter.
I'll remind you that we did have one less operating days, so volume growth in truckload for Nast.
In the quarter was higher than our average head count growth in the quarter slightly.
The third area was the fact that if you remember back to a year ago. We had done some short term cost savings initiatives related to the pandemic. The primary impact on Q4 last year was the suspension of the match to our retirement savings plans in the United States and Canada and so this year.
With those restored we had a year over year increase in expense.
For Nast as well those are the primary drivers.
Nast.
Mike I want to just pile on a little bit if I can two in the year over year increase.
In personnel expense and ask two I think that we realized as we were going through the pandemic and the onset of the pandemic in 2020, we cut pretty deep in terms of head count in Nast and third quarter through furloughs and things of that nature.
And in retrospect, we likely stifled some growth through those actions that we took to reduce head count it to the levels that we did and so some of this is adding back getting back to those levels and a little bit ahead in order to ensure that we've got the appropriate number of capacity routes and operations reps to deliver the service our customers expect and to ensure that we're not stifling grow.
With artificially by by really artificially constraining head count against the opportunity.
Okay. That's super helpful and just in terms of how quickly maybe some of that unwind, particularly some of the incentive comp stuff in 'twenty two.
Yeah from a.
Incentive comp standpoint, we expect to go right back to a target level.
And that will adjust as the year unfolds based on results and we would expect our the ability to adjust.
Head count would be aligned with the wins incentive performance will go as well.
And Chris ill, just add one more I'll add one more point, Chris that while we don't as you all know provide guidance around revenue or EPS.
Just on what Mike just shared around kind.
The go forward on personnel specific to Nast, we do expect to see operating margins improve next year in a meaningful way off of.
From where they finished from where they finished in 2021, even with that incremental potential expense.
Great. Thanks, very much I appreciate it.
Thank you. Our next question is coming from Ken Hector.
Bank of America. Please go ahead.
Hey, great, Yes, I appreciate that digging into the costs. There I think that's really key but maybe just flipping over to the to the topline.
I guess net margins youre pricing gap shrunk to about 50 basis points to 18, five versus your 18 costs versus a 100 basis points last quarter. When the market kind of stayed strong can you maybe talk about what you saw accelerating or did your ability to price relative to those costs decelerate just wanted to understand.
Kind of the market outlook there.
Yes.
Without going too deep week by week through the quarter Ken.
Ken we definitely did see markets tightened on the on the back half of December around the holidays. It felt like a lot of drivers. This is anecdotal, but it feels like a lot of drivers took the last couple of weeks.
Off if you will and so there were some really tight market conditions around the holiday that really influenced the upward swing in.
Cost of purchase transportation, there, but yes to your point the spread did moderate a bit from Q3 to Q4, but still favorable in terms of positive spread for us.
Our net revenue per mile.
And looking at that continued to improve throughout.
The quarter every quarter in 2021, and that's a metric that we'll continue to look at and through.
Getting back a little bit more healthy in that contractual portfolio, we see the opportunity to continue to drive expansion there.
So is that something you see accelerating I just want to understand it because given this market.
Seem to stay strong I get that it tightened it the yen, but wouldn't your pricing have adjusted for that given the strength of the market on the pricing side.
I mean, if I'm looking at a chart here of the last six quarters in.
Year over year cost change of 16, 532, and a half 33, and a half 47 526 and.
18.
It's pretty tough to stay out of those things when they're moving that quickly when you've got over happier portfolio tied into contractual longer term commitments and so if you think about our spot market business. We certainly stayed ahead of those and we were agile moved with the moving market, but when you're kind of.
Selling long and buying short if you will in the contractual business, it's hard to it's hard to catch up there and so given the fact that we think pricing will moderate on a year over year basis. In 2022, we would expect to be able to get ahead of that and stay ahead of that.
Alright, Thanks, a lot.
Thank you. Our next question is coming from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks, good morning.
So you guys gave us some pretty specific cost guidance, there must be some underlying net revenue assumption.
So maybe directionally can you talk about what that is.
Net Rev. If costs are up.
