Q3 2022 CH Robinson Worldwide Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the C. H Robinson third quarter 2022 conference call. At this time all participants are in a listen only mode. Following the company's prepared remarks, we will open the line for a live question and answer session to ask a question. Please press star one on your telephone keypad.
If anyone needs assistance at any time during the conference. Please press Star zero.
Reminder, this conference is being recorded Wednesday November 2nd 2022, I would now like to turn the conference over to Chuck <unk> director of Investor Relations.
Thank you Donna and good morning, everyone on the call with me today is Bob Bestir felt our president and Chief Executive Officer of room, Roger <unk>, Our Chief operating officer, and Mike Xactly Meister, our Chief Financial Officer.
Bob and Mike will provide a summary of our 2022 third quarter results and outlined some new cost reduction actions are rune will provide an update on the innovation and development occurring across our digital platform and then we will open the call up for questions.
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 if we do refer to specific information on the slides, we will let you know which slide we're referencing.
I'd also like to remind you that our remarks today may contain forward looking statements slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations and with that I'll turn the call over to Bob.
Thank you Chuck and good morning, everyone and thank you for joining us today on our second quarter earnings call in late July I talked about a deceleration in demand that we were expecting to see in the second half of 2022, and three large verticals for freight including weakness in the retail market and further slowing in the housing market.
We're now seeing those expectations play out and with slowing freight demand and price declines in both freight forwarding and surface transportation markets.
Throughout the changes in the freight cycle, we've maintained our focus on continuing to improve the customer and carrier experience, while scaling our digital processes and operating model to foster sustainable and profitable growth.
Today, we believe that renting a time of slower economic growth, where freight markets will continue to cool from their pandemic peaks and will operate more reliably at more normalized rates with fewer disruptions.
These changes in market conditions, coupled with many successful endeavors on our digital road map directed at scaling our model to be more efficient are allowing us to take actions to structurally reduce our overall cost structure.
Compared to our third quarter operating expenses. The actions. We're currently taking are expected to generate $175 million of gross cost savings on an annualized basis by the fourth quarter of 2023.
Inflation other headwinds such as annual pay increases and tailwind such as lower incentive compensation are expected to result in net cost headwinds of $25 million in 2023 that we expect to partially offset the gross savings, resulting in net annualized cost reductions of $150 million by fourth quarter of next year.
<unk>.
We also continue to identify opportunities to accelerate our enterprise wide digital and product strategy to drive greater impact and speed of execution a room. Roger has been promoted to the role of Chief operating officer since.
Since joining CH Robinson in 2021, Arun, it's been a critical contributor to and strategic leader of our digital and product strategy.
Arun is helping us to think and act differently as we accelerate our pace of digital transformation and scale, our operating model and.
In his new role in addition to leading the product organization a room will have expanded direct responsibility for both technology and marketing organizations, bringing these three critical functions together under a single vision and leadership structure will allow us to integrate these functions more deeply into single threaded teams and to put the needs of our customers and carriers at the center of our organizational design.
To ensure that we're positioned well to meet the needs while accelerating the impacts across the business units of C. H Robinson.
Our rooms teams will work directly with the business unit presidents to operationalize these efforts.
Now, let me turn to a high level overview of our third quarter results for North American surface transportation and global forwarding.
In our Nast truckload business, we grew our year over year volume for the sixth quarter in a row, albeit with a modest shipment growth of about half a percent.
Volume growth and drop trailer flatbed and temperature control was partially offset by a decline in our dry van volumes.
Within the quarter, we saw mid single digit volume increases in July turning to declines in August and September as freight demand weekend.
Our adjusted gross profit or AGP per shipment increased two 5% versus the third quarter of last year due to a meaningful increase in our contractual truckload AGP per shipment.
On a sequential basis, our truckload AGP per shipment came down 15% from the record peak, we saw in the second quarter, but remains above our historical average.
The sequential decline was particularly pronounced in the spot market, where our AGP per shipment declined 25% as we continued to pursue volume in the spot market and collaborating with our customers.
The spot market as part of their procurement strategy.
During the third quarter, we had an approximate mix of 65% contractual volume and 35% transactional volume compared to a 60 40 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 from $1 four in the second quarter to one three in the third quarter, which is the lowest level we've seen since the pandemic impacted the second quarter of 2020.
Changes in the national driving and load to truck ratio also reflect the softening of the freight environment. While this ratio was between three and 401 for most of the third quarter. It has declined throughout October with the latest reading of approximately $2 six to one and week 44.
The sequential declines in truckload line haul cost and price per mile that we saw in first and second quarter continued throughout the third quarter.
This resulted in approximately 17% year over year decline in our average truckload line haul cost paid to carriers excluding fuel.
Our average line haul rates billed to our customers excluding fuel surcharge decreased year over year by approximately 13%. This resulted in a year over year increase in our Nast truckload AGP per mile of 15, 5%.
Consistent with historical patterns, we expect to reprice, approximately 60% of our contractual truckload business in the fourth quarter of 2022, and the first quarter of 2023.
