Q2 2022 CH Robinson Worldwide Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the C. H Robinson second quarter 2022 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 to ask a question. Please press star one on your telephone keypad if.
If anyone needs assistance at any time during the conference. Please press Star zero.
As a reminder, this conference is being recorded Wednesday July 27th 2022.
I would now like to turn the conference over to Chuck Ives Director of Investor Relations. Thank you Donna and good afternoon, everyone on the call with me today is Bob <unk>, Our President and Chief Executive Officer, Arun, Roger <unk>, Our Chief product Officer, and Mike <unk>, Our Chief Financial Officer.
Bob and Mike will provide a summary of our 2022 second quarter results and our room will provide an update on the innovation and development occurring across our platform.
And then we will open the call up for questions are.
Our earnings presentation slides are supplemental to our earnings release and can be found on the investors section of our website at Investor <unk> CH Robinson Dot com.
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 I'd.
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.
Thank you Chuck and good afternoon, everyone and thank you for joining US today, our second quarter was another quarter of record profits as our business model performed as we would expect it to in this part of the cycle are investments in our customer relationships through the early part of the cycle. While the cost of purchased transportation was rapidly increasing are paying dividends as we retain and gain share with these customers.
Through the terms of our agreements.
Our strong results were again driven by significant operating margin expansion in our North American surface transportation, our Nast business as we further improve the profitability of our truckload and less than truckload businesses and grew truckload volume in a declining market.
Our global forwarding team continued to deliver strong financial results, while benefiting from the market share that they have gained over the past couple of years.
Additionally, our Robinson fresh managed services and European surface transportation businesses, all increased their adjusted gross profit on a year over year basis.
Now, let me turn to a high level overview of our Nast and global forwarding results.
NAFTA adjusted operating margin in Q2 was 44, 3% up 970 basis points year over year, and 830 basis points sequentially due to improved profitability in both truckload and <unk>.
In our Nast truckload business, our volume grew 2% year over year compared to the Cass freight index that reflected a 2% decline in shipments.
Our adjusted gross profit or AGP per shipment increased 48% versus Q2 last year and 26% sequentially at the cost of purchased transportation declined during the quarter and the percent of truckload shipments with a negative margin returned to historical levels.
Our truckload volume growth included increases in dry van flatbed and temp control services and throughout the quarter, we pursued volume in the spot market and collaborated with our customers to use the spot market as part of their procurement strategy.
This included a 21% increase in volume that was driven through our real time proprietary dynamic pricing engine.
During the second quarter, we had an approval an approximate mix of 60% contractual volume and 40% transactional volume compared to a 50 545 mix in the same period last year.
Routing guide depth of tender in our managed services business, which is a proxy for the overall market declined to one four in the second quarter from one seven in the first quarter broadly speaking route guides are performing well as first tender acceptance rates are near pre pandemic levels in the first backup providers accepting rejected tenders most of the time.
Since the exceptional market tension in January caused by Covid related absenteeism and winter storms. The truckload market has seen greater balance returned to the spot market.
With the exception of road check one week, where many drivers seemingly temporarily leave the market the national driving on load to truck ratio hovered around four to one throughout the second quarter.
Between three to one in 401 for dry van is considered a reasonably balanced market versus the ratio closer to $5 75 to one that we saw in the extraordinarily tight year of 2021.
But the sequential declines in truckload Whitehall cost and price per mile that we saw in February and March continued throughout the second quarter. This resulted in approximately 5% year over year decline in our average truckload line haul cost paid to carriers excluding fuel surcharges.
Although pricing declined sequentially in Q2, our average line haul rates billed to our customers excluding fuel surcharges increased year over year by approximately one 5%, which was supported by our contractual truckload portfolio that was negotiated in prior quarters.
This resulted in year over year increase in our Nast truckload AGP per mile of 46, 5%.
Slide seven of our earnings presentation shows the historical trend of our truckload AGP dollars per shipment.
The past three years have been volatile ones in the freight market and our truckload AGP per shipment reached a new low and a new high within the past eight quarters.
Putting this quarterly volatility aside, though our average AGP per shipment on a trailing two five and 10 year view continues to remain relatively constant which demonstrates the resiliency of our business model and our ability to obtain adjusted gross profits through cycles.
Through it all we've worked tirelessly to help our customers optimize their freight networks and their costs.
Carriers improved their equipment utilization and to provide strong returns to our shareholders.
As we prepare for the second half of the year, we expect the truckload cost per mile will decline further both sequentially and year over year due to demand deceleration in the three biggest verticals for freight <unk>.
Weakness in the retail market is expected to persist.
Further slowing in the housing market as expected and there are early signs of deceleration in the industrial or manufacturing space. Although this vertical is holding up the best on a relative basis.
Our truckload contracts continued to trend towards 12 months durations and we're proactively repricing some contracts in order to remain competitive in a changing market and to grow our wallet share with customers.
Although we are the largest provider of truckload capacity in North America, we only account for approximately 3% of the for hire market, which leaves us with significant market share opportunities to fuel our growth.
In our Nast LCL business, we again generated record quarterly AGP of $166 $9 million in second quarter or up 30% year over year.
Through a 37% increase in <unk> per order that was partially offset by a 5% decline in volume.
As was the case in the last few quarters. The second quarter decrease in LCL volume was mainly driven by a normalization of business levels as our <unk> volumes in the second quarter of 2021 were bolstered by a few large customers that benefited from a stay at home trend during COVID-19, which contributed to 23% LCL volume growth in the comparable.