7% or so based on the guidance is net revenue up more or less than that and then Bob just big picture when I look at Nast net operating margins. When you guys first started reporting them. They were at 45%, they're now at 33% I think they've only gone up once in the last six years.
How should we think about these net operating margins going forward.
Yes, I appreciate the question I'll start with what the net the net operating margins and Youre right. I mean, if you look at the past seven years. The average is still 41%, but they have they have declined from the first year, we reported through today.
19 was the last year that we achieved in excess of 40% and our net operating margins I think 42% was the year end in 2019, Mike talked about some of the specific drags in the short term.
But.
We still have a very firm belief that we can deliver 40% net operating margins in that <unk> business. Mike stayed very focused on on the cost side of it and I can I can build a bit more on that or add some more color, but the drag on our contractual portfolio of of our customers on the truckload side. It has been in each.
Two were greater for us if we get a quote unquote get that contractual portfolio right. It does more than offset the majority of the cost increases that that Mike that Mike referenced there. So as we think about next year and how do we get at or closer to that 40% operating margin, it's about getting the health and the profitability back in the contractual marketplace.
The contractual contractual book of business, Mike talked about the increase in equity expense. If I compare 2019 to 2021, just using kind of that as a baseline. The last time, we were at 40.
Net net 80% of the increased personnel expense in Nast over that two year period is really tied to that performance that increase in performance based equity and we see that coming back in next year or two to an extent.
You go back into SG&A.
One of the areas that will stay with us as incremental investments that we've made into warehousing, it's not material per se, but as we get further into consolidation and cross border, but it is going to continue to be a part of the part of the SG&A moving forward.
But thats good business for Us and then the other piece that I would that I would maybe mention is just the technology investment and it's obviously been part of the headline over the course of the past several years, but that's another part of the SG&A investment of masks that had a drag on operating margins over the course of the past couple of years and we've talked through how <unk>.
When it comes before return in these in these programs and you heard from Arun in the approach that we're undertaking there in tech and product development. We expect moving forward. The benefits of these these technology investments to start to compound, which will also offset offset some of that cost. So the keys are growth grow volume ahead of ahead of the rate we have the <unk>.
Last couple of years improved the profitability of the contractual portfolio increase the pace of delivery of Teck resources that drive growth.
And efficiency and then just benefits through some of the cyclical things like decreased cost of equity and performance compensation.
Based on how the cycle than in 2021, so we see a path to get there it's going to take some work, but we still believe in that as being as being the right the right target.
So just to follow ups and so if there was 33% last year I mean, directionally does it get better does it get worse at any target and then the first part of my question was just about.
You must have some net revenue assumption based on your cost guidance. So if you had some directional thoughts there.
We expect that Scott, we expect that operating margins in that business are going to improve next year.
Whether we get back to the 40% next year is TBD, but we're certainly pushing hard in that in that direction.
We're not going to give a full guidance on revenues, but just know that if we expect operating margins to improve.
Improve we've given you some forecasts on cost.
You can draw your own conclusions on our assumptions on revenues there.
Okay. Thank you guys.
Thank you. Our next question is coming from Jordan Alder of Goldman Sachs. Please go ahead.
Hi, I was wondering if you could give a little more color or detail around where you are on your tech spending slash rollout and.
Yeah, I know in the near term, there's been a lot of hiring needs.
But specifically I know in the medium to long term there is sort of all the talk about.
And that technology.
<unk> head count need less people going forward too.
Yeah that was sort of like the positive.
And then more of a digital strategy so.
Give some high level thoughts on the tech side and and when you think that you can really start to see the leverage from that.
Relative to how you can drive EBIT in North American surface transport. Thanks.
Yeah, I'll try to answer at a high level and then I'll ask Arun to chip in a little bit here.
In slide 12 of our dock I think we outlined some some key things that we drove in terms of change of behavior capabilities.
Different ways of working this year inclusive of driving $875 million.