Encouragingly our win rate on large contractual bids in the third quarter improved year over year, as we pursue profitable share gains and respond to changing market.
In our NAFTA LCL business, we generated quarterly AGP of $161 million in the third quarter up 23% year over year.
This was through a 24, 5% increase in <unk> per order and partially offset by a one 5% decline in volume.
<unk> volume decline was driven by decreases in final mile temperature controlled and consolidation, while our common carrier business, which is the largest component of LPL had flat volumes.
In our global forwarding business, we're now seeing the market correction that has been anticipated high inventories reduced consumer spending due to rising inflation and a muted peak season have all contributed to reduced import demand, which also led to declining prices for ocean and air freight.
For the third quarter global forwarding generated AGP of $248 4 million.
Representing a year over year decrease of 20% versus a record high for a third quarter in 2021.
Within these results our ocean forwarding AGP declined by $55 million or 26% year over year.
This was driven by a 24% decrease in <unk> per shipment and a two 5% decrease in shipments this is compared to a 12% volume growth in the third quarter of last year.
The slowdown in global Ocean demand was most evident in the U S West coast, where rates and volumes declined more than other trade lanes and allowed port congestion CES activity on the U S. East coast remains stronger as freight continues to be diverted from west coast ports and due to relatively stronger demand in the Trans Atlantic Trade Lane.
Improving ocean scheduled reliability and the ability for shippers to accept longer transit times has resulted in conversion of some air freight back to the ocean.
This combined with a slowdown in global demand has impacted air freight volumes and pricing.
Airfreight capacity also continued to improve and drive prices lower than many trade lanes due to increased belly capacity on more frequent commercial flights.
AGP in our airfreight business declined $12 $5 million or 21% year over year, driven by a 16, 5% decrease in metric tons shipped and a five 5% decline in a GP per metric ton shipped.
Overall, the forwarding team continues to provide differentiated solutions and customer service selling aggressively in the market and leading to further additions of new customers and diversification of industry verticals and trade lanes in.
In the third quarter for example, 60% of our AGP from New business was generated from trade lanes other than the Trans Pacific Lane.
Additionally, we've attained the status of being the leading ocean freight forwarder from India to the U S and from the U S to Australia.
As shown on slide 10 of our earnings presentation, expanding our capabilities and presence in key industry verticals trade lanes and geographies is an important part of our sustainable growth strategy.
For the enterprise, we continue to believe that through combining our digital solutions with our global network of logistics experts and our full suite of multimodal services, we are uniquely positioned in the marketplace to deliver for our shippers and carriers regardless of market conditions, We believe our strategy and competitive advantages will enable us to create more value for customers and in turn to win more business.
<unk> increased our market share and enable sustainable profitable growth with that I'll now turn the call to a room to walk you through the product innovation and development that's occurring across our digital platforms.
Thanks, Bob and good morning, everyone I'll begin by saying that I'm excited to take on an expanded role as the company's Chief operating officer I look forward to further building integration between our digital product strategy, and our technology and marketing teams to accelerate delivery and adoption of our meaningful products features and insights to both sides of our two sided marketplace.
During the third quarter, we continued to deliver enhancements to our NAV CEO product platform, while extending the penetration of our digital offerings with both our carriers and our customers.
Due to the digital improvements that are being delivered the number of carriers looking loads and atmosphere carrier in Q3 increased 77% compared to the third quarter of last year.
Since providing carriers with enhanced capabilities to place digital offers and loads via an atmosphere of carrier, which improves the carrier experience and our productivity. We saw a 34% sequential increase in digital offers from Q2 to Q3.
Another data point that demonstrates our progress as the execution of 615000 fully automated bookings with carriers in our Nast truckload business. During Q3, which is an increase of 87% compared to the same quarter last year and represented $1 $2 billion in digital bookings in Q3 alone.
Broadly speaking, we're focused on providing scalable digital solutions that deliver improved customer and carrier experiences and service levels by working backwards from their needs. Much of this is about operationalized our information advantage at scale to features such as backhaul load recommendations for carriers.
On the customer side, it's about getting customers insights around price and coverage and one way to do this as scale I'd like you to make IQ and procure IQ products.
Scalable digital processes will enable us decouple volume and head count growth and drive increased productivity and we are laser focused on opportunities to automate or make self serve processes are core to operating model.
This includes increasing the digital execution of all of the touch points in the lifecycle of a load, including order management appointments in transit tracking cash advances in financial and documentation processes.
Scaling these processes are foundational to being the lowest cost operator, which ultimately gives us the pricing flexibility to accelerate growth and gain market share and the two sided marketplace that we serve.
While delivering on our long term operating margin targets.
I'll turn the call over to Mike now to review the specifics of our third quarter financial performance.
Thanks, Arun and good morning, everyone.
Our Q3 enterprise results reflect truckload volume growth in das along with sequential and year over year price declines on softening demand in the freight forwarding and surface transportation markets that Bob referenced earlier.
Our third quarter total company <unk> was up $43 million or 5% with growth in Nash, partially offset by the decline in global forwarding.
On a sequential basis total company AGP declined 14% from a record AGP in Q2 with declines in both Nast and global forwarding.
