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

Hi, everyone. I hope you've been enjoying our conference so far this year. I'm Roxanna Islam, Senior Associate to Bruce Chan, who's currently hosting another panel right now. We're joined here today by C.H. Robinson. We have CEO, Bob Biesterfeld; and CFO, Mike Zechmeister. So we've had them just about every year we've done this conference, and they've always been a really good session. They're a very large broker, and they know a lot about what's really going on in the market. So we'll go through a fireside chat first. And then at the end, we'll save some time for your questions. And you should have a box at the bottom of the -- of your screen where you can type in your questions just as we go along. And then towards the end, I'll save a few minutes, and I'll read those audience questions out loud. So I think to start things off, it might be useful just to talk a little bit about the basics and background of the company. So for those in our audience that are unfamiliar with C.H. Robinson, can you just start by giving a rundown of the company, its business segments and your overall business strategy?

Absolutely, Roxanna. First off, thank you for hosting us here. As you said, it's the -- we're at the Stifel Conference just about every year, and it would be nice, as we were discussing before, to be at Miami as it's a little bit chilly in Minneapolis today. But thanks for hosting us, and thanks for everyone for joining here remotely. As you said in your opening, Robinson's a really big broker, but we like to think that we're a lot more than that. And today, C.H. Robinson is one of the largest logistics platforms in the industry. And we have over $21 billion in freight under management within Robinson, and we're moving over 19 million shipments a year across our platform. If you think about the engine that drives our business, it covers multiple services, starting with our Global Forwarding service, which accounts for our air, ocean and customs business; North American Surface Transportation, which is our largest division, which is truckload, LTL and intermodal; and then we have our Managed Services or our 4PL business, where we operate as a software as a service and an outsource provider for some of the world's most largest and complex supply chains. We also have a Robinson Fresh division, which is where our business was started over 100 years ago, where we continued to manage the growing and distribution of fresh produce into food service and retail establishments. And finally, we have a European Surface Transportation division as well that's doing cross-border and local trucking and groupage for our European customers. All of those services are combined with our global technology platform that is called Navisphere. It's technology that's built by and for supply chain experts, and we have our entire network operating on that platform that connects over 180,000 different customers and services providers. In terms of the direction of the business and where we're going, I really see our focus being in 4 kind of critical pillars. And the first is around technology and being tech forward, really focused on building leading digital capabilities and leading our industry in those digital capabilities to drive growth of our platform and benefit for our customers. The second pillar is about being talent-enabled. And so we really believe that supply chain is a people industry and Robinson is a people company. So us having diverse and empowered teams that are focused on our customers' performance are a critical part of our future. Third is around being efficiency-minded, so us continuing to look for ways to reduce friction within the transactions to add incremental value to our customers and carriers while taking cost out of our model so we can continue to compete and win in a more primarily digital environment. And finally, it's a pillar around being growth-oriented and us continuing to be focused on taking market share across all of our global suites of services and balancing that with a focus on profitable growth. So the sum of those parts add up to one of the world's largest logistics platforms that delivers industry-leading operating margins and really strong cash flow and returns for our investors.

Okay. So -- I mean you mentioned just so many operating segments within the company. Is there a specific area that you feel has a lot of growth potential? I mean in particular, what are you most excited about this year?

Well, I think what I'm most excited about in terms of the growth potential of our business is the -- even though we maintain a leadership position and we're the largest provider of truckload services. We're the equivalent of a top 10 LTL provider, and we don't own a truck or a warehouse. We're the largest NVO from China to the U.S. So we've got these great, market-leading positions in our core services. But yet, we're only just a fraction of -- percent of the market, 3% to 4% of the total addressable market. So because of the way we operate, we have a huge total addressable market and really no limits on our ability to grow through that.

And so do you have any color about your customer end market exposure as well? And has that mix changed over the past year with the pandemic?

We've seen some negative impacts on our customer mix, or I should say, negative impact to segments of our customers, specifically that around small businesses. And we've seen a lot of those small businesses negatively impacted by the economic impacts of COVID over the course of the last year. But part of -- the great part about our model is that we don't have exposure of more than 20% to any one industry vertical, and no one customer makes up more than 2.5% or 3% of our total revenues. And so we've got a broad, diverse, global network, global services, broad base of customers and many different industry verticals in which we serve.