Order last year.
In our global forwarding business. The team continues to provide solutions and excellent customer service in a market that's becoming more balanced.
In this quarter global forwarding generated another quarterly AGP record of $324 4 million.
Representing year over year AGP growth of 36%.
Operating income also grew by $59 million or 55%.
Against increasingly tougher Comparables Q2 marks the ninth consecutive quarter of year over year growth in total revenues AGP in operating income for our global forwarding business.
Within these results our ocean forwarding business generated Q2, AGP growth of $77 million or 51% year over year.
This was driven by a 47, 5% increase in adjusted gross profit per shipment and a two 5% increase in shipments which was on top of a 29% volume growth in the second quarter of last year.
Global Ocean demand is becoming more in line with the industry's overall capacity and ocean rates, while still elevated have started to come down.
China ports appear to be back to normal operations and while port congestion on the U S. West coast improved in the second quarter congestion is edging back up again.
Congestion on the East coast has risen due to a higher percentage of freight being routed to the airports as shippers attempted to mitigate risks from a potential labor dispute in the west coast.
With limited new vessel deliveries in 2022, we expect ocean rates will remain elevated compared to historical levels, but may taper a bit more in the second half of the year.
Finally, our international Airfreight business delivered <unk> growth of $4 million or seven 5% year over year, driven by a 14% increase in AGP per metric ton shipped which was partially offset by a 6% decrease in metric tons shipped.
Airfreight capacity has improved in certain trade lanes due to increased belly capacity and we're seeing some conversion of air freight back to the ocean.
Overall, the forwarding team has a great foundation to continue providing excellent service to our customers and to collaborate with them to leverage our flexible solutions for their shipping needs our win rates and our forwarding business are strong and we continue to implement our pipeline of new customer business.
For the enterprise, we continue to believe that through combining our digital products with our global network of logistics experts and our full suite of multimodal services, along with our information advantage from our scale and data we are uniquely positioned in the marketplace to deliver for our shippers and our carriers regardless of the market conditions.
We believe that our strategies and competitive advantages will enable us to create more value for customers and in turn win more business and increase our market share, while delivering higher profitability and shareholder returns with that ill now turn the call over to a room to walk you through the product innovation and development that's occurring across our platform.
Thanks, Bob and good afternoon, everyone as I've said before that all of our products is to relentlessly address customer and carrier needs and we continue to make good progress on both fronts during.
During the quarter, we continued to deliver enhancements to our nanosphere product platform, while extending the penetration of our digital offerings with both carriers and our customers.
Our work is improving both the customer and carrier experience with Robinson as evidenced by the results outlined on slide 12.
Our earnings presentation.
I won't touch on each of these data points in my prepared comments and I'll highlight a few that are extremely relevant and show progress and the benefits of our digital investments.
In the second quarter, we executed nearly 600000 fully automated bookings in our Nast truckload business and increase of 107% compared to the same quarter last year.
This represents $1 $1 billion in revenue flowing through this digital channel.
Because of the digital improvements that have been delivered we have increased the number of carriers booking loads through our digital channels by 96% year over year.
On the customer side of our marketplace to further integrating and scaling our real time dynamic pricing engine, we priced 71% of our spot truckload volume through this digital tool, resulting in $597 million of truckload business.
Extending this capability allows us to be more responsive to changes in the market better meet the needs of our customers, while also creating additional stickiness customer relationships.
More broadly we are focused on designing and delivering scalable digital solutions for growth.
Private sides as described by transforming our processes accelerating the pace of development and prioritizing data integrity.
The main pillars of this effort are scaling capacity of procurement.
Mailing demand generation.
Scaling quality customer outcomes and scaling our marketplace dynamics as outlined on slide 11 of our earnings presentation.
Okay.
These four pillars are focused on improving both the customer and carrier experience by working backwards from their needs and increasing the digital execution of all touch points in the lifecycle of a load, including order management appointments carrier offers and booking in transit tracking and financial and documentation processes.
As we do this we will continue to apply the appropriate regulatory direct asset investments towards products can choose and insights that includes the rate at which we acquired retain and grow share customers and carriers, which in turn serve as a primary inputs to power our future growth and the two sided marketplace that we serve.
I'll now turn the call to Mike to review the specifics of our second quarter financial performance.
Thanks, Arun and good afternoon, everyone. In Q2, we continued to leverage the strength of our non asset based business model to deliver another record quarter of financial results. Our second quarter total company adjusted gross profit or AGP was up 38%, reaching a record high of $1 billion.
With growth in each of our segments and services on a sequential basis <unk> was up 14% and also grew in each business segment on.
On a monthly basis compared to 2021, our total company AGP per business day was up 43% in April up 39% in May and up 31% in June .
After seven consecutive quarters of increasing price and cost per mile in our North American truckload business. Both declined sequentially in Q2 with costs declining faster than price due to a softer demand environment and capacity that has grown over the past 12 months the line haul cost and price.
Our mile which exclude fuel surcharges declined sequentially in each month of Q2.
As the cost of purchased transportation declined our contractual truckload AGP per shipment improved and our Nast team managed our load acceptance rates to optimize our truckload AGP and look to the spot market to find additional volume opportunities.
Q2 marked the seventh consecutive quarter of flat to increasing truckload AGP per mile.
Claude AGP per shipment improved 26% sequentially and by 48% compared to Q2 of 2021.
Now turning to expenses Q2 personnel expenses were $444 $8 million.
