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

All right. Well, welcome back, and good afternoon, everybody. It's Chris Wetherbee, Citi Transportation, back with another exciting presentation. We've been going pretty much all day today in -- on the freight side, and it's been a great session so far. Really excited for the next one. We have C.H. Robinson joining us for our conversation. Now we're really excited because we have Bob Biesterfeld, the President and CEO of Robinson joining us. I think a lot of you guys know Bob. But Bob, thanks so much for joining us this afternoon. Appreciate it.

Yes. Thank you, Chris, and welcome to everybody that's joining virtually today.

Yes. So yes, this has been an interesting day so far. We've been kind of covering a lot of topics. I think there's a lot out there to discuss. But maybe probably the best way to get started here is to maybe talk a little bit about sort of the shorter term, and then I want to sort widen out the lens quite a bit to talk bigger picture. But I think brokerage, obviously, in the fourth quarter, saw some interesting strengths where we saw a disruption in the market, tightness of freight, strong demand. A lot of that's carrying over into 2021. So I don't know if you could -- and I know you don't give specific sort of intraquarter updates. But I think could you maybe help sort of set the stage for '21 from a brokerage perspective and maybe how you think the market might develop over the course of the year. I think that's a good place to start.

Sure. I mean I think you hit the nail on the head, Chris, in terms of the fourth quarter dynamics. I mean we saw price increases in the fourth quarter that were at the highest rate than we've seen over the past decade, right? And started in the third, continued then into fourth, and that strength is really -- has really carried into 2021. As I think about the dynamics specific to the brokerage space, the truckload space into '21, there's a number of things that are converging that would lead me to believe that there are some real structural tailwinds for the brokerage business, for the transports in general. Obviously, you've got a strong consumer right now. You've got the e-commerce pull-forward that I think is really changing the consumer demographic. Lots of demand on that side. We've got a global constraint around supply, certainly on the truckload side. Those barriers of entry have, I think, gone up a bit more than they have in the past, which I do think it's structural, whether that be increases in insurance rates, the drug and alcohol clearinghouses, potential barriers for entry or recycling capacity out. So if you think about a strong demand environment that we're in today, inventories being meaningfully lower than targeted, constrained supply with structural headwinds of supply coming back in, with potentially a strong back half of the year with the "reopening", I think we're set up for some really nice near-term environment for our business, certainly, on a global basis.

Okay. Yes. No, that's a helpful backdrop. I guess then maybe sort of zeroing in on what Robinsons' opportunity is within NAST and as you think about sort of the development of the business, as we think about the cycle, so truckload pricing has obviously begun to improve, we started to see that come through with contract rates reported by some of the larger carriers beginning to move in the right direction. The outlook for this year is quite good. So can you maybe talk a little bit about your book of business? What's your opportunity here in the relative near term, let's call it, the next couple of quarters, the first half of 2021 to reprice the business? And what do you think the contract business is capable of in terms of rate increases?

Sure. So as you know, our contract business typically ranges anywhere between 50% of our book to 70% of our book, kind of depending on market factors. I think we exited last year about 55% of our truckload business being tied to contracts. I'd expect that to settle in somewhere more in the 60% range as we cycle through this year. We started repricing. I'll quote some numbers. And I guess, I'd say keep in mind, these are representative of our enterprise 700 accounts, our largest 700 accounts. We intended to reprice about $1.3 billion of business in the fourth quarter -- truckload business last fourth quarter. About $300 million of that rolled forward to this quarter due to mini bids and delays and some shipper decisions. But net-net, across Q4 and Q1, we'll reprice about $3 billion worth of freight across that enterprise group of clients. And much more of the business will reprice on a local -- with some smaller client relationships. So a pretty massive amount of repricing, call it, 60% of our book we'll reprice between Q4 and Q1 on the contract side. In terms of directionally, the thing that I think about in our industry is cost always leads price, right? And we can look back over time and spot market always leads the contract market. And the fourth quarter of 2019, we're in an environment where the spot market was well below the contract market. And the expectation going into '20 was that, that was going to continue to drag on the contractual marketplace. Obviously, that ended up being something very different, given the market dynamics of last year. But right now, we're in a place where the spot is leading contracts higher. We're expecting pricing to reset in the high single-digit to low double-digit kind of on average. Obviously, each customer is its own case study to that end, depending on the types of freight that they have and what our relationship is with them. But if you look at the trajectory of pricing that was up, whatever, 27% in third quarter, 28% in fourth quarter, we don't think it's going to be that type of a curve, but it will more flatten out. It -- kind of in line with where pricing probably should be if we look at it over kind of the average growth rate over time of 3% to 3.5%.