In truckload revenue through our algorithmic digital pricing right. That's a big transformation for us in terms of our ability to connect our customers electronically give them real time pricing that allows us to generate tens of thousands of quotes so that we can so we can increase our win rates drive profitability, that's the utilization and integration through <unk>.
Arpus was up over 200% last year close to 200% last year.
The automated bookings, obviously, a big conversation about the ability to automatically for carriers to engage with us booked for it on our platform over a million a million two automated bookings last year up 65% year over year.
And then to your to your question to Jordan on kind of the shipments per person per day or.
The decoupling of head count from volume growth.
Even though that's shipping per person per day metric that we include on slide eight of our deck has come down in the past couple of quarters. We're still ahead of where we were in the 2018 to 2019 period of time still demonstrated a positive 620 basis point spread there this year for mast and as we move towards more of a product led organization we do.
Back to deliver faster in a more lean manner and eventually take cost out of that process I don't know Arun if you would if you would add.
I would just say that.
The level of rigor, we're applying in terms of.
The data in research, we're using to inform our investments as it relates to any of the above that Bob talked about as an example, automated bookings to drive up productivity of our employees.
Yes.
We have a tool kit for our employees that you need to have their current ways of booking loads that we also want to create a much more robust self serve self serve capability for our carriers.
So if we can drive more automation automation through that channel, which we will.
Asked me sort of take a more rigorous approach and going on sort of science engineering.
In digital marketing all coming together to drive that.
We should we should see some improvements.
And Jordan, obviously not lost on us that as we've been making these investments for the past couple of years, but ultimately we expect to have positive impact to operating margins and we havent realize those in the past couple of years, but we do anticipate that we're on the right path and that ultimately this is going to drive greater efficiency greater productivity greater market share.
Growth and ultimately greater returns of Nast, which leads to greater shareholder value.
Thank you.
Thank you. Our next question is coming from Jack Atkins of Stephens. Please go ahead, great. Good morning, Thanks for taking my question.
So Bob I guess going back to the productivity comments earlier on slide eight.
You know I guess, when you think about that that chart and how it's trended a lot of moving pieces there, but do you feel like what we're seeing today is more representative of sort of the more of a steady state run rate of the improvements that you've been making from a productivity perspective or really is it more like what we're seeing in the first half of 'twenty, one and I guess, it's sort of a tag on.
To that you talked about the rollout of these enhancements to your to your carrier booking platform. I know there was some news in the press yesterday about that getting delayed a bit do you think that could.
Provide a step function change to overall <unk>.
Hmm productivity would be curious to learn more about that thank you.
Yes.
So the chart on slide eight.
Obviously, a backwards looking chart our goal with that is obviously to make that continue to go up into the right and to continue to drive that spread between <unk> productivity or between head count and volume growth, but we can't we can't have that be the only metric ultimately we've got to we've got to drive topline volume growth top line <unk> growth in <unk>.
Online returns for our shareholders.
The piece that came out yesterday, unfortunately that piece lacked completeness of information and context, but we feel really good about the <unk>.
Product that will bring to market. This week be personalization that will that will come and allow our carriers to interact with us even more effectively and I don't know if you'd add color yeah, I think I'd say its back to our.
One thing I will say is that it's not it's not meant to be a big Bang step function type of approach right I mean, where we are.
Wiring together, our science and engineering in a more meaningful way to drive personalization and recommendations for our carriers and we will see improvement without this study the data and use that to iterate and Bob talked about a leaner approach that will be taking so we'll see improvements, but but it's that but it'll be it's not a step function improvement you shouldn't expect that and so I think there wasn't this character.
Horizon and some of the press.
And I would I would add to that Jack that.
<unk>.
What was maybe characterized in that in that piece around us.
One to eliminate the other using tech to eliminate people I think Arun said earlier our goal is to provide the most comprehensive suite of truckload matching solutions, whether it be via our people via our technology integrating with our customers integrating with our carriers and just create greater liquidity in the marketplace. So everybody wins that's real.
Really the goal, but it is going to be through them with our people for sure.
Thank you. Our next question is coming from Tom <unk> of UBS. Please go ahead.
Yes, good morning.
