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

Yes. We still -- again, we talk a lot about tech as a headline, but any of these tech investments or most of these tech investments are -- that drive internal productivity are also coupled with an intersection with something around a structural change or an organizational realignment of how a task or a process gets done. So some of the drawdown that we've seen in headcount in 2020 has been a great example was the implementation of Microsoft Dynamics CRM, right? And that was something that we worked hard to get into place. And now we've got automatic lead generation flowing up to all of our salespeople, great tech investments, but that alone wasn't going to get us the return on it. We worked to move our sales staff into territories across the globe, which then by rightsizing the sales staff to the opportunities in each geography we realized that we had a sales staff that was too large, right? So we were able to trim down the overall size of the sales staff. And now we're seeing opportunities, activities and results across our sales organization up, in some cases, 100% when compared to last year because we've rightsized that sales force by using technology and a change in structure and an ongoing process evolution on the go-to-market. So I think that's an example of how those things come together. Our goal is not to see how low we can get headcount. Our goal is to drive growth, right? And we're still twisting some of those dials to get the right level of headcount in the right roles, in the right business functions. But ultimately, we're not going to save our way to growth. We're going to grow our way to growth, but we've had to rightsize some of the roles as a part of that.

Okay. Okay. Got you. Maybe we could pivot the conversation a little bit to the competitive landscape. I think we got to go back. That's something that folks tend to get more concerned about during more challenging period, though, the freight market less concerned about it now when freight trends are good. But we're also hearing about a lot of pressure on some of your "digital competitors". I mean you guys are good broker. But these term digital competitors who are losing a significant amount of money and it does feel like they are driving up some improved financial results. What are you seeing on the competitive front from some of these new market entrants in digital brokers? Are they less authority of your size than they were a year ago, say, more so? Just curious about that.

When I joined C.H. Robinson in 1999, Sid Verdoorn was the CEO at the time. And he made a comment to me that will always stick with me. He said, "Bob, we don't need practice moving freight. We're already really good at it. So if you're going to make -- if you're going to move freight, let's make sure that it makes sense for our shareholders and for the company as well." And that still sticks with me today. Look, in terms of -- I don't know -- I've been on record in multiple formats saying that I don't think that the digital disruptors, digital entrants have brought anything particularly disruptive to the marketplace. I do think that they've been disruptive in terms of some of the predatory pricing that they've taken with some specific accounts. It does appear that, that tide may be shifting a little bit in terms of some of the investments that we've seen made in those spaces and conversations about them seeking profitability in the next 12 to 18 months. I think the reality, though, is that we sit in a super competitive and highly fragmented space. I mean there's something like 20,000 different brokers that we compete with every day, a bunch of big asset players that we compete with every day. We can't chase the competitor -- the strategies of our competitors. I just think we're best served at really keeping our heads down and focusing on our strategy and the value that we create, that I think is pretty unique in the marketplace. But look, in the end, we'll see kind of who survives this. I like our chances. I mean, I've said this to you before, Jack, I don't know if in a public forum or just us having a conversation. But if you look back at the last 20 years and you look at who the top 10 3PLs were in any 5 or 10 year tranche on that, there's kind of 1 consistency, Jack. And it's that top rung on the ladder, and a lot of the other names have changed. And I've had the opportunity in the last 20 years to have those conversations about is Mark VII going to disrupt C.H. Robinson or is Coyote going to disrupt C.H. Robinson or is XPO going to disrupt C.H. Robinson, is Convoy or Uber going to disrupt C.H. Robinson. And our growth record has been pretty spectacular through that period. We've had up years and down years. But in general, I think we've done a pretty good job in maintaining our industry-leading position, and I certainly intend that we'll do that as well.

Okay. I think that's right. So maybe last question on the competitive front, Bob, and then I'd like to ask Mike a couple of questions on costs. But do you feel like -- do you think there's been any real change -- structural change in your net revenue, profitability per load as you look cycle to cycle here because of what's been happening on the competitive front? I mean, it's hard for us to tell because we don't see your shipment count. You do. But I mean -- I think that's the question I get a lot from investors. Has there been any structural change in profitability? What are you -- how would you get to that question?

