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

Hi, everyone, welcome back. It's Jason Seidl, Cowen Senior Transportation Analyst and one of the hosts for our 14th Annual Global Transportation and Sustainable Mobility Conference. Cowen, once again, is honored and pleased to have C.H. Robinson present at our conference. Representing C.H. Robinson is President and CEO, Bob Biesterfeld. Bob, welcome.

Thanks, Jason. Good to be with you today.

So let's jump right into a little bit of a fireside chat here. Some of your peers how about won you in terms of volume over last year. What should investors expect going forward in terms of market share at C.H. Robinson versus some of the other large brokerage players?

Yes. So as we think about our business going forward, Jason, we still do believe that there's a significant opportunity for us to continue to grow and take market share organically in the service transportation market, both in our truckload and less than truckload business. If we think about the addressable market for Robinson, it's certainly one that is almost limitless in terms of how we go to market. We would expect as our volume to grow consistently through cycles from quarter-to-quarter sequentially and year-on-year, which we demonstrated last quarter, and we'd expect to moving forward. I think for our truckload volume, I think mid-single digits is kind of the right way to think about where we're managing the business to and having really profitable volume growth in that mid-single digits range. The products and services that we deliver to our customers, the 100,000 companies that work with us are continuing to win in the marketplace and our ability to integrate our services across air, ocean, customs, LTL, truckload is just another way that I think is unique for us in the marketplace to drive that volume growth.

And just a reminder for investors out there, you can ask a question over the conference webcasting app or you can ask a question via e-mail at [email protected]. Bob, you mentioned growth and taking market share, do you think that you're going to be taking market share from sort of everyone or is it just easier to take market share from some of the less sophisticated brokers that are still out there in the marketplace?

In our business, based on how we go to market and with kind of our balance between both the spot market focus and the contractual focus, it's often unclear who we're really competing against depending on where we're engaging. If I think about upstream with some of our largest global strategic customers, when we go to market in truckload, more often than not, we're not really competing with other brokers. We're competing with large assets, right? We're competing with those companies that are willing to work with the large shippers to make forward commitments to both rate and price, will that be live load or drop load, drop trailer, et cetera, we really compete directly with many of the large asset-based players. As you go downstream into some of the smaller businesses, that's likely where you would see a higher likelihood of competing with some of the smaller niche, your local brokers. But again, based on that go-to-market between contractual and spot market, we really don't think that we're limited to kind of that definition of the 30% of the freight that oftentimes is referred to is that, that moves through brokerages.

Got you. You guys have always had good technology. But I think the market is sort of -- that mean the industrial market has sort of overlooked that. How do you think you measure up to some of your larger competitors as well as some of those newer entrants that really did a good job with PR, if you will, early on in terms of your tech capabilities? And do you think that's one of the more misunderstood things about you in terms of investors?