On a monthly basis compared to 2021, our total company AGP per business day was up 20% in July down 1% in August and down 2% in September .
Q3 personnel expenses were $437 5 million up nine 4% compared to Q3 last year, primarily due to a 13% increase in average head count on a sequential basis personnel expenses declined $7 2 million.
Due to lower incentive compensation.
Our Q3, ending head count also declined 1% from the end of Q2, which is consistent with our stated expectation of flat to declining head count in the back half of the year.
For the full year, we continue to expect our personnel expenses to be approximately $1 7 billion.
Which is the high end of our original guidance. This excludes onetime restructuring expenses in Q4 of $15 million to $20 million related to the cost savings initiatives that Bob described.
Moving on to SG&A Q3 expenses of $162 million were up $28 5 million compared to Q3 of last year, driven primarily by increases in legal settlements purchase services and travel expenses.
For 2022, we now expect our total SG&A expenses to be in the high end of our original guidance of $550 to $600 million.
Including the $25 $3 million gain in Q2 from the sale and leaseback of our Kansas City Regional Center, which is largely offset by nonrecurring legal settlement expenses.
We also now expect 2022 full year, depreciation and amortization to be 90% to $95 million.
Which is down from our previous guidance of approximately $100 million.
Interest and other expense totaled $16 million down zero point $7 million versus Q3 last year.
Q3. This year included $28 million of interest expense up $7 $7 million versus last year, primarily due to higher average debt the.
The increased interest expense was partially offset by a $5 $2 million gain on foreign currency revaluation in Q3 of last year FX revaluation was a $3 $8 million loss.
Our Q3 tax rate came in at 16, 9% compared to 16.0% in Q3 last year.
Our year to date tax rate is 19, 2% and we continue to expect our 2022 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal state or international tax policy.
Q3, net income was $225 8 million down.
Down eight 6% compared to Q3 last year, and we delivered diluted earnings per share of $1 78 down 4% versus last year, but up 78% compared to Q3 of 2020.
Turning to cash flow Q3 cash flow generated by operations was a record $625 5 million.
Impaired to $73 5 million used by operations in Q3 of 2021.
The $699 million year over year improvement was primarily due to a $359 million sequential decrease in net operating working capital in Q3, driven by the declining cost and price of purchase transportation in our model.
Firstly Q3 of last year included a $412 million sequential increase in net operating working capital as costs and prices were rising.
From the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1 5 billion.
The cost and price of purchase transportation have come down we have realized the benefit to working capital and operating cash flow on a lag basis based on our DSO and <unk> to the extent that freight prices continue to decline, we would expect a commensurate reduction to working capital.
Capital expenditures were $31 3 million in Q3 compared to $22 7 million in Q3 last year, we expect our 2022 capital expenditures to be at the high end of our previous guidance of $110 million to $120 million.
Driven by the increased cash flow in Q3, we returned approximately $607 million of.
Of cash to shareholders through a combination of $536 million of share repurchases and $71 million of dividends. The Q3 cash returned to shareholders significantly exceeded net income and was up 156% versus Q3 last year driven by the record cash flow.
From a capital allocation standpoint, we remain committed to growing our quarterly cash dividend in alignment with long term EBITDA growth and using our share repurchase program to deploy excess cash.
Now onto the balance sheet highlights we ended Q3 with approximately $1 1 billion.
Liquidity comprised of $896 million of committed funding under our credit facilities and a cash balance of $188 million our debt balance at the end of Q3 was $2 2 billion up $472 million versus Q3 last year, primarily driven by share repurchases due to our expanded capacity to borrow.
Given our EBITDA performance, our net debt to EBITDA leverage at the end of Q3 was 136 times down from $1 three nine times at the end of Q3 last year.
Finally, as Bob discussed, we are taking actions to reduce our costs by $175 million when including expected net headwinds of approximately $25 million driven by inflation and merit increases in 2023, we expect to realize net annualized cost savings of $150 million.
By the fourth quarter of 2023.
This savings is in comparison to the annualized run rate of our operating expenses in the third quarter of this year.
Related to these actions we are expecting nonrecurring restructuring charges in the fourth quarter of this year of approximately $15 million to $20 million, which are incremental to our 2022 expense guidance as I mentioned earlier.
These net annualized cost savings are intended to be long term structural changes investments to scale, our digital processes, particularly in nast enable us to take these actions and adapt to changing market conditions to foster long term profitable growth for our shareholders now I'll turn the call back over to Bob for his final comments.
Thanks, Mike as inflationary pressures weigh on consumer discretionary spending and global economic growth. We continue to believe that our global suite of services are growing digital platform, a responsive team and our broad exposure to different industry verticals and geographies supported by a resilient and flexible non asset based business model put us in a position.
To continue to deliver strong financial results.
But we also need to continue evolving our organization to bring focus to our highest strategic priorities, including keeping the needs of our customers and carriers at the center of what we do while lowering our overall cost structure by driving scale.