Bob I wanted to get a bit more of your sense of how you expect CH to perform in the market.
I think and how that ties to your head count additions you know I think it seems pretty fair to say 'twenty, one was a pretty strong market for brokerage and I think on your volume growth in truckload, you probably underperformed the market.
It sounds like when you're adding head count you're probably.
Looking at maybe outperforming the brokerage market in 2022 is that the right way to view it.
And just how do we tie that I guess, the head count additions in Nast too.
So how optimistic we should be on volume yes.
So if we think back to the first quarter of 'twenty. One we had a belief in how the year was going to shape out and I, certainly don't say that we called the <unk>.
Dramatic increases in pricing, we certainly thought that the market was going to continue to tighten and that pricing was going to increase throughout the course of the year and that position at the time in first quarter of last year was a little bit different than how many shippers were thinking about it how many of our competitors. We're thinking about it. So we started out kind of digging out of a pretty big hole in the first quarter.
Where our volumes were down mid to high single digits and since then we've recovered in kind of in that in the mid single digits volume growth range through through the balance of the year.
Looking forward, we feel like we've got some wind in our sales right now with three consecutive quarters of both AGP improvement in our truckload business volume improvement in our truckload business and doing that in a market where I'll use the DHT load to truck ratios, just kind of a market indicator.
Growing volume and AGP improvement in an environment of a tight truck market like we've seen.
Honestly, you kind of have to go back in time, a little bit with within our model to see that happen on a consistent basis typically over the course of the past five years or so Robinson has grown their volume at the highest levels in times, where markets were loose not necessarily where they were tight so one of the things that I've talked about in the past few years is getting us to a <unk>.
Point, where we can grow volume through cycles right grow volume not only in the loose markets, but also in the tight market by having that balanced focus on both our contractual portfolio and in our transactional portfolio. So.
Three quarters doesn't necessarily make a trend obviously, you've got some easier comparisons last year into this but looking into 2022, we expect to continue to build on the momentum that we have and growing volume on a year over year basis.
We believe that the health of our contractual portfolio will continue to get better as we reprice in a more moderate inflationary price environment, and we think the market will be tight and still allow us to benefit in the spot market. So we see a pretty favorable construct for 2022 for our Nast truckload business.
Okay, but just to make sure I understand do you think it's actually a better environment for you to grow volume when the market stabilizes a bit so you might.
You might have better volume growth or better opportunity for volume growth in 'twenty two than than in 'twenty one.
I believe that given the balance of our portfolio between both spot and contract kind of a $55 $45. We've leveled out at periods of extended tightness in the market, we do very well at in terms of volume growth and revenue growth.
Okay. Thank you.
Thank you. Our next question is coming from Jeff Kauffman with vertical research. Please go ahead.
Thank you very much.
Just want to go back to the cash flow and.
Return on capital deployment question.
Clearly youre levered to a level that youre comfortable with.
Given your view of improvement in the market and returns what are your thoughts on capital priorities I know you've raised capex, a little bit you're going to be spending a little bit more on tech but.
And you mentioned, the 20 million share reauthorization, but in terms of the free cash deployment, how are you thinking about that split.
Yeah. Thanks, Jeff So on free cash flow clearly when we're operating in an environment, where we have rising costs, and therefore rising prices and our business model, where we get paid.
Slower than we pay.
We're absorbing working capital and that's impacting free cash flow.
As I pointed out we've seen a record highs here now for five straight quarters. So thats a lot of absorption of working capital as the market pricing stabilizes or comes down that is going to be at an inflection point for our free cash flow and we will start to see that working capital.
Come back to us proportionate to how the market changes.
So that's a little bit about.
Free cash flow as it relates to working capital now capital priorities, we do have a strong balance sheet, we have maintained leverage.
Down.
One four times on a net debt to EBITDA ratio here. This past quarter, we've got a little bit of room for additional leverage and if you remember back to last year when the pandemic hit we pulled back on our share repurchase.
And that took our leverage down a little bit lower than than we normally would have operated but our goal is to maintain investment grade credit rating and in doing so we do have a little bit of room on leverage to take that up as far as priorities.