So when I think about the structural marketplace that we serve, I don't think that there's really anything that's changed structurally in the -- this question is typically geared at the truckload market, right? 85% to 90% of all the truckload freight in the U.S. is still executed under the terms of a contract with a carrier or motor carrier or broker, typically 1 year in contract. We've still got a highly fragmented carrier base, and there's really only a few big carriers. We've got a highly fragmented broker base. There's only a few big brokers. The barriers to entry are maybe a little bit higher today because of some of the regulatory things that we talked about earlier, the insurance cost, the cost of execution. So those things all seem like common -- call it those kind of common currency across the past decade. I think that the digital transformation in our business is real. Structurally, I think that is real. I mean -- and that, to me, is going to be the dividers of the winners and losers in this industry over the course of the next 5 to 10 years. I think those that can embrace digital and think differently about digital and supply chain are going to have a distinct advantage. I think others are going to fall by the wayside and disappear. The -- if I peel back the other structural thing, if I think about this Robinson's margins, our -- we haul more short-haul freight today than we ever had in any time in the past. On average, our -- the average length of a load that we execute today is about 150 miles shorter than it was 8, 10 years ago. And the reason that that's important is that we think about our profitability on a per mile basis, much like a trucker does. And less miles equals more pennies per mile that we earn on that. And so structurally, that shift has gone from 800 miles a load to 650 miles a load, whatever those numbers -- wherever those numbers sit today, that's probably the biggest structural change. So if I think about where does -- so what does that all add up to? Q3 of this year, our net revenue per load was the lowest it's ever been in truckload. I don't think that's the new normal. I don't think that's where we fall to there and maintain. But at the same time, if I go to over the tail end of '18, beginning of '19, and we were having conversations about truckload being at record highs, I don't think we're going back there for any real extended period of time either. I mean that was the exact inverse of this, right? You had your contract rates and costs dropped precipitously. You experienced margin expansion. And so I think it's somewhere in the middle of there. That's such a compound answer, right, take the high, take the low and say it's going to be somewhere in the middle. But I do think that, that is somewhere where we land, and it's north of where we're at today.

Okay. Okay. Got it. Got it. Other than just to kind of -- we'll follow-up on that. Other than the changes to the -- that you've seen in sort of length of haul, you don't really feel like there's been any deterioration in your core profitability per load. How these cycle explains out? I mean we're talking about the core profitability per load.

Now if you normalize it, Jack, for -- if you throw out the high and you throw out the low and you normalize it for the change in length of haul, our net revenue per mile trades in a band about that wide, again, taking the lows and the highs out. And there's just not really anything there that would indicate a structural shift. I think the positive note of all that, if you believe that to be true, which I do, is we're doing more work today, and hopefully you'll transition this with Mike, around optimizing our cost structure. So that if we -- if by chance or in tenant, we do get back to those higher levels of net revenue margin, that's going to generate a lot higher return on the EBIT line.

Okay. Got it. Absolutely. Well, Mike, maybe we can shift gears to you for a moment here and talk about costs. You guys have done such a great job this year managing the business through an extremely volatile sort of period. I'm just curious about the expense structure. There are a lot of moving pieces between temporary costs and the permanent cost savings plan that you guys are executing on. I think there's about $90 million in temporary cost savings this year. Can you walk us through just for a minute about how -- the themes of how those sort of come back into the business over the next couple of quarters as things begin to normalize here?

Absolutely, Jack. So just as background, we did in our Q3 call, like you said, we're expecting to take about $90 million out in short-term or temporary cost savings for 2020. And through Q3, we had delivered about $80 million of that, and that was split $40 million Q2, $40 million Q3, so at least $10 million more for Q4. And if you look at the primary drivers of that and you look at when they come in and out, so the first 1 would be on the personnel side, primarily driven by our furloughed employees. And for the most part, those employees are back to work. And they came back end of July time frame. So those savings will not be part of Q4, and they won't be part of next year. Another major driver was the suspension of our 401(k) match in United States and Canada. And we expect to lift that suspension on January 1. So those savings will be in Q4, but will not be in next year. And then another driver is travel. And travel Is kind of a wildcard. Maybe we are optimistic early on thinking that by Q4, we might get back to doing a little more travel. But given the impact of the pandemic and the hold that it's kind of taken, that's not going to happen here for us in Q4. And really, the extent to which that savings rolls into next year is really determined by the impact of the pandemic. So that's 1 where we'll see that savings in Q4, and we'll see it for some period of time into next year as well.

