C.H. Robinson Worldwide, Inc. (CHRW) Earnings Call Transcript & Summary

All right. I hope everyone had a great lunch and a great presentation. We're ready to kick things back off for the content portion of the conference. So we're very lucky to be joined here by C.H. Robinson. With us, we have Bob Biesterfeld, who is the CEO. Bob has been with the company for a very long time but is relatively new to the -- leading the helm role. We're also joined by Mike Zechmeister, who's the new CFO at Robinson. So he comes in after really a lot of experience in the CFO role, United Natural Foods and a few other organizations. Although he's a bit new to the freight world from a carrier service provider perspective, he's spent a lot of time on the other side of the negotiating table. So very happy to have both of these gentlemen joining us here today. As you know, we're doing something a little bit different this year and going with more of a fireside chat approach. But I think to start things off, it's maybe useful to talk a little bit about the background of the company. Maybe, Bob, if you want to just discuss how the portfolio and the strategy has changed over the years and what you're going to look like going forward.

Yes. Well, good afternoon. Thanks, everybody, for joining us. I hope that everyone in the room is at least somewhat familiar with C.H. Robinson, but really, our history is that of one of the largest North American third-party logistics companies. Post deregulation of the trucking industry, obviously, brokerage became a bigger and bigger part of our overall suite of services. Over the course of the last 8 or 9 years, we've really worked to diversify that service base, and Global Forwarding has become an even more important part of our overall mix. Today, I think about 20% of our revenues have exposure to forwarding, primarily on the ocean side, ex China, ex Asia, towards North America. So today, we like to talk about ourselves as a technology-enabled supply chain company with a broad global diverse portfolio of services. We think that the people that we have at C.H. Robinson are a real differentiator for us. Our customers continue to reinforce that and tell us that, that our people matter a lot. So we're committed to ensuring that we've got really talented people out in the field to serve our customers and our carriers and to generate returns for our shareholders.

So Bob, you mentioned that you think of C.H. as a technology-enabled company at this point. Obviously, a lot has changed about the market. But the company has been around for a very long time, over 100 years. And in that time, you've managed to reach industry-leading margins. Maybe talk about what it is about your model and your competitive advantage that allows you to hit those margins.

Do you want to take it, Mike?

Yes, absolutely. Thanks, Bruce. So we do have industry-leading margins and we don't take that for granted. We think that we've got to work every day to continue to expand those margins. I think in our last earnings call, you heard us say that we've got a commitment to $100 million cost takeout over the next 3 years. But I think the difference for Robinson is probably 3 elements: it's scale, it's relationships, and it's our tech platform. And on the scale side, there's obvious efficiencies that go along with scale. The investments that we have can get spread over a greater base. But I think there's also an exponential benefit to some of the scale aspects that we have. If you think about, on the customer side, customer scale is great for carriers, and there's more options for them. Carrier scale is great for customers. And so there's a flywheel effect there that's important to our business and helps us with respect to scale. On the relationship side, we've got tremendous relationships. We've got 119,000 customers, 78,000 on the carrier side. Those are long-standing relationships, have very high rate of retention. If you look at Fortune 500, we've got roughly 90% of the Fortune 500 that we've maintained relationships for over a decade. We learn a lot from those relationships. They had really helped us develop a core that's extremely solid and enables those margins. But I think it also enables us to understand more clearly where to place investments going forward to continue to improve our platform, and that's that tech platform. We've got Navisphere. It's very important to the core of our business. It's been built over a long period of time. It does a fantastic job. It really enables those margins. But as we talk about our tech investment for the next 4, 5 years, $100 billion in spending, a lot of that is focused on continuing to improve that. So through the scale, through the relationships against our tech platform, those investments really help us continue to push those margins in the right direction given the competitive headwinds that we face.

Okay. Great. And then just maybe a multipart question here to follow up on that. Why is technology so important, not necessarily to you, but to the industry in general? And following on that, maybe talk about specifically what your investments in technology have been recently, what you're planning in the next couple of years to drive that efficiency, to drive those results. Specifically, what is it about the Navisphere platform that you think is so effective in helping to drive your leverage, helping to drive your industry-leading margins and your industry-leading service?