Okay. Okay. That makes sense. And I guess maybe if I go back to the fourth quarter, I think you talked about some delayed opportunity for repricing. Can you dig in a little bit on sort of what the -- what caused the delays in terms of sort of the repricing of some of that business? And then I do want to talk about volume first -- volume next, but maybe we can talk about sort of pricing in the fourth quarter, maybe kind of what happened there?

Sure. Shippers will always work -- and I don't say this in any way to be critical, but they'll work in their best interest, right, and whether that means at times pulling bids forward, which we saw some shippers attempt to pull bids forward into the second quarter of last year when the freight markets were really depressed. And then we saw some shippers delay their bids from fourth quarter to first quarter, hoping that they wouldn't be purchasing transportation at the peak. And the markets have remained largely unchanged from Q4 to Q1. So we've been able to work with those shippers to put kind of bridge pricing in place, short-term agreements in place. So in some cases, exiting a business where we couldn't find a mutually beneficial, level playing field. But eventually, it will all reprice. We're working with our shippers to take some of the conversation off of just that annual RFP. Because I think with all of the volatility that we've seen from the end of 2017 through today, probably in no time like I can think of in the past, one party has run the risk of really being disadvantaged by that annual contract, whether that be the carrier or the shipper, just given the volatility that we've experienced and the change in rate and cost over the past 3 years.

Okay. Okay. That's helpful. I appreciate that perspective. I guess when we think about what happened from a volume standpoint, and the reason why I want to ask is I do think it's important to understand as we look out to 2021. First, maybe let's just talk about the split of TL versus LTL business within your portfolio. You've got a lot of growth on the LTL side, and you contracted on the TL side. So can you talk a little bit about, sort of, what's driving the dynamics between that mix shift within it? And then maybe how you see -- let's start with the LTL side, what is the opportunity on the LTL side for you in 2021?

Yes. So first, I'd say I think both businesses are really, really healthy. They're definitely at different parts -- different paths in their growth curve. So a lot working in our -- excuse me, a lot working for us in the LTL business. One, we have the acquisition of Prime that we finalized in February of last year. And so Prime was accretive and additive to that business. It really brought together their expertise around retail consolidation with our expertise. And we had some expertise there as well with what we do with middle mile and distribution. So we've got a really robust retail product there that I think has driven a lot of growth throughout the last year. And we expect that growth to absolutely continue. We have a number of different retailers that we're working with in different phases of pilots that have some pretty significant nationwide rollout capabilities for that business model. Secondarily, obviously, e-commerce and final mile helped to really bolster our LTL results over the course of last year, and we're capturing that business on an ongoing basis. I think everybody on the call like me knows this, but the pricing dynamics between LTL as well as the capacity dynamics between LTL and truckload are quite different. And given our ability to maintain those relationships with the regional and national LTL carriers, the business really flowed through nicely in a mutually beneficial way for the carriers and for our customers. On the truckload side, I've been asked the question a lot in the last couple of conferences around what happened to truckload volume in the fourth quarter. Why is it that some of your peers that -- publicly reported very different volume trends? And if you peel back within our truckload business, our transactional or spot market business demonstrated very similar growth trends as did many of the other companies that have reported robust, double-digit, strong volume growths in that business, but were offset by some declines in our contractual business as we work through both repricing and kind of managing through acceptance to mitigate some risk. Normally, our truckload business ranges somewhere in the range between 5% and 7% negative files. Through the third and fourth quarter, that got up into the upper teens, which are historically high levels. And so we worked to draw down those levels of negative files, which had a negative impact on overall volumes, but was a positive thing for the net results of the organization and for our shareholders.

Okay. And how do you feel about your ability to capitalize on transactional business during the quarter? That seems to be an area where some of the peers had really, really, really robust volume. So where do you see? Do you feel like you've got your fair share of transactional business? Or do you think that there are other factors that play there?

Yes. Like I said, our transactional volume grew at strong double-digit rates. In a compressed or where there's a finite amount of capacity in the overall marketplace, we made some intentional decisions to honor those contractual commitments. If there was 1 truck and 2 loads, so to speak, a contractual long-term customer relationship versus a spot market opportunity, we certainly leaned more towards protecting those customer relationships that are long term. I think it's why we maintain such a strong retention rate of our enterprise accounts. I think we're at 98%, 99% of our top 500 accounts that we've maintained. The average tenure with those customers is over a decade. So I can't guarantee that, that will bear fruit, so to speak, in every case. But I know that many of the customer conversations that I've been in so far this year as part of annual business reviews and in conjunction with bids is those customers were not only appreciative of the stance that we took on the contractual side, but also are responding in kind -- in terms of how we're thinking about our business together in 2021 and beyond.