Okay. Got you. Got you. So I think, structurally, the pandemic has shown a lot of folks were there some major -- some potential major cost efficiencies we had to the business. We've seen that across more of our companies. I think on the third quarter call, you said that you expect to achieve that $100 million permanent cost reduction goal by mid-2021, which is, I think, correct me if I'm wrong, about a year ahead of schedule. Does that mean that you guys have -- I guess, I was confused if that was an acceleration of the plan that you're able to get that $100 million earlier, but there's really nothing in addition to that? Or were you able to just find more savings, and you would still expect to continue to be able to remove costs -- more permanent costs over the next 12 months that could be an addition to that? I don't know if that question makes sense. But I'm just trying to get a feel for is that $100 million potentially something greater than that when you think about additional cost savings that perhaps you've identified?

That's a good question. And the short answer is a little bit of both, but let me kind of get into it. And maybe just to recap, we do have $100 million of cost savings earlier this year. We said it would take us 3 years to do it, so all the way through to the end of '22. Last quarter, we said, you know what, we'll do it in half the amount of time. So we'll get there in mid '21, and we'll get there by delivering 2/3 of it in 2020 and then the remaining 1/3 in the first half of next year. But specific to your question, we are both pulling forward some expenses, some savings that we had planned. Think about that as headcount reductions, furloughs getting converted to permanent headcount reductions and the like. But we're also, because of the learning with the pandemic, finding other areas of expense savings. So those are new. Maybe the best example of that is travel. And we think that going forward now we probably only need half the travel spend that we had in 2019 on a go-forward basis. So that's excluding the fact that we're down even more significantly than that now. But once we get back to whatever you call the new normal, we think we'll have a run rate of about half. So while we're delivering that $100 million in half the time we originally anticipated, by no means says that we're stopping. We're not stopping our cost savings work. This is important to us. Maybe as an example, we're also looking at our network footprint. We've learned and been pleased with our ability to get to remote work. And we think going forward, that will have implications on our footprint. And as background there, our properties are almost entirely leased. And so we -- while we may have to wait out a lease term to get savings, we don't have to sell a property in order to deliver that savings. And as I mentioned in the Q3 call, occupancy runs 15% to 20% of our SG&A expense. So there's some opportunity there. But mainly -- and you heard Bob talk. If you think about our tech spend, so we're not even halfway into the 5 year $1 billion tech spend commitment. But on that spend, we need to justify the spending, and that's either going to be through growth or cost savings. And so we've got quite a bit of process redesign and automation left in front of us here as justification for the component of that IT spend that's really around savings. So we're on a journey here. That journey continues, and it doesn't come to an end in mid 2021, for sure.

Okay. All right. So I guess, kind of, putting it all together, Mike, as you think about the cost structure of the business, today, netting out all the puts and takes, in terms of these multiyear investments you're making, sort of, probably spend more on the go and your cost savings program, the incentive comp is at the end. I mean I've got to remove all that noise and just trying to think about more structurally. If we go back to a year like 2018, you had $2.7 billion of net revenue and you were able to generate just under 34% net operating margin, I think 33.7%. If we get back to a similar level of net revenue in the future, would you say that your net operating margin would be better, worse, the same? I'm just trying to think about structurally what's happening on the cost side.

That sounds like a clever way to get us to give you some margin guidance for next year, Jack. And some of my comments have talked about where we think we're headed here, and I can provide some more color on that. If you take a $2.7 billion net revenue in 2021 and you compare it to 2018, there are a few things that I would comment on. So number one, there's a little bit of margin mix in there, right? Our Global Forwarding business is bigger today on the top line and much bigger on the bottom line. And our target EBIT margin in Global Forwarding is around 30%. But I think in the near term, you're talking about mid-20s, whereas in NAST, we're talking about target of 40%. So there's a little bit of a mix shift there. You talk about tech spend. And on the tech spend side, we're running, call it, 250 basis points as a percent of net revenue higher than what we were in '18. And so we believe in that tech spend. That tech spend will generate results, but there's a lag there. And you've seen that lag in where we're headed. And so when you rack it all up and you said, I've talked about the incentive headwind for next year, our $100 million cost savings will allow us to cover that incentive cost, for sure, for next year. But it's probably not enough to cover us for the incentive cost increase and the one-timers that come back in terms of savings from 2020. And so 2018 is a pretty decent comparison. So one of the ways you could get at it is if you go back to 2018, which was a good year for Robinson, and you look at total personnel expense per headcount in 2018. And then you put an inflation factor on it to get you from 2018 up to 2021, that's going to give you a pretty good estimate of total personnel expense in '21. Now of course, there's less headcount in '21 than there was in '18, but that's a way that you'd kind of get at where we'll land.