Okay. And then as a broker, we've already talked about how you guys have a pretty large scale in an ever-evolving industry. So can you just talk about the growth of the brokerage industry and exactly why scale is so important to have?

Sure. And again, I'd say that I think our service as a global transportation provider transcends of that just freight -- of just freight brokerage. I mean the freight brokerage share of the overall Surface Transportation dollar continues to grow at a rate ahead of the overall market, now somewhere in the neighborhood of 22%, 23% of all the freight dollars running through that brokerage. But given how we position our service in the market, we think that, that brings us a market opportunity that exceeds that. But with that being said, why is scale important? Scale is important because really, if you think about the efficiencies of our model, it's kind of like a flywheel, right? We have the largest network of motor carriers, both in truckload and less than truckload. Because of that network, we attract customers. Because of those customers that we have from the largest multinational companies all the way down to the small businesses on Main Street, we continue to bring more carriers into the network as we added again last quarter close to 4,000 carriers. And so why that matters for the carriers is that deadhead is a really important metric for the motor carriers. And these small motor carriers have 20%, 25% empty miles. Even the biggest, most efficient motor carriers are 10% and 11% empty miles. And given the size of our truckload network, we're able to help these motor carriers through our technology and through our scale to drive those costs, those empty miles out of their networks, which is good for their profitability and their yield, it's better for the environment and it's a problem that we've been solving for them for years. On the carrier side -- or on the customer side, rather, we're able to take this long tail of small carriers and make them look and feel and act like one technology-enabled motor carrier. And it's not the 85% of the trucking companies out there that are one-truck owner operators. We're able to give those carriers the look and feel of an enormously large fleet, leveraging the technology of Robinson and our operational excellence. Also within the importance of scale is data, right? And we continue to capture data across these 19 million shipments on multiple points, which help us to fuel our algorithms, to help us to get more accurate on pricing and market forecasting and to take that data to help shippers leverage that to solve their own supply chain challenges as well.

I'm going to shift topics just a little bit and start talking a little bit about the freight cycle. So I know you guys have -- you not just have scale, but you've been around for a long time and you've seen many freight cycles. And so what do you think about this current freight cycle, where we are, where we're heading next?

If we look over the course of the last 7 or 8 quarters, we've seen more volatility in the freight market, specifically the North American Surface Transportation and truckload market than we've seen it at any time in the past. '17 into '18 and the rapid increase in pricing and then the rapid deceleration on the back end of '18 into '19 and then just unprecedented run-up in costs that we've seen through the mid part of 2020 off of the base. And so volatility is the key word. I mean if we look at where the market is right now, it's -- the Surface Transportation market is still tight. We're still seeing -- as we talk to customers, they're still experiencing routing guide failures at high rates. Our routing guide depth of tender in January maintains at 1.8% in our Managed Services business, which we think is a good proxy of the overall contractual market. And while we've seen increases in truck order rates, we still haven't seen those come to -- come into the industry necessarily because of the order to build cycle. And we've got other headwinds for adding capacity in a meaningful way, too. I mean it's clear that insurance is having a real impact to small and large operators and their ability to operate profitably. You've got inflationary costs around driver wages that will continue to occur. And so there's a lot of tailwinds here, I think, in terms of how the market is going to shape up for 2021. And I think there are some real structural inhibitors for adding meaningful capacity into the Surface Transportation network, which to me feels different than where we were in '17 into '18, where it really felt like a lot of the momentum that drove that freight market up was around the expected impact of electronic logging devices, weather associated with Snowmageddon, I guess, is what we've come to know it as. But these headwinds around adding meaningful capacity back seem much more structural. And on that tail -- against that, you've got really low inventories, low retail inventories and, hopefully, knock on wood, an economic reopening in the back half of this year that could cause some meaningful demand as well.

Yes. Hopefully, that happens. And can you give us any color on just the bid process this past season? And how has that been changing recently?

So we -- between fourth quarter of last year and first quarter of this year, we would intend or we have planned to reprice about $3 billion -- roughly $3 billion of our truckload contractual rate portfolio, and that's across really our largest enterprise accounts. We've seen more movement this year than we have in years past in terms of some shippers pulling bids forward last year trying to attempt to capture the benefits of a depressed freight market in Q2 with a hope that, that would carry forward. I don't think that, that's worked really well. Others delaying bids or spacing out bids from fourth quarter and into first quarter. I would say definitely a lot more occurrence of shorter-term bids and mini bids is kind of the fallback. We worked really hard to work with our shippers to take the conversation off-line and have it be less about the bid and more about supply chain liability and supply chain performance and using our data and our technology and our scale to help them to think differently about how to navigate through these really volatile freight markets and in order to ensure that in this world that's fueled by a drive of e-commerce and the importance of on-time and full and having inventory placement appropriately, trying to follow the bid process but also have those side conversations and consult to help them be more effective.