Well, I think we're well positioned right now in terms of the technology and engineering talent that we have at Robinson and the products and services that we're delivering. We're a couple of years into kind of a public commitment around increased investment around our technology spend in order to really invest and create capabilities for our customers, our carriers and our employees. And it's clear that in today's digital supply chain technology is an even more critical part of the solution set that we deliver to our customers, but it's just one part. And we really stay true to the fact that we believe that this is really about people and technology, right? And when we talk to our customers, the thing that they say is the #1 reason why they do business with Robinson, the #1 reason to keep coming back, the #1 difference maker. It's about people and supply chain talent that are additive to their teams that we work with. So it's not to dismiss the importance of technology, but only to say that technology on its own can't solve many of the most complex supply chain problems that we're tasked to work on every single day. So as we think about our investments in tech and kind of where we stand, I feel good about the platform that we have the data, we'll talk more about the importance of data and scale on that data and the ability to use that data asset to guide better outcomes and solutions for the customers and carriers. We've put a lot of focus on our technology platform as being what we would call the most connected, right? So having over 200,000 companies connected to that Navisphere platform we're literally moving billions of digital transactions across that platform on an annual basis. In order to do that, it takes scale. It's a lot of investment to ensure that, that technology is always on. It always works. It's highly reliable. And then we can scale from the millions to the billions of the transactions. And today, on that platform, we've got, over the last 12 months, some $23.5 billion worth of freight under management. That freight under management garners a lot of data that we can use to help informed decisions that represents about 19 million shipments. So what do we do with that data, right? So the data, how do we think about utilizing that data asset from end to end. First area of focus is on improvement of pricing, right. Helping us to be more accurate in the marketplace, leading to higher win rates, allowing us to leverage that pricing assets so that our customers can better understand trends in the market so that they can better plan and better forecast. We think about quality through using that data to predict service issues, so the customers can be more informed of trends in their business where they might face adversity or have to react to potential risks. We think about that data helping us to improve yields, both for ourselves in terms of our results, the yield of our carriers through more effective and efficient matching and the yield of our customers through their ability to think beyond just rate per mile and really address some of the core areas of supply chain improvement. We really build our tech to support our execution-based culture. I mentioned that really about tech plus people, and that's an important component of our messaging. Unlike some of our competitors, whether it's emerging or existing, we've really taken an approach to our technology investment that we're going to meet our customers kind of where they want to buy and how they need to be served. We know that across the 130-some thousand customers that we serve, we serve a lot of Main Street businesses, right, that are fairly simplistic in their supply chain needs. What they want is reliability, ease of use, access to capacity, access to some scale that they're not able to accomplish on their own. And so we deliver that to the potentially 9 million different shippers that exist out there that have similar needs through our Freightquote by C.H. Robinson platform, which is literally an online portal that allows them to get truckload rates, LTL rates, parcel pricing and as simple as getting a small line of credit or swiping a credit card, they've got access to the largest network of freight capacity in North America. As carriers and as customers rather get -- go upstream further and have more complex needs, we're able to use -- to leverage them into our Navisphere platform, where they can have supply chain visibility as simple as dots on a map for supply chain insights, right, which is really about what are the trends in their business. And then for the largest customers that we work with our technology investments really there have been about how do we integrate with their native systems. We know that the largest companies in the world have ERPs and TMS systems. They're not necessarily going to operate their business from our web portal. So we want to make sure that they can experience the strength of Robinson's execution and technology, whether they're working in Blue Yonder or Oracle or SAP, et cetera, and bring to life our experience through their tech. And so a lot of investment has gone into that really in the areas of connectivity, pricing and visibility regardless of where you sit on kind of that customer continuum. The obvious other side of this is the technology for carriers, that's been a lot often talked about and some of the transformative things that have happened in supply chain in the past several years. We've often kept really the carriers at the center of our focus on our tech on that side. We've had mobile applications in the field with our Navisphere carrier and Navisphere driver apps, each of them with unique kind of personas that they're geared towards, whether it be an owner operator or more of a fleet operator, giving those carriers the ability to manage their business more effectively, giving them what is often now more and more favored kind of this automated or book it now functionality, the ability to instantly book freight online. And we continue to see uptake in terms of the number of carriers looking for that and ultimately, a number of carriers using it on a regular basis.

Can you -- Bob, can you give us some numbers around the carriers using it? So maybe now versus the end of last year so we can sort of get a sense of the growth.

Yes, absolutely. We've got somewhere north of about 90% of all of our truckload freight is now available to be booked automatically should carriers want to in a frictionless environment, will be a web or app. Just north of about 20% of our freight today is booked in a frictionless environment through a couple of different mechanisms. But the carrier utilization is up over 90% year-over-year in terms of the uptake in carriers and how they're using that functionality. And we expect that to continue to grow.

And to get from 20% to the full capable 90%, are the carriers -- is carrier utilization sort of the main thing that you have to increase? Or is it other factors as well that are limiting between 20% and 90%?

I don't -- I actually don't expect that we would ever get to 90%. I don't think that that's a realistic expectation. Some of that freight is not necessarily well suited for that instant booking experience, there may be additional complexities that need to be managed through a carrier rep. Again, kind of this thesis of meeting our customers and carriers where they want to buy, we've heard loud and clear from some carriers and drivers that they love that experience. And we've heard from other carriers and drivers that they choose not to go down that path, and they really value the relationship that they have with their carrier rep at Robinson. They kind of looked at that rep as their tour guide, if you will, across the country and have established rapport and trust and they really prefer that. And so we're certainly not going to chase those drivers and carriers away from that experience. It's already highly efficient, highly effective and develops strong relationships that last through the years. In terms of the total opportunity, we think getting to 30% to 40% of our freight in that automated booking would be a meaningful step forward. Much of that has to do with carrier adoption. We have work in flight in terms of our product road maps to make that an even better experience for our carriers a fully digital experience from start to finish, which we think will drive adoption. But we continue to see step changes and improvement in adoption overall in that space.