Okay. That was super helpful, Mike. I really appreciate that detail. Now to do something else, really kind of back into all that, but at least you gave some benchmarks to work around. So that's great. Okay. So we're down to the last, call it, 5 or so minutes of our time here. So I guess, maybe one last question for you, Bob. And then if you have any closing comments, we'd love to hear those as well. But if I take a step back, I really love it in the last couple of minutes here to sort of hear your vision for C.H. Robinson over the next 3 to 5 years. You've been touching on it this whole conversation. So just sort of hear you sort of put a bow on it and help us be able to kind of think about it. My sense is that all the efforts you guys have been sort of putting into the business over the last several years, you've really been to put C.H. Robinson back on control of its own destiny versus the whims of the freight cycle. So would love to kind of get your take on sort of where you see this business heading and as you look out over the next several years.

Yes. Well, thanks for letting me close with that. The thing that I would say, I've been in this role now for coming up on a couple of years now in May of next year. And the thing -- there's 2 things that really get me excited about our organization. That -- first is that the mission, vision and the values of this company had been in place, I think, still remain in place, and they remain a driver of who we are, the culture of our organization, and it's what makes us a great company, and it's why people want to come to work at C.H. Robinson and why we've been able to become who we are as an organization. Second thing that I get really excited about is the total addressable market that sits in front of us on a global basis. I mean, our ability to grow both organically and inorganically over the course of the next several years will not be limited by the size of the market. Even when we're the largest in a market like we are in North American truckload, we've only got 3% or 4% share. And we don't even really approach that kind of market share in any other area of the world. And it's a tremendous growth opportunity. But if I look at C.H. Robinson and the C.H. Robinson that we're building for the next era, if you will, whether it's Robinson V3 or Version 4 or Version Max, it comes down to kind of four key pillars. And the first is around being called what I'd call tech forward. And that's really about leading our industry and digital capabilities that are driven around driving the growth of our platform and improving our own productivity, right? So this concept of driving the growth of the platform to be the most connected, the most efficient, the most digital, those are key for our future. I think about things like freight quote by C.H. Robinson. I think about the launch of our Procure IQ product. I think about the connectivity that we have to all the ERPs and the TMSs and really connecting those pipes as examples about leaning in and being really committed for leading our industry in digital capabilities. Second, and of equal importance to that, though, is about being talent enabled. And we know that our future success is going to be driven by diverse teams that are performance-driven, incentive for great performance, right, incentive for great performance, rewarded for great performance and empowered to deliver really strong results for all the stakeholders that are involved in C.H. Robinson, our carriers, our customers, our communities and our shareholders, right? And I'm committed to ensuring that we've got -- we're the team with the best players because in all my years in playing sports and leading businesses, the teams with the best players typically win. And so we're going to be talent enabled. The third thing is that we're going to be efficiency minded, right? And that's efficient through some of what Mike talked about, simplified, standardized processes that eliminate waste and reduce our cost to serve. And we're taking an engineering, manufacturing type of approach to that and really looking at lean principles across our organization to ensure that we can deliver the lowest cost structure that enhances the greatest return. And the fourth pillar of this is really about being growth oriented, Jack. And that's what I tried to talk about a lot is we're not going to save our way to growth. We're going to grow our way to growth. And we talk in all of our leadership meetings about taking share and achieving volume growth across all of our services on a global basis, while effectively managing margins. And that second piece is of critical importance, right? I'll go back to my comments from June of 1999 from Sid Verdoorn. We don't need practice moving freight, but we do need to grow share and effectively manage those margins in the process. And so when I think about how those 4 pillars come together and the combination of those, I think that's what leads us to be able to deliver an industry-linked product and service that customers want to work with, that carriers want to work with and also that delivers industry-leading operating margins and cash flow and return for our shareholders. So those are really the 4 areas where we're investing our time and our mind share ensuring we're leading the industry in digital, ensuring we've got the best team on the field. We're focused on the lean principles, the efficiency -- of being efficiency minded and being customer-centric and growth-oriented on a global basis.

Okay. Well, Bob, thank you so much for those comments there. Those are very helpful. Mike, thanks for your time. Bob, really appreciate it, guys. And thanks for attending the conference this year. And looking forward to being in-person and seeing you soon. I hope you guys have a great Thanksgiving, and a great rest of your day. Thank you, again.

Thanks, Jack. Take care, everybody.