Up 22, 6% compared to Q2 last year, primarily due to increased head count as we support growth and transformation opportunities across our business. We also incurred higher incentive compensation due to an increase in our projected annual financial results.
For the full year, we now expect our personnel expenses to be at the high end of our previous guidance of approximately one six to $1 7 billion due to the higher expected incentive compensation.
As we discussed in our last earnings call, we expect head count additions to be weighted more towards the front half of 2022.
For the remainder of the year, we expect our head count to be flat to down.
If growth opportunities are economic conditions play out differently than we expect we will adjust accordingly.
Moving on to SG&A Q2 expenses of $117 $2 million were down $8 $5 million compared to Q2 of 2021 excluding.
Excluding the $25 3 million gain from the sale and leaseback of our Kansas City Regional Center Q2, SG&A was up 13, 4% driven by year over year increases in purchase services and travel expenses.
For 2022, we continue to expect total SG&A expenses to be $550 million to $600 million.
Excluding the gain from the sale and leaseback of our Kansas City Regional Center. We also continue to expect $100 million of depreciation and amortization in 2022.
Q2 interest and other expense totaled $27 4 million up approximately $13 $9 million versus Q2 last year, primarily due to a $10 $3 million loss on foreign currency revaluation due to the strengthening of the U S dollar primarily versus the euro and one.
This FX loss was $8 $4 million higher than the $1 $9 million loss in Q2 of last year.
Interest expense increased $4 $3 million.
Due to a higher average debt balance, but with lower net debt to EBITDA leverage.
Our Q2 tax rate came in at 21, 3% compared to 21, 6% in Q2 last year, which brings our year to date tax rate to 20.0%.
We continue to expect our 2022 full year effective tax rate to be 19% to 21% assuming no meaningful changes to state federal our international tax policy.
Q2, net income was $348 2 million up 80% compared to Q2 last year and we delivered record quarterly diluted earnings per share of $2 67.
Up 85% year over year.
As a reminder, our Q2 net income included the $25 $3 million gain from the sale and leaseback of our Kansas City Regional Center.
A $10 $3 million loss on foreign currency revaluation.
Turning to cash flow Q2 cash cash flow generated by operations was approximately $265 million compared.
Compared to $149 million in Q2 of 2021, the $116 million year over year improvement was primarily due to the $154 million increase in net income.
Over the past two and a half years, our net operating working capital increased by approximately $1 5 billion drew.
Driven by the increasing cost purchased transportation.
This reduced our operating cash flow by the same amount over that time.
If the cost and price of purchase transportation come down we expect a commensurate benefit to working capital and operating cash flow.
In Q2, our accounts receivable and contract assets were down one 5% sequentially and our days sales outstanding or DSO was flat sequentially.
Capital expenditures were $43 2 million in Q2 compared to $16 3 million in Q2 last year, we are raising our 2022 capital.
Expenditure guidance.
From $90 million to $100 million.
Two $110 million to $120 million, primarily due to higher level of internally developed software, which is tied to higher future returns.
We returned approximately $409 million of cash to shareholders in Q2 through a combination of $337 million of share repurchases and $72 million of dividends.
That level of cash to shareholders equates to approximately 118% of our Q2 net income and was up 100% versus Q2 last year.
Over the long term, we remain committed to growing our quarterly cash dividend and alignment with long term EBITDA growth.
And using.
Our opportunistic share repurchase program to deploy excess cash now onto the balance sheet highlights.
We ended Q2 with approximately $1 1 billion of liquidity comprised of $826 million of.
Of committed funding under our credit facilities, and a $239 million cash balance.
Our debt balance at the end of the quarter was $2 $2 7 billion up $901 million versus Q2 last year, primarily driven by increased working capital and share repurchases, our net debt to EBITDA leverage at the end of Q2 was 135 times down from $1 49.
<unk> at the end of Q1, due primarily to increased EBITDA.
Let me take a moment to comment on our return on invested capital or ROIC.
Which is an important metric for many investors with our asset light business model, we operate with a relatively low capital base, which naturally enhances ROIC.
Relative to other asset base logistics providers in fact, 88% of our operating asset base is comprised of accounts receivable and noncash intangible assets with a representing 67% as a result, all else equal ROIC for Robinson.
Robinson is impacted more by changes in receivables driven by changes in the price of purchased transportation than from proportionate changes in our capital expenditures.
In Q2, we delivered our highest ROIC and a decade at 32, 1% up 890 basis points from Q2 last year. Despite the contribution of our historically higher receivables balance to our operating asset base going forward. If the price of purchase transportation continues to fall.
Receivables, which represent two thirds of our operating asset base will follow and represent a tailwind to our ROIC all else equal.
By driving scalability into our model with focus on the four main pillars that Arun talked about we expect to generate growth inefficiencies that support long term growth and our total shareholder return. Thank.
Thank you for listening now I will turn the call back over to Bob for his final comments.
Thanks, Mike So as questions linger about global economic growth inflationary pressures and consumer discretionary spending our global suite of multimodal services are growing digital platform, a responsive team of logistics experts, our broad exposure to different industry verticals and geographies and a resilient and flexible non asset based business model.
It'll put us in a position to continue delivering strong financial results.
While we're pleased with our performance this quarter and the fact that both Nast and global forwarding delivered operating margins above our publicly stated targets. We know that we have work to do to consistently deliver at these targeted levels.
But the work that the teams are executing that a rune reference related to scaling our model, eliminating internal legacy processes and improving quality, while working backwards from the needs of our customers and carriers will drive continued improvement in operating profits long term as this work is focused on growth customer satisfaction and productivity improvements will interact with.