So we've only got 25 minutes for that question, Bruce. Technology is, obviously, it's a key point of every conversation today that seems to come up around supply chain. And I think that's not just true for Robinson. I think that's true for all the participants in the supply chain. I mean technology is becoming an even more important way to drive for efficiency for -- I mean, every customer that we have is looking for a way to run a more efficient business, right? They're looking for how do they take cost out of their supply chain, how do they deliver on time and full more effectively, how do they ensure that they've got a differentiator in getting their products either in a manufacturing facility or under the retail shelves. Every motor carrier that we look -- that we work with is looking to run a more effective business, whether that's large publicly traded or large-asset fleets that have got 10% to 15% empty miles that are looking to condense that or whether that's a small owner-operator that's running a small business that's saying, "How do I take my 20% to 25% empty miles and reduce those?" And technology today has a way to really help drive that in a way that we haven't been able to in the past. I mean for as long as I've been at Robinson, 20 years, we've talked about people, process and technology being the pillars of our business, and I think that that's true today. But the ability for technology to drive performance, the ability for technology to become more predictive and more prescriptive in terms of the actions that we take versus just being a system of record is really changing a lot. You hear a lot at any conference you go to, the world's most best or the world's biggest fad, and there are some truth to the fact that there are many different platforms that are available today. I don't think that our industry is a winner-take-all. There's going to be one supply chain platform. I think the winners are those that are able to bring together the best of the best and whether that's a Navisphere system that we're building at home, connecting to a world-class CRM or a world-class ERP to try to take friction out of the supply chain. I mean I look at the companies that are in our industry today that maybe started as load boards or there's companies that started as visibility platforms or "digital upstarts" for truck brokerages. And there's kind of a common pursuit to a more efficient supply chain, a reduction in friction in supply chain and an improvement of operating performance for every party along the supply chain, and I see that as our charter. That's how we create value for our customers and our carriers. And ultimately, it's that balance of what do we build, what do we buy and then how do we leverage technology, again, is what I think is the secret sauce of Robinson because technology alone isn't going to solve a lot of our customers' problems, but how does technology then bring together the global network, the local expertise, the multiple services and some of the data advantage that we believe that we have to create better outcomes for customers and carriers. So technology is one part of it.

So part of what I'm taking from your answer too is that this is not a zero-sum game. Obviously, there are a lot of big players. You talked about the digitally enabled entrants, the Convoys, the Ubers and then a host of many others, including Amazon. Obviously, the conversation and the discussion has changed a little bit over the past few years in terms of how the market views them. What's your perspective internally about them as a competitor?

Look, I think the best way to get a perspective from them is to ask them. What I would tell you is 20 years ago, when I came to Robinson, the top 10 providers and how the probably 3PL industry was depicted then is very different than who the top 10 are today and who the top 10 were 10 years ago. So there's a natural progression and evolution about companies that have staying power, if you will, and how companies are able to compete and to evolve to continue to win. I mean if I go back 20 years ago, Mark VII was a top 10 3PL or competitor. You don't see that today. I mean the names are going to continue to change as those companies are able to consolidate, able to continue to build capabilities. There's been one consistency in terms of the top name on that list in each of the 5- or 10-year tranches over the last 20 years. And I believe that as we move forward in the next 5 to 10 to 20 years, that name that's going to be on the top of that is going to continue to be there, and that's based on C.H. Robinson's ability to continue to evolve, continue to invest in the things that our customers and our carriers value and benefit from. And if we get off-kilter or off-center from that and start to really worry about -- "worry about what others are doing" versus in the -- into the competitive landscape versus what our customers and carriers are asking for, that's where I think we introduce risk to our mettle.

Okay. I think that's fair. You are on record saying that, over time, you do expect average industry gross margins will trend lower over time, whether it's because of maybe some of these new competitive entrants or other factors. But there are, I think, a lot of investor fears that this slide is maybe deeper that then we expect or maybe something that's going to be shallower. How do you think about the extent of that gross margin pressure? Where does it stop? And how do you counteract it?

Yes, we're in a brokerage business, right? And I think you can look at any brokerage business across any industry over time. And over time, margins typically come down. I don't think this is Schwab versus E*Trade and somebody announces that it's going to be 0 tomorrow. I don't think that that's reality. We're often depicted as being the traditional broker with 15% to 20% margins. There's a lot that goes into that number. There's different mixes. I mean as we've grown our Global Forwarding business, forwarding typically operates at a higher net revenue margin than does the North American Surface Transportation. As we've grown our LTL business from $0 to $2.5 billion, LTL operates at a higher gross revenue margin than does truckload. I -- we have plenty of customers, believe me, in our portfolio that operate in the 5%, 6%, 7% net revenue margin in our truckload business that probably create equal to or greater EBITDA contribution than any of our 20% margin customers, right, because the characteristics of the freight, the way that the customers interact with us, the way that we connect with them, the way that we're able to programmatically drive efficiency into that business, we can operate it at a 5% margin. Now that the attributes of the freight are something other than that, and it's highly manual, it's highly volatile, its commitments and actuals don't match, that's not freight that we want to try to operate at a 5% margin because it's not beneficial to the investors and the owners of Robinson.