The work that our team is executing on related to scaling our digital processes and operating model, while working backwards from the needs of our customers and carriers is entirely focused on driving improvements in our customer and carrier experience, which in turn will drive market share gains and growth, we're focused on improving productivity, which in turn reduces our long term operating <unk>.
And increased profits leading to continued strong returns to shareholders. This concludes our prepared comments and with that I'll turn it back to Dana for the Q&A portion of the call.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Permission 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, we do ask that you. Please limit yourself to one question to allow as many questions today as possible again Thats Star One to register a question. The first question today is coming from.
Todd Fowler of Keybanc. Please go ahead.
Great Thanks, and good morning.
Bob I guess, maybe to start if you can maybe share with us on the cost savings that you are expecting going into 'twenty three yes, maybe some comments around the buckets, where you see those savings coming from.
Or we should think about those across segments and then as you think about kind of this initial stab on the cost side do you see additional opportunities as you move beyond this do you have to wait until you get to the end of these cost savings for some other opportunities or can you identify some things as you continue to move forward. So a lot kind of packed in there, but maybe you can share some thoughts on that thanks.
Yeah, I can start and I'll, let Mike weigh in a little bit too Todd.
In General terms, if you think about our cost structure right now, it's about 75% personnel, 25% SG&A and so generally I would think about the cost reductions kind of following that same that same approach.
As we look forward I think there's really kind of three three drivers in terms of what's what's driving these these cost reductions obviously, we're seeing a changing marketplace.
We're seeing supply chains operate more efficiently more effectively with less disruption and so over the course of the past couple of years, we've had to really ramp staff in order to deal with many of those acceptance assistant required more human engagement more human labor and as supply chain for us that will allow us and afford us the opportunity to make some some difficult personnel decisions there.
In order to take cost out of the model. Additionally, as rune talked about a lot of work on the digital endeavors to scale. The overall, the overall model and drive efficiency in our model about two will provide us those those opportunities.
Yes, I think that covers it I think I'd put additional emphasis just on the digitization efforts and while 175 worth of cost reduction initiatives net 150 is important.
For our model, it's not where we and it's just an articulation of the progress that we're making and that Digitization is really the key for us to continue to drive costs down going forward and I think Todd too you asked kind of by segment.
I would just state that.
This will this will be broad based primarily nast and forwarding related but there will be cost reductions across the enterprise.
Okay. Thanks for the thoughts.
Thanks Scott.
Thank you. The next question is coming from Jason Seidl of Cowen. Please go ahead.
Thank you operator, Bob and team. Good morning, appreciate you taking my call.
We've been we've been seeing a lot of talk about <unk>.
Spot pricing in the truckload sector and Theres been some talk about maybe finding a bottom here. If you will for a bit would love to hear some of your thoughts on that and then maybe if I can squeeze one more in just thoughts on that 60% of the new business being generated from <unk> other than trend specific end.
In global forwarding I thought that was rather interesting wondering what's behind that.
Yeah, So I'll talk a little bit about the cycle and spot more specifically you know we often use the TMC routing guide as a proxy for kind of where we see the industry overall in terms of routing guide performance and obviously, it's critical to understand how effectively.
Putting guys are holding up in the contract space to kind of get to get a sense of the unplanned freight that moves into the spot.
The TMC routing guide depth of tender was hovering around one three and September dropped to a one to four and so when we look at that from a historical context from a load acceptance perspective, that's really reflective of times like 2009 2019 in the first half of 2020, So I think that kind of helps to paint the picture.
The current.
Contract compliance that exists in terms of where we see the cost market going.
In general as we think about 2023, we think that the cost forecast that we have have.
The beginning of the year and the end of the year looking looking pretty similar but with a deceleration in spot pricing in truckload pricing in the first half of the year with a slight reacceleration in the back with we kind of think that that's more the cost floor comes in kind of that April .
April may time period, and so there is very little unplanned freight in the spot market today.
Are seeing a number of shippers intentionally use the spot as a mechanism to to capture lower cost savings and.
Keeping some some some freight out of the contract market.
As it relates to your second question around around forwarding.
We were certainly proud of.
Our leadership position on the Trans Pacific.
And we continue to add business in the Trans Pac, but we've also been very focused on diversifying the overall global forwarding portfolio, so as not to be so reliant upon that and so we're seeing strong growth in Europe , and South East Asia, Oceania, Australia, Latam, India as examples.
We climbed to the number one spot as the leading border from India to the U S as well as from the U S.
To Australia, so hopefully that gives you some color.
So it was more of a concerted effort to diversify yourself as opposed to just where the market was going in general.
Yes.
Perfect. Thank you very much for the time appreciate it.
You.
Coming from Brian <unk> of Jpmorgan. Please go ahead.
Hey, good morning, Thanks for taking the question.
So I just wanted to come back to the conditions in the contract market Bob.
65, 35 split you had spreads with spot market contract kind of widening out.
Through the quarter.
Margins came in a little bit weaker than we would've thought or at least that was historically suggested was that the compliance.
Aspect of it that caused some of that that weakness was it just less spot market volume then.
Than we would've thought I mean, it does seem like it declined fairly quickly.
And then just a quick clarification, maybe for Mike on that.
Legal settlement.