You absolutely have to give the flexibility to your customers in terms of what they want. So you said 30% to 40%, what's the time line on that?

We think we haven't shared a time line publicly on that. We've got some work to do on the product road map that will guide some of that. But I see that as really the opportunity. And as that comes to life, that has really positive impacts on the overall operating margins of the business and the efficiencies, carrier reps, your ability to be even more effective at kind of solving the complex problems and taking some of the simple task oriented things of assigning a truck to a load out of the repertoire of what they have to do every day.

Are there any ranges in terms of some sort of margin benefits to you? Can you say it's 100 basis points greater, it's 500 basis points greater than doing it in other ways? How should we think about that?

The way that I would think about it, there's been a lot made in the press and investor communications, about how the digitalization of the supply chain is going to lead to lower margins and decreasing adjusted gross profit margin, ultimately decreasing operating margins. And candidly, what we've seen in our business is where we have applied algorithmic-based pricing engines to either the customer side or the carrier side. Candidly, we've seen the inverse of that. We've seen stronger margins. We've seen greater consistency in earnings power. And I think much of that is due to really the customization and the approach that we've taken in our -- I'll speak to the carrier pricing in that space specifically. We haven't taken a one-size-fits-all approach to what the rate is that a driver sees when they go onto the website, right? We understand, based on our applications, kind of the behaviors of that carrier, if they're likely to be in a head haul lane or a backhaul lane. And so we can really personalize the pricing for them and so that it's not every carrier seeing the same rate on every lane. And that helps us to really gear the right freight towards the right carriers in the way that they're willing to interact with us but also optimize the profitability and earn.

Okay. Let's just stick with the gross margins. I mean you touched on it a little bit. There's obviously been a lot of talk, as you mentioned, over the past few years. I think everyone understands there's a cyclical nature to gross margins. But I think going forward, there's probably going to be a little bit lower than they have been in the past. Can you speak to this and talk a little bit about how C.H. Robinson can sort of offset this anticipated decline, if you will, by investors?

Yes. So if we think about the last 4 years, from '17 through where we sit today in '21, there's never been a point in time that I can think of a more volatile rate environment and specifically in the truckload space, right, in terms of what happened in '17 and '18 fall in the back half of '18 and '19 and kind of a lull before we got off to the races, so to speak, kind of midpoint of last year. And so whether you're a carrier, whether you're a broker, whether you're a shipper, you've experienced more volatility in rate and cost in the past 3 years or so that you have at any point in the past. And because of that, I believe that it's really having an impact of changing the behaviors of all of the parties in the supply chain. The reality is, if you were a shipper in the contractual environment in the back half of '18, front half of '19, you were highly disadvantaged. And if you were a carrier or a broker in back half of last year, the first half of this year, honoring the contract, you are highly disadvantaged as well. And so I see pricing terms in many cases of contracts coming in a little bit tighter 3- to 6-month contracts versus 12- to 24-month contracts, a greater focus and respective incumbency realizing that incumbents tend to perform better and hold on to contracts and commitments longer. For us, I've seen a real opportunity to kind of intersect this middle ground between contract and spot by connecting our API rating engines and introducing more index-based pricing to customers, which provides them some protection from having to go into that spot market where perhaps a contract market isn't holding up. So I share those things because I think the pricing dynamics and the pricing environment continues to change, and those will ultimately impact and influence what that gross margin percent is or that net revenue margin percent is. As I've said a number of times, we manage our business to net revenue or adjusted gross profit per transaction, right, because we can control that much more so than we can the cost of fuel or things that impact that net revenue margin percent. Our net revenue -- sorry, I got -- adjusted gross profit per shipment in our truckload business is right in the range of kind of our historical average. It's a bit lower than our 5-year trailing average, but we can certainly see the average from where we sit today on a per-load basis. And we would expect through the next several quarters of continued repricing that, that number likely goes up and not down. And so will net revenue margins compress over time? I've been clear that I think that there's a chance that they could do that, Jason, over time. But we're also taking a lot of steps to ensure that our operating expenses are able to absorb those changes in potential net revenue margin so that we can continue to deliver strong operating margin to our shareholders.