We will in turn reduce our cost to serve our customers.
As we look to the second half of the year, we are watching economic conditions closely and the management team and the board continue to consider all strategies to grow operating profit and maximize long term shareholder returns through all phases of the business cycle and various economic scenarios.
This concludes our prepared comments and with that I'll turn it back to Dana for the Q&A portion of the call.
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Last question today is coming from Todd Fowler of Keybanc. Please go ahead.
Hey, great. Thanks, good afternoon, and congratulations on the results.
Bob I guess maybe to start.
If we take a look at slide seven where you've got the truckload AGP and it's certainly helpful to see obviously the profit per load versus the percentage, but can you talk to your thoughts around the sustainability of the profit per load is obviously at a very elevated level versus the last 10 years would you expect it to be able to.
We remain at this level with some of the dynamics in the marketplace or how do you think about kind of the sustainability of the profit that youre seeing right now.
Sure. Thanks, Todd Thanks for kicking us off maybe I'll paint the picture of how we've seen this play out in the past and then try to tie it into where we are today.
After I think Mike said seven consecutive quarters of year over year rising cost of purchased transportation on our truckload business. We finally saw that moderate and turned negative this quarter on a year over year basis, and while we can't be certain about the economy looking forward over the past couple of cycles. What we saw was on that year over year basis cost typically declined year over year for around.
Seven quarters after that inversion quarter from growing kind of positive to negative.
I look at Q3, 15, Q1 of 2017 kind of resolved two points on.
On slide seven and then again.
From Q4, 18 through Q4 Q2, 'twenty, So no no way to be sure that that's how it's going to play out this time, but probably worth noting of how its played out in the past so.
<unk> per load during the second quarter of two point was at the highest point, it's been in the past decade, and we're certainly not considering this to be the new normal as we think about our long term planning and believe that eventually it will.
To the mean I think the question that we have is just how long will it take to do that so we're certainly not building our strategy our long long term cost structures around maintaining the level of earnings per load that we experienced in second quarter over the long term now with that as a backdrop I think encouragingly, we continue to make progress on our digital.
And more and more of our transactions as you heard a room side are now flowing through more fully automated and frictionless processes and so while the market will undoubtedly shift from this point over time, we've got a clear view on what it's going to take to deliver against that 40% operating margin target through the cycle. Both in terms of the components of volume AGP.
Transaction I'm, just our overall cost structure. So as we continue to digitize more of that work, we see a clear path to lower our operating costs.
On a per transaction basis as I said in my prepared comments, if you look through the volatility of each of these quarters going back to 2013 that average AGP per shipment is virtually unchanged on a two year look back a five year look back or a 10 year look back.
Yeah, No I got that in the comments, so that makes sense and it sounds like that from your view, we're still relatively early in kind of the cycle with what we typically have seen so I Bob I appreciate the comments I'll turn it over.
Thanks Scott.
Thank you. The next question is coming from Jason Seidl of Cowen. Please go ahead.
Thanks, operator, and Bob and team congrats on a good quarter.
Wanted to talk a little bit on the on the pricing side. I think you guys said that pricing ex fuel was up on the contractual side about 1.5%.
But you also made some comments that you were proactively repricing. Some business can you can you talk to the instances, where you took the proactive stance to reprice that business and just how much that might have come down from from prior pricing trends and where do you think that should set up for <unk>.
<unk> and <unk>.
Sure. So just to just to clarify on the on the data point. The one 5% was the overall book of business not just the contract. So I just want to make sure that everyone's clear on that.
Largely if I think about the contract kind of the contract side of our business and the repricing. We continue to see most of our business that we've repriced in the first half of this year renew on 12 month terms and just as we saw kind of on the upward trajectory of the market over the past six or seven quarters. There was there was constant repricing there.
We expect to see that now not not broad based brought us proactively going back and having conversations with customers.
Aggressively and intentionally using the spot market as a strategy to help customers access.
Cost of purchase transportation outside the course of their contractual agreements that drives volume for us and savings and opportunities for the customers within the contract book of business our win rates for the quarter were strong we define our win rates. So its kind of the percentage of freight that we bid on but ultimately we were awarded and that increased by 110 basis.
In the second quarter of 'twenty, two compared to the second quarter of 'twenty, one and was right in line or ahead of kind of our long term average win rates as I said most of these are coming out at 12 month terms.
I would say the market at least our customer relationships I'd say people are mostly acting rationally as it relates to these contracts, we're not seeing shippers largely come out and rip out bids or awards or go back and re pricing activity. So we feel good about about the state of the contract business as well as our ability to.
Use the spot is an intentional strategy with our customers to continue to drive volume.
Okay that was my one I appreciate the time.
Okay. Thanks.
Thank you. The next question is coming from Brian Hoffman back of J P. Morgan. Please go ahead.
Hey, Thanks, Good afternoon I appreciate you taking the question.
So wanted to ask more about the automated bookings is up.
Substantially again on sequential basis.
How much how much further room to run do you have on on that metric alone and maybe you can talk more broadly about how that integration of more technology more automation is impacting and employee productivity is there any pushback on the receptivity of it.
And then if you can just tie in some comments about digital competition digital natives overall.
There's been paring back head count wondering if youre seeing anything in the markets from that side as well. Thanks, a lot yeah. Yeah, you bet I'll use the technical term that Ryan and I will Ham and egg the answer to this one and I'll kick it off on the carrier bookings side, we had about $1 $1 billion in freight that was booked through the digital channels. If you think about the question of how much of your.