Like Thats in the SG&A guide in offsetting the other charge offs I wanted to see if you could expand on that.
That's where that was located from a segment perspective, because that was a.
A fairly large number you just called out.
Yes, so our comps if I if I go to the truckload AGP.
We saw in the quarter.
Brian was was continued strength in the AGP per truckload shipment in our contract business. So that was up considerably on a year on year basis. So the model is reacting in the contract business as we would expect it to our spot business as we continue to pursue share and grow volume in the spot.
We've had to get really aggressive in that area in order to in order to grow volume and so youre seeing a pretty significant drag on the overall ADP per shipment just based on that 35% of the volume that's in the spot. So are our margins in spot or AGP per truckload shipment today and spot are much lower than they are in the contract space. It's really at the end.
<unk> of where we were in the third quarter of last year, where the margins and spot were far greater than that of the contracts and that's kind of flipped as it sits right now, but but net net our AGP per truckload is up considerably compared to Q3 of last year and continues to be above the historical average.
Yes, and then Brian just to add a little bit of clarity on SG&A, we were up 21% in the quarter 28 overall guiding to the high end of our original guidance, including the $25 million gain on the sale leaseback of our Kansas City Regional facility, which was in Q2, but we also had <unk>.
And your point about.
Nonrecurring legal settlements in the quarter.
On the year largely offsetting.
That gain from Kansas City, and so just a little more specifically in the quarter on the legal settlements. They represented about a third of that increase in expense and SG&A for Q3.
Yes.
And Mike, which which segment in particular does that impact or is that more on the corporate line item.
Yes, that's a corporate line item, but impacting.
<unk> business.
Okay.
Okay. Thank you.
Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.
Thanks, operator, and good morning, everyone.
Bob just going back to your second quarter call.
Commentary back in July you had you had some pretty cautious outlook comments, especially with regard to global forwarding and it looks like that caution was on point you had division EBIT down almost 50% sequentially. So I guess, we were a little surprised to see that you were still adding headcount there up about 100 people quarter over quarter.
Maybe you can help us reconcile those two things why you were adding.
When the outlook was with so conservative.
Yeah.
In forwarding admittedly, we like we got to we got ahead of ourselves in terms of head count. We certainly did not expect that the market was going to come down as rapidly as it did we were certainly cautious.
A lot of a lot of the head count the way that we pre plan our workforce plans Bruce we're hiring in advance of opportunity and so many of those hires were already in.
I'd say in flight leading into the quarter. There were offers at about access had been extended and accepted and we didn't feel like it was the right thing from a talent brand perspective to be re sending offers in that in that environment. So you know.
As we talk about the cost reduction initiatives and kind of that balance between SG&A and personnel that will clearly deliver a drawdown in head count commensurate with the cost reduction and.
As I said before that'll be focused primarily on asking Florida.
Okay Fair enough and then just maybe to follow up really quickly can you give us an update on how youre thinking about the portfolio just in terms of.
Strategic alternatives that maybe you consider what businesses do you see as core or noncore and whether you have any kind of processes in place to maybe monetize some of some of those assets.
Yes, Bruce I think it's really prudent to continuing to review the business portfolio and to assess the best way to create long term shareholder value right that goes without that goes without saying.
<unk> seen our earnings back on Slide 10, we continue to believe that global growth and continuing to drive share gains through our integrated solution design between forwarding surface Trans managed services and fresh are part of that sustainable growth growth strategy in each of them in its own way kind of feeds the flywheel of growth overall, particularly across Nast in forwarding.
As we look at instances, where we engage customers with both of those services relative in comparison to where customers just engage one or the other we see on a five year CAGR, we see over a 450 basis point increase in our five year revenue CAGR growth rate of customer revenue when we integrate.
Both services with those customers, so we see greater growth and greater retention and so again, we continue to to review the portfolio we continue to.
Take the view that we have to do what's right for the customer and for the company and for the long term value of our shareholders, but there is nothing to update today specific to the portfolio.
Okay I appreciate the color.
Thank you. The next question is coming from Jack Atkins of Stephens. Please go ahead.
Okay. Thank you good morning, I guess.
First just a quick housekeeping item, Mike So was the legal settlement in the third quarter about eight or $9 million.
Just want to make sure is that and is that a nast or does that incorporate so that's my first part of it that I guess secondly, when we think about the.
$150 million in cost savings.
Can you help us think about why is that taking four quarters to implement.
And then I guess bigger picture Arun as you as you execute on on your technology initiatives.
Within your purview I mean would you expect that number to potentially expand over the course of the next few quarters as you as you see additional efficiency opportunities.
Yes, Jack let me just start off and cover your question about the legal settlements in Q3, yes, the legal settlements were $9 $4 million the impact Nast.
On the business.
Yes, Jack in terms of timing.
To take the appropriate pace to us to ensure that we're able to not disrupt the business not disrupt our customer relationships and not and not put future growth at risk Arun can talk about about the roadmap and kind of some of the things around operationalize thing and we've talked about kind of.
Making self serve automating and eliminating some of those legacy tasks and so some of this will phase in as those.