Okay. Okay. Yes. No, that's helpful. And then maybe just sort of rounding out some of the NAST conversation, at least to some extent. As we think about 2021, do you think you can grow both sides of the house? So obviously, the comps change in February. So with the Prime acquisition as you lap -- so we're kind of at that point now. So go forward on the LTL volume growth might look a little different than what we've seen over the course of the last several quarters. But at the same time, we're still in a very robust demand environment from a freight standpoint. So do you think you can grow both LTL as well as truckload volumes in 2021?

I do. And even without the Prime comps, we had really, really strong organic volume growth in LTL last year. And I would -- I don't see any reason why that volume growth shouldn't continue throughout the course of 2021 with the implementations. We've got some large outsource-type relationships that have come on in LTL. And I hope, too, that the small businesses start to reopen here a bit in -- as the year progresses. And that supporting small businesses through our Freightquote by C.H. Robinson product in both truckload and LTL, we see as being a tailwind for us as well. On the truckload side, we absolutely intend and are focused on growing volume, but it will be a balance between ensuring that we're getting the net revenue on a per transaction basis to the -- to an acceptable level as well as growing volume through taking share.

Okay. Yes. No, that makes sense. And I guess, when you think about the margin profile, the gross profit or net revenue margin, however you want to think about the sort of the terminology around the margin dynamic, as we think about 2021, in previous conversations with the company, it sounds like sort of "normal year" is probably what you'd expect as you see the cycle kind of mature and pricing on the contract side begins to come up in NAST. But does that make sense? Is that sort of in the sort of like 15% to maybe 16% range? I don't want to pin you down to a very specific number if you're not comfortable, but give us a sense of how you think about the NAST margin profile for '21.

So there's puts and takes to it in terms of whether that's 15% or 16%. Obviously, there's a lot of things in play there. Fuel, as an example, is in play. I mean if we get into an environment where fuel costs start rapidly rising, that has a downward pressure on the net revenue margin. But it doesn't change the net revenue dollars on a per basis shipment. And we really try to manage to that dollars per shipment versus the net revenue margin because it's just easier to focus in on. The mix of our business will continue to dictate that. While 15%, 16% may be kind of the "normal", we don't earn 15%, 16% margins on our largest, most complex accounts, right, because they are highly integrated, they're highly efficient, they're highly automated. Those may be high single-digit net revenue margin accounts but equally, it's profitable on the back end. And so there's a mix between growth rate in LTL versus truckload, there's a mix between size segment and automation of the accounts. But net-net, I think what I feel really good about, Chris, is that from bottoming out in July of last year in terms of net revenue per load, net revenue per load in our truckload business has increased every single month since then and into 2021, and we've continued to see improvements in our net revenue per shipment in LTL as well. So we'll stay focused on optimizing net revenue dollars per transaction in those 2 critical modes. And the net revenue margins will kind of shake out where they must. But we'll stay focused on taking costs out and optimizing that operating income as a percentage of net revenue and work on getting NAST back closer to 40%.

Yes. Okay. No, that's helpful. And then coming back to the point that you made about the negative loads and sort of bringing some of those -- the negative [ 5% ] down from the high teens to something that's maybe a little bit more normal, which I think is, like you said, 5% to 7% historically. It would seem like that would provide a pretty decent tailwind from a margin standpoint to the segment just because simply you're removing a higher percentage of negative business. So I just want to make sure I'm thinking about that appropriately. Is that something that gets recognized relatively quickly as you go through that process? Or is there some sort of lag that ultimately kind of flows through?

No. It's definitely a significant contributor to the overall -- the averages of net revenue. And I can say it was in excess of $150 million in net revenue per shipment losses tied to negative files last year. And so you can think about drawing those down to more normal levels has a significant impact on the profitability of the business.

Okay. And just to wrap that up, what do you expect to be back to the "normal levels"?

Obviously, as we reprice things in the fourth quarter and the first quarter and throughout the course of the year, we see -- we anticipate, based on what we think about the marketplace, that, that will only continue to get better as the year progresses. Perhaps back to more normal levels by the second half of the year would be our targeted goal there.