Freight is that I think we're right around $4 billion in truckload freight and NAV for the quarter check me on that Chuck right. So about 25% of the revenue running through running through that fully digital channel and that'll give you a perspective of the $600 million on the customer side as well from a productivity perspective.
Even with the additional head count that we've that we've added into nast over the past several quarters, if I, if I use 2018 or 2019, because the head count was virtually flat as kind of a pre pandemic comparison, our shipments per person per day unmasked are up about 16% in total.
And obviously the technology investments have a lot to do with that one point that I would add to that though and I think an area, where we could be could have been more effective in communicating with our investors and the analysts does that over that time period. Our head count has started to include more and more employees that work in our consolidation and warehouse facilities post the ACA.
Position of prime so knowing that those warehouse employees are never going to really contribute to the productivity.
Focus of our truckload marketplace.
The increase in those warehouse employees, our head count in NAFTA is actually down about 2%.
In terms of the employee base that really focuses on the customer and carrier marketplace compared to 2019 and so.
The productivity index there the shipments per person per day were actually up about 21% in total over that over that time period as it relates to kind of the.
The digital natives, we're not seeing anything necessarily drastically different in terms of how the marketplace is acting right now I think.
There is less focus of growth at all costs, I guess I would say in this industry and many others and so a rational pricing environment in an environment, where industry participants with scale our pricing the market rationally. We think is a good thing for Robinson, maybe open up to around to see if there's anything you'd add yes, I think the only thing I'd add is that there is definitely more.
Room to run.
Digital bookings and therefore stepped in Mosul slipped from the first proof point of how that can move the needle.
But if you look at digital execution of every step in the lifecycle of the load.
<unk> order management appointments.
Carrier offers and bookings, which we have made progress on that in transit tracking financial and documentation processes. So then just looking at the entire lifecycle of the load.
While we made progress on the productivity front as Bob pointed out there's still a lot more opportunity.
For us to drive up digital execution and all of those steps.
Arun could you phrase that maybe use a baseball analogy what inning we're in.
How far you can get the 25% anything else just to give us some additional context of where you are versus where you expect to be in.
Several years' time.
I would say.
If you look at 25% on the booking side.
I think we have more room to run.
I won't come up with a percentage.
But I'd say, there's no reason that we shouldn't aspire to to double that percentage.
And in terms of some of the other steps in the process.
I'm not going to make.
A hard commitment there, but theres certainly opportunity, let's think of it as like does it does the digital versus manual ratio that we look at for instance, the steps are.
I'd say, we're in the early innings on this yes.
I'd say to just some of our conversations in terms of our prioritization of work while digital bookings are probably the metric that people talk about the most is being kind of.
The leading edge of digital transformation, we actually believe the highest leverage points are not the actual booking and much more so some of the operational tasks that a room spoke too because that's really where a lot of our people's time ends up being spent and the more we can move those towards digital on the back end of a digital demand signal from a customer or before.
Digital booking with a carrier that is where the real productivity lift and ultimately our ability to drive down the cost of incremental transaction really really happens.
Alright, Thanks, guys I appreciate it.
Okay. Thank you.
The next question is coming from Ken extra with Bank of America. Please go ahead.
Hey, good afternoon.
Bob and team I thought that was a great answer thanks for that on the digital side and congrats on a great quarter.
I've been intrigued Bob on your market comments other carriers seem to suggest they are not feeling it yet yes, most obvious youre seeing it in the spot rates as they come down and the benefit youre talking about on the costs. So maybe talk a little bit about what customers are saying in terms of the impact in your thoughts on where we are in that.
In the market.
And is this a factor of what the smaller carriers are feeling versus the larger in terms of that spread widening.
Yeah, It's an interesting question Ken.
A lot of a lot of talk about.
The small carriers and the rate and the speed or if they are exiting the market at pace.
Canada I was quite surprised to see that we actually added 12000 additional carriers throughout the course of this quarter right, which is I think a record number of new carrier sign ups for us on any given quarter I really had expected that that number would go down so perhaps the health of the small carriers a bit better than it is being is being advertised.
The other way you might look at that is if.
Those small carriers, we're working with another broker that other broker doesn't have the network density today that they want to add that there are retreating to safety are retreating to Robinson.
So overall in the network.
I mentioned in the prepared comments or the industry I mean, we're definitely seeing on the consumer side things start to soften there we're seeing the consumer trade down.
On the construction side, we're starting to see that come in manufacturing holding up relatively well compared to compared to those other areas.
Our aggregate demand in truckload has come down sequentially from Q1 to Q2, just in terms of the total number of tenders, but on the flip side of that we've seen acceptance rates go up significantly many fewer canceled loads many fewer negative loads and so the health of the business on the contractual side has been really really good and as.
I'd say use.
Using spot is an intentional strategy to automate that with customers, giving them access to the lower cost spot market has helped us to maintain share.
I appreciate it thank you Bob.
Thank you. The next question is coming from.
Gordon <unk> of Goldman Sachs. Please go ahead.
Yeah, Hi, how are you.
So shifting to the forwarding side of the equation can you maybe give a little more color on your thoughts on on the outlook from here, obviously trends have been super strong and we've seen some moderation, but I guess, maybe more importantly can you talk to the share gains that you mentioned, what's what's actually driving that.
Above the market and.
What customer base, so you're penetrating to get the share gains and who might you be taking share from thanks.