And I guess -- go ahead.

No, no, no. So in terms of what do we do to fight back, if you will, against kind of the -- what has been depicted as a secular margin compression. One is the diversity of the portfolio, right? And we think that having a diverse portfolio is an important part of our strategy. But the second piece is plan for the worst and hope for the best. And hope is not a strategy, but if we think that there's a chance that truckload net revenue per load is going to go from here to here over the course of the next 5 years, let's prepare for whatever here is, if that's $150 a load or 10% margins, pick your number. And if margins don't go there, great, we'll be in better shape, and we'll continue to expand operating margins as we have. If truckload net revenue per load goes $100, $150, whatever that number is over time, then we'll be prepared in a very, very highly efficient model to address that if and when that happens.

And I think there are a lot of people out there that are looking at what's going on in the market today and the gross margin compression that you're seeing out there right now and thinking that maybe this is a lot of that secular gross margin compression that we've been talking about. Is there a way to parse out how much of that is typical and how much of that is secular?

You are the first one to ask that, Bruce. Just kidding. I had mentioned it on the earnings call, our net revenue on a per-mile basis in truckload was almost exactly the same in fourth quarter of '19 as it was in the past 2 troughs of the truckload cycle in the last decade. And there's other moving parts to that, right? Maybe the fall has gotten shorter and mix has changed a bit. But ultimately, I mean, we can track, pick a metric, Cass, ATA tonnage demand, however you want to measure the cycle change in rate and cost and look at where we would expect net revenue on a per-mile to being where it actually lands, and it's within a couple of pennies on either side. So I'm not ready to say that there's been this broad-based secular disruption to the pricing model in North American Surface Transportation. I think that there has clearly been narrow focuses of some large CPG-oriented customers or some large customers where they have made decisions to award freight to the lowest-cost provider. That's nothing new, right? The lowest-cost provider often wins freight and awards in our industry. It's just a matter of the depth of how you would define lowest cost. So I don't think that there's been any significant secular disruption.

Okay. So C.H. Robinson has been around for a very long time. The company has seen a lot of different cycles. Is there anything about this cycle that we're in right now that we've seen over the past few years that's different from previous cycles that you've seen? Or is this kind of more of the same? And based on your experience, what is your outlook as far as 2020, where we are in the cycle, where we're headed?

Yes. So if you go back, we've got a great chart in our investor deck that shows the last decade and kind of the average increase in rate and costs and truckloads over time. And if you just take our data over the course of the last 10 to 20 years, we all know this, right? And there's a few asset-based trucking companies in the room here that knows us better than anyone. But we're in an inflationary environment -- inflationary cost environment in trucking, and that has to play forward over time. And if you look at our data, on average, rate and cost growth about 3.5% a year. So when you ask the question of what's different about this cycle, 2018 Q3 and the Q4 of '17 through '18 saw an absolute unprecedented increase in the increase in industry pricing, stable spot market, but spot leads contract. So we sell on our data something to the effect of a peak of around 22% to 23% year-over-year increases in the spot market. That's -- that hasn't been seen before as we go back post-recession era. So it took about 5 or 6 quarters to run off to that peak. It took 4 quarters to come down. So the question might become, how real was that bubble at the top, if you will? Were the underlying economics there to support it? People smarter than me will have to answer that. But what's different about this cycle and what was very stark in our fourth quarter results is we've never seen peak to trough move that quickly, right? And so our truckload net revenue per load was about where we would expect it to be in the fourth quarter of last year given the market, and our truckload net revenue per load was about where we would expect it to be in the fourth quarter of '19 given the market. But that spread of, whatever it was, 30-some percent on a year-on-year basis, we've never seen before. So as we think about how we've seen kind of Q4, as we've gone into Q4 pricing events for 2020, how we've seen volume play out in the first part of 2020, it feels more normal, whatever that is. If we kind of go back to that band of inflationary pricing over time, low single-digit pricing improvements, flat to low single digit, that feels more realistic about what we're entering into in 2020. None of us are forecasting the volatility of up 20%, down 20% that we've seen in the last couple of years. We know that as we kind of hit the -- what we think was the bottom of the market here a couple of quarters ago, our data showed us that we had retreated all the way back to some 2017-like pricing and we know that the inflationary costs associated with trucking are up quite a little bit from there, so that would tell me that there has to be an increase. Now caveat to that, if you would have asked me this question reading into 2018, I would not have said I think there's going to be a 23% price increase either.