Okay. Yes. Got it. Okay. I'm just looking at some questions that have come in here, just one other one on NAST. I don't want to go -- before we go away from it. Market share on spot versus contract, I guess, you've talked about this a little bit, but I don't know if you could put a little finer point on what maybe a normal or a more normal year might look like. Is that going to be something closer to, I think you said, around 60-ish percent or so? Is that kind of the right way to think about the balance between contract being 60% and spot being 40%?

I think it really depends on where the overall market shakes out because we tend to follow the market in terms of what our distribution looks like there. So the more effectively the routing guide perform in the truckload market, the higher percentage of our business tends to skew towards contract. So if I just think about the general market, 85% to 90% of all truckload freight moves under a contract term in typical markets. And obviously, this market isn't anything but typical the last 12 months, highly dislocated. And so I don't know industry-wide where that landed. But as that pendulum swings back towards more normal routing guide performance, albeit at higher pricing, we would anticipate that our book would lean back that direction as well. We'll never get to the industry average of 80% or 90% simply because we participate with so many small businesses that just don't purchase transportation in that mechanism because of their size or their access to capacity.

Okay. Got it. And someone is reminding me here on the questions, I asked you about truckload and LTL volume growing. I didn't ask it specifically that would you grow outside of what the industry is expected to grow. Do you think you can gain share in 2021?

I do. I think we've certainly proven that, in LTL specifically. But if you look at our blended growth rate in truckload and LTL over the past 8 quarters, it exceeded that of the Cass Freight Index in terms of the volume growth there. So in truckload, we're 3% of the overall marketplace, some might estimate 15% of the brokerage marketplace. So given our services and the way that we bundle our global services, complement it with our with our personnel and our expertise, complement it with our technology, we think that our growth can transcend that of the common definition of the brokerage marketplace. So yes, we don't see growth as being limited by our current size.

Okay. Got it. That's helpful. So let's sort of pull the lens back a little bit. Still focusing on NAST and sort of the truckload market and talk a little bit about some of the bigger picture stuff. So I guess technology is becoming a sort of bigger thing. And for years, we've been talking about sort of, I don't know if you want to call them technology-based competitors or what have you. I think everyone uses technology in some way, shape or form. And I think at times, it can be overstated, the technological prowess of some of the newer entrants into the market. But how do you think about -- what are your specific initiatives that you're focused on in terms of driving tech? You've talked about more automation in terms of basically automated loads running through the network over the course of the last several quarters. But sort of what's this year and maybe a couple of years beyond look like in terms of more automation moving into brokerage in general look like?

Yes. The way that I think about it, Chris, and I think that somehow down the road, we got the narrative spun out that this was an industry that was being disrupted. And really what I think this is, is an industry that's evolving at a pace and a speed faster than we have in any time in the past. But it's really a natural evolution, from the DAT truck stop, load boards, to the Internet, to freight matching platforms, to progressive brokerages with apps and websites, to today, given the fact that the industry has adopted visibility, mobility, logging devices and stuff, there's so much data, and the cost of compute is coming down, we had this opportunity to just really rethink the business processes across the entire supply chain and take costs out to improve efficiency and to drive growth and do it in an exciting way. So for us, that investment in technology is complemented with, again, great people and a network of experts, but we're focused on taking friction out of those points in the supply chain, how do we become the easiest company to work for, for our shipper customers. Whether that's connecting via their platform or connecting the hours, we want to ensure that we're embedded with real-time cost, API connectivity with rating engines for when they need to go to the spot market, but also working with them in ways when they have preferences in the contract market and bringing unique creative solutions like Procure IQ to life within their ecosystem. So on the carrier side, we know that there are a number of carriers that prefer -- with us in a frictionless environment. They want to go onto an app or a website and click a button and shop between us and other 3PLs or other resources and click a button and select a load. But we know that, that doesn't necessarily apply to all types of freight or all carriers. So again, we want to work with our carriers in the way that they want to interact with us. And I think I said it in the fourth quarter call, and maybe I'll update. Today, we're at a point in the U.S. where 85% of our truckload freight, 1 pick, 1 drop freight and nonhazmat, is available via our app or via our web for automatic booking by carriers. And that's a huge step forward in terms of our capabilities to deliver that. The adoption rate certainly hasn't matched the amount of freight that we're putting out there. But every day and every week, we continue to see adoption pick up and we hit new highs. And so more and more customers connected digitally via API or into their TMSs, their ERPs, more and more carriers coming in digitally and connecting and booking freight, which is helping us to demonstrate some of the productivity gains that we showed in terms of net shipments per person, per day and that NAST productivity index, which lowers our unit cost per shipment and keeps those customers and carriers inside the flywheel of our ecosystem.