So a lot there Jordan.
Right.
No that's all right.
All I probably won't get these in the right order. So I might ask you to repeat a couple of those so let's talk first about kind of the customer base and where the growth is coming from if I. If I give you a really simple customer segmentation ABCD with <unk> being really big customers and D being smaller customers going into the pandemic, our our COO.
<unk> mix tended to skew towards the Bu season. These write more mid cap to smaller customers.
As we went into the pandemic and throughout and into today.
The vast we've won in all segments and we've grown in all segments, but we've grown outsized in really that what I'll call customer type a or theyre really large.
Global customers is where we're winning the most in the most impactful too to our overall volume in terms of the forward look on the forwarding business. We do expect that we will continue to see some softening.
<unk> in the marketplace within within forwarding and domestically as well, but given the share gains that we've made given the work that the forwarding team has done in order to really structurally I think put that business.
Different place in terms of profitability, we feel like we've got a we've got a forward look that's going to allow us to continue to deliver at or above the kind of stated 30% operating margin targets.
For that for that business. We are today the number one NDA OCC from all of Asia to the U S. Along with a number one from China to the U S. So if we are going into some moderating.
Economic environments, we are doing it with a strong with a strong tailwind and still a strong pipeline of customers to implement.
So maybe tell me if I've hit on hit on your question on what did I Miss.
The other thing was like who might be taking share from is it like a smaller freight forwarding group base out there is it larger players any way to assess that it's really difficult to assess.
I think you can look at our share gains relative to some of our peers and draw draw your own conclusions on that Jordan, but I don't have a kind of a play by play by play that I would feel comfortable sharing in a public forum that would have any level of accuracy to that.
Okay. Thanks, so much yes. Thank you.
Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.
Hey, everyone and thanks for the time.
That's on the.
Great print here.
Bob you've had some really helpful comments on the overall demand equation and I, just maybe wanted to pick up on some of that.
I know, it's still kind of early to talk about peak season here, but as you start discussions for capacity planning on the global forwarding side. What are you. What are you hearing from them, especially if you think about some of those issues that you mentioned with labor disputes and increasing congestion at ports.
Yes, so the way that we're thinking about the peak season, right now and all given our exposure to the ocean market I'll start there.
Looking at the Trans Pacific Trade Lane, where we're obviously.
Through our most of our density as we've seen rates steadily decline here over the course of the past couple of months I think thats, mainly been caused by the issue of high inventories and either canceled or reduced pose that have been driven by the impact of just this continued inflation on the consumer.
Concurrently other shippers have been pulling forward orders in stocking up for the holiday season early due to the fears of the congestion with labor negotiation on the West coast ports and kind of this looming congestion on the east coast and so we really look at the convergence of those two factors likely leading to a more muted peak season.
Looking at the airfreight in the same corridor, our air volumes have started to come down a bit over the past couple of months and again against that backdrop of a more muted peak season.
Seeing as much of our air freight volume is driven by Ocean conversions, we would expect a bit of slowing there as well through the balance of the year I think the the outsized maybe.
Alternative perspective, there is that perhaps its just a later peak.
As.
We worked through inventory here domestically and then we may find ourselves in a spot where we say hey, we don't have what we need for the holiday we could see a later peak as well, but that's speculation at this point.
Okay. That's really helpful. And then just maybe a quick follow up we've heard some noise about maybe some concerns about production over in Europe with.
Some of the Russian gas supply have you seen any of that on your European trends business or on your reporting side.
Not that I could speak to Bruce with with with any level of expertise that hasnt elevated itself to any of our really broad based management team discussions related to trends in the business.
Got it appreciate the time.
Thank you.
Thank you. The next question is coming from Jack Atkins with Stephens. Please go ahead.
Great Good evening and thanks for taking my question congrats on the great quarter.
So Bob I guess, maybe just kind of going back to the thoughts on the sustainability of the 40% net.
Net operating margin and.
And that's through cycle.
Historically, we've seen.
Your profitability in Nast follow.
A GP per load you know pretty pretty closely.
I guess as you sort of look forward.
And you think about over the next several quarters and a normalization of that AGP per load do you feel like that.
The product work that are a rune has been undertaking over the last couple of quarters and the efficiency gains and productivity gains that you guys are beginning to see in the business.
We're going to be able to spool up enough to really sort of offset.
The normalization of AGP to the degree that it materializes.
For later this year or into 2023.
Yes.
It's the right question to ask Jack I'll take that on and then open it up to the rest of the team here too. So I want to I want to lead in with one comment when you say that the work that <unk> is leading and leading is the appropriate thing, but I also want to characterize this work is not just being technology worker product work, but really us thinking about the entire system.
<unk> CH Robinson works in system not in the reference of technology systems, but just the entire system from quote to cash and how do we best engineer every touch point, along the way both through technology and thinking differently about how we execute the business and so that is critical work at the core of the.
Unlocking value at C. H Robinson, and we're making progress there, but let's let's go back to kind of how.
Indirectly I think your question Jack is hey, if ACP comes down can you grow volume enough to drive the business and so here's here's how I'm thinking about that a bit as we've now grown truckload volume for five consecutive quarters and that is the first time, we've done that since 2016 into 2017 vol.
Volume in our truckload business in July is continues to be positive year over year and actually on a per business day basis. It's at the highest level of the year in both truckload and <unk> and our total truckload volume has increased on a per business day basis sequentially. Each month of this year, including July .