<unk> delivered as well.
Yes, Jack so right now we have a.
Clear road map to increase productivity and masked by roughly 15% by the end of two.
2023, which all that or is up to the $150 million.
Bob described.
As it relates to additional opportunities so.
If you recall we've talked about.
The lifecycle of a load so starting from order management to appointments in trans and tracking.
Financial documents cetera, right so that.
What we're focused on as part of this initial unlock 15% productivity improvement is in transit tracking and appointments, having said that there are certainly.
The other opportunities that are starting.
There are probably earlier in the cycle, we have more confidence in the 15% based on and trends are tracking in appointments as we gain confidence and other efforts.
There is likely more opportunities that Neil in Atlanta factor that just yet.
Okay. Thank you.
Thank you. The next question is coming from Jordan <unk> of Goldman Sachs. Please go ahead.
Yeah, Hi morning.
Maybe just following up a little bit can you talk to a little more of the timing of the cost savings as they roll through next year is it evenly spaced and is there a way to get some sense for what SG&A and personal personnel expense could look like.
In 2023 after all these savings and then finally.
I know you don't give guidance per se, but.
Holistically thinking about this plan and the productivity savings you just mentioned can that EBIT margin stay north of the 30% level for the total company FX.
Yes, just in terms of the timing on the expense savings initiatives, we obviously want to get after those as quickly as possible, but as Bob said, we've got to do it with the right cadence in terms of.
What we are delivering on the business the market conditions the pace of the digital efforts.
In our normal course will come back and give you guidance on many of our expense line items on our Q4 earnings call.
Yes, and in terms of.
The operating profits of the business, we will continue to work backwards.
From our stated operating margin targets of 40% for Nast, 30% per forwarding in mid thirties for the enterprise and so we're using that as a guide as we continue to move forward here and kind of solve for and so that that in itself will help too.
Kind of determine the pace in which in which the cost reductions come.
Okay. Thank you.
Thank you. The next question is coming from Ken <unk> of Bank of America. Please go ahead.
Hey, great.
So Mike just to clarify because I know, we keep hitting on this cost I guess because it wasn't as explicit.
It's possible the $25 million gain last quarter is just partially offset by the 9 million legal settlement right. It wasn't a full ups I just wanted to clarify that from your earlier statement and then.
I guess looking at the difference Bob on on the profitability and on.
Nast and then in truckload and specific.
Is there just inordinate fuel gains last quarter that added to this I'm trying to figure out.
Why the decline sequential decline in these in these margins.
Whats shifted here to make that I mean, your percentage went down from on the spot from 40 to 35 right. So you went up on the contract and so you said the contract margins were much much greater just trying to figure out why that that margin than overall went down so dramatically and is it worth than chasing that spot volume businesses.
It still contributory.
Yes, Ken let me take your first part of your question just to make sure we're clear on that SG&A.
The comments about Q2, and the Kansas City game, we're in the context of our annual guidance being at the high end of our original guidance that we gave on SG&A and so with that we had onetime legal settlements.
In Q3, but we also had smaller settlement in Q1, and we're really talking about what we believe will happen for the year. So the comment about.
Nonrecurring legal settlements largely offsetting the $25 million gain was really.
A comment about the year in its entirety all of 2022, not just what we experienced in Q3, which was a $9 4 million dollar charge for.
Nonrecurring legal settlements hope that's clear yeah.
Yes.
Yeah, and as it relates to the contract business as you know.
The contracts are constantly repricing and so part of part of the drag on the contract.
<unk> per shipment in third quarter was caused by bids that we repriced in the second quarter and through the third quarter that are that are resetting at lower AGP per shipment.
We've seen costs they came down precipitously, if that's the appropriate or do you use in the second quarter, which caused that record spread that we had the highest AGP per shipment in our history and so cost of normalized as contracts are repricing.
We're still in a place where we feel very.
Good about about kind of the health of the contract portfolio.
The.
Spot market business is still contributory in terms of in terms of pursuing those those share gains in those volume gains. So yes, it's down it's down from second quarter. We certainly didn't look at the second quarter as being a sustainable adjusted gross profit per shipment and certainly we're not building any any plans around that but to be clear too there is.
No fuel impact to our truckload business. It is it is a straight it's a straight pass through there is headwind.
<unk> and <unk> with fuel on our LCL business when fuel is going up it tends to benefit our LPL business when it comes down.
Headwind.
And then just to clarify on that the 150 million Bob is that a shift in <unk>.
Incentive comp payout and commission structure or is that just reducing the people as you mentioned earlier given the digitization just that.
Sorry for the follow on.
Yes, it's going to be.
There's going to be a component of all of the above to that and we think theres puts and takes headwinds <unk> in terms of next year incentive comp will be a tailwind reduced head count will be will be.
We will be an impact so theres enough as I said kind of at the onset of the call do you think about 70 525 being the split between personnel expense and SG&A.
One way or another it will likely closely follow that.
Alright, I appreciate the time guys. Thank you.
Thank you. The next question is coming from <unk> majors of Susquehanna. Please go ahead.
Just going back to forwarding, if we look at the sequential trend.