All right. And I think you mentioned this a bit earlier, but there's just so much volatility and disruption in the market right now, especially with congestion, service issues. And just supply chains, in general, have been a huge mess. So how does C.H. Robinson help solve these problems?

So I think the #1 thing that we're having conversations with our customers about right now is compliance, right, and how can they get better compliance in a tight market, how can they ensure that they've got capacity when and where they need it to bring their goods to market. And so we do that by augmenting the highly fragmented carrier base that I talked about earlier. 85% of the trucking companies in the U.S. have one truck, right? We bring those together. So we deliver a unique capacity solution that's a blend of that access to capacity with our technology to deliver a really frictionless solution there. We do that through connectivity to our customers via our various ERP and TMS connections, ensuring that we can deliver pricing whether it be in the spot market or the contract market, in real time with guaranteed capacity when and where needed. And probably as important is how we execute the execution services is it's consulting with those shippers and sharing our best practices. We get a pretty broad view of across a large number of customers and a large number of geographies -- or geographies, customers and verticals. And so we can bring those customers together to share best practices and to collaborate more effectively.

Okay. That's great. And I think I'll switch the topic up a little bit towards margins. So C.H. Robinson, you guys have some of the best net operating margins in the entire logistics arena. So what makes this possible? Over the last decade, there's been a lot of pressure on these margins. What's the source of the pressure? And how can you fix that?

Thanks for the question, Roxanna. First of all, I'd say, even though we've had great margins in the business, we feel great urgency to continue to push our efficiency and expand our margins, and we feel like there's an opportunity to do that. So we don't take for granted what we've got, and we're working hard. And I think you've seen that over the past year or 2 when you look at shipments per person per day or you look at our productivity indexes like volume per headcount, you've seen good improvement there. But I think if you look at why Robinson has had it, Bob talked about scale. Scale is important. That flywheel effect is important. To add to that a little bit, it helps us on the buy side. So the cost of purchased transportation for us, given our scale and all the different alternatives out there, we can purchase well there, which helps our margin. And I would also say that when we go to do investments, so when we're investing in our technology, having greater scale helps us because we can spread that cost over a greater base of business. So we can get better returns, whether that be for efficiency or for growth. So those are things that really help us out. I think our innovation, Bob talked about some of that. Our innovation has been something over the years that has really helped us improve our margins. I think that the asset-light business model is important also and helps us preserve capital at times -- when times are tough. So those are things that help us out well in addition. When you look at the volatility that we've seen over the past 5 years, it's -- it has been a factor that you -- when you think about pressure on margins and you look at our margins, and the basis of your question is that we've seen pressure there, you've got to sort through that volatility because it has been tremendous. But when you get beyond that and you start looking at it, one of the things that has put pressure on our margins is also our mix of business. So we've got a lot of service lines and that's great, and it's complementary to our business, but they don't deliver the same kind of margin that our NAST business does. So as we've grown those businesses, which is certainly our intention, there is a little bit of a mix issue there, too. Now you also look at competition or some of the technology advancements that are out there, those put pressure on margins as well. But we still feel confident that because of our increased focus on cost, that we can still maintain that 40% margin on our NAST business and actually grow our margin in Global Forwarding to 30% in the long term. We delivered 32.5% last quarter, that's a strong number. It's probably more likely to be mid-20s margins in the near future, but we feel like we've got expansion opportunity on that business.

Okay. So I actually have a couple of audience questions about margins. So I'm just going to throw them in there while we're on the topic. So the first question from the audience here is regarding margins, is there an optimal market for C.H. Robinson in terms of a tight market, an economically weak market or a changing market.

I think that we've shown over the -- our history as a public company and before that, that we have the capability and the ability to grow through markets, right? Now what is the best market for Robinson? I would say the best market for Robinson is one with a strong demand economy with just sustained growth, right? I mean I think that's the best market for all of us, but that's truly where we -- long, sustained, economic-driving, tighter capacity, that certainly would be our preferred market.