The employee additions that we've made into the team over the past several quarters are starting to get their legs under them a bit a little bit more capable to actually help us drive growth and there are signs that the freight market is decelerating and you probably saw in our client advisory that we published on July 21st but based on the indicators. We look at we now expect truckload cough.
To decline on a full year basis around 15% for the full year now.
Given that type of environment.
We also believe is that we will continue to see increased acceptance rates in our in our contractual business. We would expect to see less volatility in the cost of purchased transportation over the next several quarters in that environment, which allows us to lean in a bit more in terms of accepting volume taking on a bit more risk because the rich.
On the downside just simply isn't as great and that type of environment and so I do feel very confident in the fact that our team should be and will deliver volume growth through the back half of this year and I think that if we execute the plan accordingly, we could start to see that volume growth ahead of head count growth even by the end of this year.
Okay. That's great. Thank you very much thanks.
Thanks Jack.
Thank you. The next question is coming from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So if I go back and look at some prior cycles your costs and pricing historically have bottomed.
Low double digit declines.
Sounds like you think it will be worse.
This time around and just curious for your thoughts on.
Why and then if I look at your price versus cost in the second quarter. It was at 650 basis points spread do you think that that.
Spread starts to compress from here and I guess, if that if that does happen just any thoughts implications on <unk>.
Margins PGP all that thank you.
Thanks, Scott take me back to the first part of your question, where you talked about the decline.
Isn't quite tracking that.
Sure I mean, if you go back and look you've been giving US this your price and your cost numbers for a while.
They typically.
Bottom there.
Slide projector.
But yes, we're looking at slide six in the deck, Okay got it got it.
Yes so.
I certainly didn't mean to insinuate that I think is going to be worse. This time.
If that came through I don't have enough forward visibility to say that I think it's going to be the worst at this time I mean, what I would obviously agree with us where we're at and AGP per shipment that is at an all time high and we're not modeling our cost structure for how we staff our business or make our investments off of that was the point that I attempted to make in my comments.
The last couple of cycles, it's been six or seven quarters peak to trough in terms of the amount of time that it's taken to get there and typically an equal amount trough to peak and so kind of using that as you know.
The the framework for what might likely play out over the course of the next couple of years typically from peak to.
Average.
As a few quarters to kind of get back into that that median AGP for profile now again I don't have a crystal ball, but I would just I think oftentimes the past is a good predictor of the future and so that's what I would use to kind of frame up how we're thinking about this cycle.
And Scott I would add relative to the 658 basis points that you're referring to which is price up one and a half cost down five.
This business as you know if price follows cost and so that spread will really be determined by how steep that cost drop off. This so if it tapers off you could expect I think that spread to be lower if it if it steeper that spread gets wider and so that's really back to how long will it take for this thing to bottom out.
Okay that makes sense and I didn't want to put words in your mouth, Bob sorry, I was just I thought you made on the prior question a comment that you think full year costs are down 15, and so they started up 'twenty, so that implies a pretty sharp drop in the back half yes.
Yes, yes, yes, yes.
That's accurate Scott and more specifically I would say within that advisory. We go on to say that we believe that the first quarter is the only quarter thats going to see any sort of industry wide price increase in order to get to our year over year down 15.
You have to see some decreases in the back half of the year, we're kind of calling week 43 the floor.
Because you kind of run into supports of the cost to operate a trucking.
At that point, we would expect to see it tick up there for the seasonal last last several weeks of the year leading into the holidays.
Makes sense. Thank you.
Thank you. The next question is coming from Chris Weatherby of Citi. Please go ahead.
Hey, great. Thanks, Good afternoon guys.
Wanted to come at the 40% operating margins just to ask a little bit from the cost side. So you talked a bit about the volume growth in the truckload side, which obviously has been really strong over the last few quarters. As you noted I guess I wanted to get a sense in a tougher market sort of the cost initiatives that youre working on and I know heads are first half weighted.
Probably see some benefit as you move into the back half of the year. What are the other thing do you think can help support that 40% in the last quarter, you gave us sort of a peak into the second quarter in terms of how things are operating from a operating margin perspective in April just curious if you have the ability to do that.
The month of July just to give us a sense of how things are going.
Yes, we won't we won't talk about the kind of the sequential operating margins by by month within within the quarter that all again, maybe Arun and I can kind of take this on together I mean, if we think about if we think about head count in Nast definitely believe that the second quarter will be will be the peak, we've got a number of in turns there.
We'll cycle through through the second quarter and the beginning of the third quarter that'll.
That'll drawdown head count.
<unk>.
Based on kind of where we see the economy going and what we've added.
Our slowing hiring towards the back half of the year and so Nast. If we ended the year with a head count number that was lower than where we are today, we would certainly not be a surprise to anybody.
In this room certainly as it relates to the highest leverage points of how we drive efficiency and reduce our cost per transaction. It really leads back to the to the work that a rune referenced that he and the team are leading and we've identified a very specific opportunity to eliminate costs.
Associated with these.
I won't call them non value added activities, because that's not an accurate depiction but.
Non revenue generating activities would likely be.
The right way to say it the different parts of the load cycle the appointments load activations the load acceptance as we have we have an idea of.
The amount of operation and personnel expense associated with executing that and through investments in the whole system and the digitization of those we see a very realistic way to reduce the operating expenses within within Nast around if there's anything you'd add.
I think Bob nailed it, but it's really scalability of the operating model.
That we're going after and that means changing processes.
Eliminating processes that maybe don't make sense automating things that.
That ought to be automated or making self serve thanks.