The top priority for us is investment in projects on our business with great returns on a risk adjusted basis. We've got a lot of good ideas that we can execute on those close in opportunities.
Opportunities that you're hearing about on tech.
In other areas of the business in Nast and global forwarding will continue to operate on the M&A market is also quite a bit of activity there.
While borrowing costs are going up theyre still low relative to historic averages and where we see an opportunity there we certainly participate.
We've talked about that and we're committed to our dividend.
We're committed to growing our dividend with long term EBITDA and.
Yes.
And of course, we returned share value to shareholders through our opportunistic share repurchase program as well so hopefully that gets to all the elements of your question, Yes, just a follow up.
To your point.
But at $860 million use of cash this year for working capital I mean, that's extraordinary so normally when a business grows youre a net user of working capital you would.
Say that it is not impossible that as you manage this and customers pay in this balance comes back down.
<unk> capital could actually be a source of cash in 2022 or is that more of a wait and see.
Yeah I mean.
It's certainly a possibility and.
When you when you break out the growth of the business.
It gives me of course the growth related to volume, we will be absorbing part of working capital, but the thing that has been most dramatic on our business over the past year.
Is the impact of the pricing increases on accounts receivable driven by the growth in the global forwarding business and so.
When when or if that pricing.
Stabilizes or declines it will absolutely create a source of cash for us.
Working capital.
Thank you very much.
Thank you we're showing time for one last question today. Our final question will be coming from Boscombe majors with Susquehanna. Please go ahead.
Yes, thanks for taking my questions.
Sequentially Nast profits were flattish quarter over quarter, Despite net revenue being up in forwarding was down quarter to quarter or flat net revenue I know you don't guide externally, but I'm curious if these were below or in line with your internal expectations.
Yes, Youre right Baskin, we don't guide, but your assessment on the business is fairly accurate I mean, the forwarding business, if I think about their overall adjusted gross profits they grew from.
From Q1 to Q2, and Q2 to Q3 and like I said relatively relatively stable three to four or I'm, sorry, forwarding was relatively stable really through the back half of the year.
We feel like we're in a solid place right now in both of those divisions in terms of in terms of where the revenue stands we think the first at least the first half of this year and forwarding the market conditions look pretty similar and beyond that it's a little bit probably too early to call and we think the market is set up really favorably in 'twenty two for our <unk> business.
Yes.
And Bob if I could just squeeze one final one from the board perspective, you recently announced a bit of a refreshed with two members stepping down in our bylaws change to move any contested election to a polar at plurality vote from a majority vote can you give us some perspective on that and perhaps a little bit of the short list on the skills.
Her experience Youre looking for in the New Board members. Thank you.
Yes.
<unk> been in the 8-K earlier and earlier last week was really all about continue continued focus on good corporate governance. The bylaw change was something that we had been considering for quite some time, it's a bit more of a shareholder friendly by law. So we did want to announce that change with the with the departure of both Wayne and Brian who have been long standing members of our board.
Both Wayne and Bryan have been with us for about 1920 years on the board they've been great. Great Directors have helped guide this company through a lot of change, but through best practices in corporate governance, and with our own kind of board refresh standards. It was it was time to make those announcements and open it up for for a couple of new directors to join Robinson and so.
Without going deep into our skills matrix and kind of how we think about that from a from a board governance standpoint, we have been actively engaged with a firm we've got a really nice list of candidates.
Slate right now that we're talking to actively that we think could be great additions as directors that are going to be closely aligned with shareholder value creation and bring skills to the board that can help us to be even more successful in the future.
Thank you.
Thank you appreciate the bathroom.
Thank you at this time I would like to turn it back over to you gentlemen for any closing comments.
That concludes today's earnings call. Thank you everyone for joining us today, and we look forward to talking to you again have a good day.
Ladies and gentlemen, thank you for your participation and interest in C. H Robinson you may disconnect your lines of log off the webcast at this time and enjoy the rest of your day.
Yeah.
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