That's good to know. I want to -- before I jump to a question or 2 here from the audience. I want to talk a little bit about your forwarding business because, obviously, that's been exceptionally strong this year. We saw unprecedented spot rate increases for both ocean and air rates, how should we think about this business going into next year? And also maybe you can talk about the differences in contracts that you have in this business, say, versus your traditional truckload business?

Sure. Well, 2020 and 2021 have been great years to be forwarders, right? And our results have certainly reflected that. And candidly, we think 2022 is going to be a great year to be a forwarder as well. There's just so many tea leaves that we look at and economic indicators. And when we look across what -- from where we sit and what we know, we don't expect that global air travel and business travel is going to be returning anytime in the next few quarters to the levels that it was pre pandemic. And we know that there's a direct relationship between available air cargo capacity and passenger travel, especially in the APAC, North America trade routes. When we look at the ocean freight environment, this time last year, I think there was something like 11% or 12% of all of the ships were idle today, that's about 2%. So it's literally operating at max capacity. And all of us read the same clips and see the same data points around delays in the ports, the time the ships are spending at birth, the dislocation and containerized freight. I mean all of these things are real. And I don't see that that's going to cycle itself out in the next number of weeks or even quarters. So we think that a bit of a stronger for longer theme that 2022 is a really strong year to be just from a tailwind standpoint to be in the forwarding business. When we emerge, whenever -- I mean, I don't think that I'm comfortable proclaiming that this is the new normal in forwarding and this environment is going to last forever. But when we emerge from the other side of this, whatever that looks like, I think what will become very clear in the Robinson forwarding business is all the work that Mike Short, who leads our forwarding business and his team have been undertaking for the last several years around process standardization on a global basis, on the integration of the number of acquisitions that we've done through going back to Phoenix, looking at the new logos that we've added from large multinational companies with diverse needs as well as the way that we stood by our core group of forwarding customers and really establishing even stickier relationships, I guess, I would say, by our ability to help them navigate, which is what has been, obviously, the most dislocated supply chain that we've experienced on the global side for quite some time. So I think there's a really strong self-help story that exists within our porting business. I would say we've been public in saying we think that long-term operating margins of our forwarding business are in the 30% range. You can go back to '19 and prior, and you see it's more in that 15% to 20% range. We don't see a reversion to the mean, if you will, in going back to that. We think that we've taken so many steps around the operational and process efficiencies in forwarding that we will be able to achieve much higher operating margin than has been experienced there in the past. Relative to your question on pricing, Jason, typically for us, at least, the contract duration of our forwarding business tends to be shorter in nature than that in our truckload and that balance of contractual versus spot tends to lean more towards spot market in that industry in general. And so we are able to be much more nimble and move with the market in the forwarding business than we do in our North American truck business.

I just want to make sure the investors knew that. We have some questions from the audience that I want to make sure that we get to Bob. So let me start asking a few here, one coming in on customers, has the portion of your revenue coming from the large/enterprise shippers versus smaller shippers shifted over the last few years? How does operating income per load look differently from a large customer versus a small customer?

Yes. So large customers are -- as we think about our kind of our customer stratification or our customer go-to-market, we talk about it in terms of kind of from largest to smallest, if you will, strategic, key primary and SBS, or small business solutions. That strategic customer base does make up an outsized percentage of our overall revenues. That kind of is our top 200 or top 500 accounts within NAST and that is a higher percentage today than it probably has been in the past. With that being said, we are very focused on our customer go-to-market strategy of bringing that unique value to life in each of those segments within NAST. So we're running different plays in the small business space than we are in the strategic space and have very kind of defined go-to-markets in each of those areas. Hit on the second part of the question for me, again, Jason.

Sure. How does operating income per load look differently for a large customer versus a small customer?

Okay. So we don't necessarily track operating income on a per load basis, but thematically, what I would say is that the larger customers in that strategic size segment, we tend to operate at a lower AGP margin per transaction, but they're also highly, highly efficient, highly integrated, highly electronic, highly digital, smaller teams managing bigger books. As you go downstream, you tend to see more manual intervention, less sophisticated shippers needing more support, more handholding, potentially less consistency in the business, which makes it a bit more expensive on the procurement side. So typically, you see higher net revenue or AGP margins in the smaller shippers. Net-net, my estimation is that the larger customers today are more profitable on an EBIT margin or an operating margin basis, even though they have a lower AGP per shipment, which is part of why we've taken the steps we have to launch, say, the Freightquote by Robinson platform to provide that seamless digital solution for that long tail -- that 100,000 customers that we work with that tend to be frequent in how they interact with us.