Gross profit was down $75 million or so from <unk> to <unk>, yet operating costs were up 6 million can we drill into that a little more besides the head count question earlier, just how much of this is a lagged abilities or respond and how much of this as a structural cost increase because if we look at spot rates it seems that that.
Pressure will certainly be more this quarter than last.
With the West coast being all the way back to call. It 2018 levels, but the cost structure in opex and forwarding being 50% above that this quarter. So any thoughts on that would be really helpful. Thank you.
Yeah.
Yes, it's almost exclusively personnel expense basket.
And the ability to control that going forward.
There is part of as part of this there is there is a plan in place to control that moving forward. We continue to believe that 30% operating margins as the appropriate level of profitability for that forwarding business and so as we think about how do we solve for that.
It's really three levels three levers right and I don't mean to oversimplify it but what are the trends in volume were the trends in AGP per per shipment and what are the what are ultimately the personnel expenses needed to to support to support but to deliver that operating operating margin.
Thank you Bob.
Thank you. The next question is coming from Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, good morning.
I wanted to ask you about your sort of philosophy on volume growth.
I think there's been a push to continue to try to gain share through fluctuations in the market in Nast and.
It sounded like this quarter that was challenging from a spot perspective, so wanted to get a sense of maybe how you think about it volume growth was pretty close to breakeven in nast.
Is it something that you think you can do does it make sense to do these types of markets, where you might end up seeing sort of an impact on profitability. As a result, I want to get your sense on how youre thinking about that.
Yes, I think in general.
We've talked about before growth.
We believe that volume growth through the cycles as an important is an important component of the health of the overall business right.
And yet the play that we run so to speak is different depending on the market conditions.
Rune and his team have a lot of work in place to really take a systematic approach to maximizing the yield in determining the appropriate level of volume and in which corridor and under what terms, we should be accepting freight but in general I mean as I look at 2023, and what we expect the marketplace to look like.
If we're going to grow volume in 2023, which we expect to do it will likely come I won't say exclusively but it will likely come through the contract through the contract market and so.
We'll reprice around 60% of our truckload business between the fourth quarter and the first quarter and we know that in order to drive growth. There, we're going to have to be aggressive in those in those truckload pricing events and so I don't know if that directly hits on your question, Chris, but if not I can I can certainly build on that.
Yes. It does its helpful. I guess that sort of gets to the point that you mentioned on the approach to contract pricing.
Anything you can share with sort of where the market is today relative to how you might think about that what type of aggressive actions you might need to take to be able to get share in that piece of the market.
We feel as though that we've really improved our pricing science, our pricing methodology and our approach to response to these bids and we see some clear demand signals in areas of short haul and drop trailer that we are aggressively responding to.
But in general I mean, we.
What we're seeing and I won't speak to help work necessarily we see the market growing but what I would say is what we're seeing in early renewals in this quarter or is that the AGP per per truckload shipment is coming in at.
Levels below where our contract freight has been through through the last couple of quarters and so again in order to drive growth in NAFTA in 2023, it's going to it's going to have to be fueled by volume growth primarily.
Okay, Alright, thank you very much appreciate it.
Thank you. The next question is coming from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks, Good morning, Mike just a few follow ups for you.
Any color on the $10 million of losses at corporate to seems higher than normal.
If we're doing our math right.
SG&A does that go higher Q4 versus Q3, and then just wanted to clarify the $150 million of savings are you, including.
Are you basing it off the reported <unk>, so including that $35 $40 million of annualized legal are you. Excluding the legal settlements when you talk about the savings versus Q3.
Yes, so first of all kind of go backwards. So first of all.
The annual run rate is just as reported so.
Including the.
The legal settlement.
<unk>.
SG&A, we guided to the high end and so yes, I guess, if you take the very high end of our guidance of $600 million and look at our year to date you'd be seeing.
170 to $1 73 ish kind of number.
Would be would be the Q4 plug to get to the high end, which is higher than what we had in.
In Q3 of 162 ish.
And then back to your first question I think you were asking about.
In our all other incorporate results our income from operations, which was a $10 million loss.
<unk> two.
What would have been a $3 $4 million loss, a year ago, and that's driven by unallocated expenses that we hold at the corporate level and think about that is primarily our investments in growth in the product organization.
In terms of the other business units like Ah Robinson fresh managed services and ESG, which are included also in that group.
We are generating income positively is up versus Q3 last year.
Okay, and then maybe just Bob real quick.
The price versus cost spread still positive.
Four points in Q3, do you think that stays positive and into Q4.
I'm, sorry can you repeat that you cut out a little bit can you repeat that sorry about that so the truckload price cost spread down 13 down 17 was still.
Positive in your favor do you think that stays positive in Q4.
From where I sit right now I would I would believe that to stay positive in Q4.
Okay. Okay.
Thank you guys.
Thank you. The next question is coming from Jon Chapell of Evercore ISI. Please go ahead.
Thank you good morning, everyone.
I think we've covered a lot Bob about the ever evolving market here changing awfully quickly I was wondering if you can provide some perspective on this cycle versus prior cycles, most especially how are some of your competitors acting.