Things that are better made self serve.
But that impacts at the whole system like Bob said the business system of the operating model and we have clear line of sight.
In terms of initiatives that.
That drive.
Unlocks in terms of manual work that could be directed elsewhere.
Manuel head count that can be directed elsewhere.
Okay. That's helpful. I appreciate the color guys. Thank you so much.
Thank you. The next question is coming from Tom Waterworks of UBS. Please go ahead.
Yes, good afternoon.
Bob you've you've seen quite a few freight cycles, you got great information for.
Understanding how the cycles work and your commentary today seems fairly cautious just in terms of activity and kind of coming a weakening in freight.
Do you think that.
I guess when I look at second quarter. It seems like there hasn't really been that much of a decline in activity.
Imports have actually continued to be pretty strong in first half. So do you think that what we're looking at is a fairly significant step down.
And you're kind of anticipating that in the next month or two.
Just kind of a delay between the impact of weaker consumer activity in the actual step down and freight.
Or are you, just saying kind of more of a moderation.
And then I guess I don't know if this is related or not but.
On contract and spot do you think that kind of contract rates hang in there a bit better.
And then there's just a lot more pressure in spot or do you think contract has to have it.
Truckload has to have a big step down as well so I guess 2212 questions within that thank you.
You bet.
So I'll take the second question first I mean, we're seeing resiliency in our in our contract business and I don't mean to articulate that theres been no changes there has been no conversations with customers right. I mean, we're we're having conversations with customers and we continue to see that contract portfolio mean, more and more towards a more traditional.
Bid cycles, 12 month bid cycles, and I would broadly describe that there hasn't been a tremendous amount of downward downward pressure on the contract markets I would expect as we go into the third quarter and the fourth quarter and go into see bid renewals. Those bid renewals are going to look different from a pricing standpoint than those that we did in the fourth quarter of last year.
The first quarter of this year.
My caution.
Feel great about I feel great about this quarter, we grew our truckload volume.
In a down market Ocean volumes were positive LPL volumes were down, but we can explain much of that just through a couple of specific customers and customer losses or changes in their in their activity from the stay at home trends. So I feel really strong about the business fundamentals I am concerned about the state of the consumer.
Based on what we're seeing from some of the retail reports over the course of the past several days here.
I'm seeing us working with retail customers moving inventory around intra company more so than I have at any time in the past and so I think the inventory thing is real and we're starting to see that and feel that in the business.
I tried to be.
Try to be cautiously optimistic in any scenario, but I think we have a very clear path to continue to drive growth in the back half of this year across across our services.
There is I don't know if theres, probably 200 million truckloads that arent hauled by C. H Robinson right now so the market itself, whether it goes into recession or contraction or expansion that shouldnt be the limiter of growth for for Robinson.
So does that hopefully that helps Tom.
Yeah, and it's really focused on the market not so much easier to your businesses performed remarkably well in the quarter right. It was a great great quarter.
And you can do better than the market, but it was more of a question on the market.
It sounds like you think maybe I'm more of moderation as opposed to a big step down in activity in the market.
I think that's I think that's right I mean, if I if I just look at the load to truck ratio and Thats, one that we use in our client advisors and we look at it internally I mean, we're coming off of ridiculous high levels of load to truck ratios in January it was 12 to one or whatever last year was $5 75 to one.
Basically right now at the five year average 3637 to one and so this feels a lot different obviously for all of us industry participants than it than it did 12 months ago, but it's it's kind of average I don't think were in the freight recession are afraid Armageddon I, just think we might've forgotten what average feels like.
For a while here.
<unk>.
The business is executing.
Routing guides are holding up first tender acceptance rates are up so I don't think that again from where I sit.
I think we've got a healthy healthy markets still but we should exercise caution on the forward look.
Sure makes sense, thanks for the time.
Thank you.
Thank you. The next question is coming from Doug Jon Chapell of Evercore ISI. Please go ahead.
Thank you good afternoon.
Bob Jordan kind of alluded to this as it related to the forwarding community, but in the traditional broker business within Nast, what's the competitive landscape shaking out like I mean on the one hand you have.
Some pretty full pockets from a phenomenal last few quarters, but on the other hand, the labor market is still tight inflation is really high there is a lot of uncertainty in the market right. Now does this push a lot of the smaller brokers out and does that provide opportunity <unk> risk to C. H Robinson going forward.
It's interesting that there is some 20000 different.
Property brokers in this industry right and from small mom and pops or operate on their house to those of the size and scale of ours.
One of the biggest challenges I think for I think one of the reasons why there's so many small brokers and so many very few of scale is one of the biggest challenges is just simply working capital and as truckload pricing has been so high over the course of the past couple of years. It takes a lot of working capital in order to fund and scale a business like that so I think many of those.
Businesses have been constrained based on that if we start to see the market come down you may likely see.
Some exits of some of those smaller smaller brokers, but given their size relative to ours.
Not a real.
I want to say an imminent threat to our model that comes from that population I think many of the upstart.
Companies that have come on in the last five years that have gotten to some scale, but have been largely funded by VC and private equity likely their owners are taking a different approach right now to profitability and versus growth at all costs and so I think that adds some rationalization to the overall environment that we're seeing and that we're competing and winning in every single day.
Okay that makes sense. Thanks, a lot okay. Thank you.
Thank you ladies and gentlemen, this brings us to the end of the question and answer session I will turn the floor back over to Mr. <unk> for 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 evening.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and enjoy the rest of your day.
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