Perfect. I'll give you another question here we go. Given the benefits of algorithmic pricing of -- algorithmic-based pricing engines, what is holding CHRW back from rolling it out across the business? How much of your TL freight is priced this way?

Well, there's nothing holding us back. Not every customer is capable of ingesting API around pricing. So let me talk a bit about how we bring it to life. We have a black box for algorithmic-based truckload pricing. And outside of that black box, we give all of our account managers the ability to kind of tweak or adjust or turn the knobs, if you will, for their specific customer and how they experience the market. But today, that black box of pricing fuels over 1 million unique views on Freightquote by Robinson. So if you go on that platform, you are receiving pricing that's generated through that algorithm-based pricing. If you are a customer that's got to log in to our Navisphere online platform and you don't have customer-specific pricing, if you go on and do a load query with us, you're going to get a price generated by our algorithmic-based pricing engine. If you're an account manager at Robinson and you're quoting a customer for a spot market load, the recommended sell rate is driven by that algorithmic-based pricing engine. If you are a large customer where we have an API plug in, you're going to be getting fed from that same black box algorithm-based pricing engine. So there's absolutely nothing holding Robinson back. In terms of how much of our freight is currently run through that process, it's roughly just north of $1 billion run rate of our truckload freight is fueled through that black box pricing engine today, and we expect that to continue to grow.

Perfect. I got another one that just came in here actually a follow-up question. On competition, are there now more scaled brokers that can compete with large customers than they were before, how has this changed the dynamics?

I don't know what the before and after time line is. But yes, there are more scaled parties in the 3PL space today than probably there has been at any time in the past. And whether that's been through industry consolidation and the private equity roll ups that we've seen occur in the past 5 to 10 years, whether that's -- there have been several different roll-up strategies or new companies that have entered that have achieved a significant run rate in terms of their revenues. There's clearly a different group of parties. But if I think about who the largest are, it's -- we're #1. Typically TQL is #2. Coyote is #3. And then -- and it's a pretty significant falloff -- Echo is #4 probably, and it's a pretty significant falloff from there. So there are more companies of scale -- There are still no companies that have the scale or the breadth of services or the industry expertise, the history that Robinson has. And I think that that's going to continue.

Okay. I have a follow-up, too. You mentioned that when we were talking about forwarding that you think this market is going to continue because of sort of the tea leaves that you're reading out there. Can you give us an idea of what you're looking at that gives you that confidence?

Well, some of it is anecdotal and just conversations with all of the customers that we'd have, right, and talking to them on a regular basis about how they're forecasting their businesses. When we look at the inventory to sales ratio, that's obviously an indicator. If you look at PMI, if you look at any number of indicators of just labor availability. I personally believe that the biggest constraint that we have right now is labor, right? And whether that's labor at the port, labor at one of our customers' distribution centers, labor at one of our customer shipping locations, truck driver availability, labor domestically, and labor globally is a tremendous constraint in unlocking some of the supply chain challenges that we have right now. If I send a truck into a distribution center that should normally take 45 minutes to unload, but I'm forced to drop a trailer for 3 days before it can get unloaded, that takes functional capacity out of the network. And those are the things that are happening every day again and again. And so there's a real constraint on a global basis around capacity that I believe labor is the core issue. We've got record low labor participation rates here in the United States. I don't see that changing rapidly. And so those are some of the things that give us pause to say we're in this probably for a bit longer than some might expect.

Yes. No, I went away this past weekend. And everywhere I looked to, there was help wanted signs and in fact, on a holiday weekend, one restaurant actually had to close early because of the lack of servers. So it's definitely out there. We are coming up here on the time here,-- oh, go ahead, Bob, I'm sorry.

I was just confirming what you said, Jason. I mean we see it in our personal lives every single day, whether it's going into a restaurant or a gas station or whatever, the lines are longer, the waits are longer and those are competing for the same labor pool that many of the supply chain people are as well.

Yes, for sure. All right. Well, we're at our time limit, Bob. On behalf of Cowen, thank you very much for your insights, and everyone be safe out there at C.H. Robinson.

Jason, thanks. Great to see you.