Youre going after volume aggressively maybe at the expense of yield.
Others doing the same as it more discipline. This time does it offer you a better opportunity for Robinson specific market share growth versus prior cycles, just any context to that.
Upcoming maybe 12 months versus <unk> 19 in 2016.
Yes.
Think about these cycles I mean, each one is has its own unique characteristics, but typically we see that the up cycle last seven quarters or so followed by a similar duration on the down cycle and so as we think about the next few quarters, we're expecting downward pressure on contractual pricing.
In terms of behavior of competitors.
Hi.
I don't think that our strategy is unique to Robinson to say, if we want to grow share next year, it's going to come through the contract market and so I would expect to see agree.
Aggressive competition and aggressive pricing in the market because thats ultimately.
In normal circumstances, 85% of truckload freight roughly operates in the contract market companies will be aggressive to to gain there to gain their share in that space.
Would it be fair to say the high highs of this cycle.
Could potentially translate to possibly a higher floor or does it just make the volatility more extreme.
It's hard for me to forecast that from where we sit right now I think.
We believe that the cost floor is higher than where it has been in the past. So if you if you take that.
Then potentially it means higher lows, if you will and I think what we're seeing from customers.
<unk> is.
In pricing they are tending to move back towards 12 months duration of their bids so youre not seeing as many many bids are short term bids in the thoughts of more more normal pricing circumstances.
Customer objectives and pricing is theres been obviously, a lot of disruption to service cost and networks over the course of the past couple of years and so working with shippers to.
Try to get back to the quality expectations that they had pre pandemic and some cases back to the pricing expectations. What they had pre pandemic and also helping shippers to kind of reevaluate their network in our network footprint to optimize our overall cost.
Got it thanks Bob.
Thank you.
Thank you. The next question is coming from Amit Malhotra of Deutsche Bank. Please go ahead.
Hey, everyone.
Mike I just had a question first one I guess.
On the cost savings plan, so I really appreciate.
The delineation between gross and net cost savings, but just try to understand how much of that 150 net is actually realize in 'twenty three versus kind of run rating and then just maybe a bigger picture question for Bob So Bob you said Arun is.
Help the organization think and act differently and I wanted you to expand on that a little bit.
Really what is the appointment of Arun as COO.
Accelerate and what.
Kind of at the front of the financial implications I don't know if you think about it that way, but that would be helpful. I'm just trying to sniff out if there's a real change going on because you have the company has a great market position. It's a high return business. So I'm just trying to see if there is there is a real inflection with this with this leadership change at the CEO level.
So we should anticipate there was as a result of the appointment. Thank you.
Yes, just on the first question there.
The run rate or how much of it drops to the bottom line in 2023 that will be.
The guidance that we provide when we come back on our Q4 earnings call. We as we customarily do we will provide you guidance for the year on personnel and SG&A that will help you understand.
How that drops and in comparison to the headwinds on inflation and merit increase in investments and all the rest.
Yes related to runes rolling his promotion I guess, what I would say from where I sit as Arun is a seasoned executive and he's got experience in many facets of executive leadership that extend beyond just product and technology and while he is highly skilled technical. He is also from a leadership perspective really a transformational leader that elevates the perform.
<unk> of people and teams around him.
Expanding our scope at Robinson is going to help us to bring together teams that are critical to advancing our progress in digital which in turn is going to fuel growth and improve efficiency allow us to compete to win.
As our industry right our industry continues to evolve and change at a rapid pace and we're really thinking about whereas with industry going to be three years from now five years from now.
As I think you know my technical knowledge is deep in the supply chain space.
Gives us deeper in the world of digital first companies in building scalable platforms and collectively we complement each other skill sets and work collectively with each of the business units to achieve our long term growth goals. The work up to this point has been exclusively focused within the <unk> organization and this allows us a platform to bring together those critical components.
And work across the enterprise.
Yeah. So that's fine but the question I have though is just like does that does that translate to.
Greater drop through of net revenue.
Net revenue grows greater market share gains.
That's the real question and how quickly can you kind of this acceleration or change in leadership at the operational level kind of help realize that that's an opportunity.
Yes, I would say 100% of the efforts today are focused on scaling procurements scaling customer demand and operationalize those those internal changes and improving the yield and the overall marketplace. So creating that two sided marketplace that can have the appropriate liquidity the appropriate cost structure.
To deal with lower AGP potentially in the future on a per transaction basis than what we experience today and so all efforts are focused on growth and customer and carrier.
Acquisition retention and growth and then completely focused on the digital transformation, which in turn drives the lowest operating cost structure in the industry, which we believe we can achieve through these efforts, which in turn enhances profitability.
Thanks, a lot I appreciate it.
Okay. Thank you.
Thank you Unfortunately that brings us to the end of the time, we have for the Q&A session I would like to turn the floor back over to Mr. <unk> for closing comments.
Thank you that concludes today's earnings call. Thank you everyone for joining us today, and we look forward to talking to you again have a great day.
Ladies and gentlemen, thank you for your participation and interest in C. H Robinson you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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