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

Good morning, everyone. I'm Brandon Oglenski, airline and transport analyst. And this is David Zazula on my team. And I think this is the fourth or fifth session today. So again, welcome to Barclays Industrial Select Conference. I'm very excited and humbled to be joined by Bob Biesterfeld from C.H. Robinson, CEO. And Bob, I think you've been in that role now for 3 years, I think.

Yes, 3 years.

Pretty exciting time. I'm sure you didn't envision the pandemic hitting so soon. But I know we'll talk a lot about that. But for those in the room here or listening online, the QR code, if you scan that, you can actually do some audience response questions about sentiment and ownership of C.H. Robinson. So we would appreciate some feedback there.

So Bob, I know we're going to talk a lot here about freight and markets, but I guess the pandemic has been really challenging. I know it's no different for your business as well. And you guys have global freight forwarding business that has benefited a lot. Your core truckload brokerage business here in North America, we'll talk through how you price that. But that's grown a little bit slower than some of your smaller competitors. So can you just tell us what's the line of sight getting out of the pandemic? And where do you see the most opportunity for your business?

Yes, absolutely. Well, first of all, great to be here today. And I guess before we dive in, I guess, I would like to just say briefly, our thoughts are certainly with the people in Ukraine today and our business associates over there across Europe. As we think about our NAST business and our forwarding businesses, we think we've got 2 really industry-leading franchises in both. I mean in NAST, we're the largest in the truckload space here in North America. We're one of the largest LTL providers. And in forwarding, we've got one of the largest -- we're a leader in the trans-Pacific eastbound freight lane, which has certainly been a key and critical freight lane during the course of the last couple of years. Looking forward, clearly, there are interesting market dynamics in play in forwarding, and we do expect that over time, we'll see some moderation of that market. What does moderation looks like? What does normal look like, I think, is the question that's on everybody's mind that's here and outside of this room as well. But we're really proud of the work that, that team has done. We think that underneath the kind of cyclical tailwinds that we've seen, when we do start to see some moderation there, I think our investment base will really see the work that Mike and his team have done to drive global unification of the systems, leverage the technology across that broad base, brought everybody together kind of on the same page and integrating the acquisitions that we've done. Within that, to your point, the truckload business has grown at a rate slower than our forwarding business has. But it's -- we can really pinpoint that to the last 6 quarters of rapidly increasing cost of purchase transportation. And as we know, that hasn't been just modest increases in cost of purchase transportation. It's been 20%, 30%, 40%. And that NAST business has a pretty broad exposure to the contracts market, which we think is important to that business because in a normal time, 80% to 85% of freight moves under contracts. But for us, when we sell long and buy short, it's difficult for us to get back ahead from a profitability in the contract space. So we've under-earned in that contract space in the past couple of years. And as we look forward into '22, into '23 and start to see what we expect to be more kind of moderating of the cost of purchase transportation, we feel that we're very well positioned there to improve that profitability, take some of the negative files out, get back to earning at the level that we should.

Yes. And then I want to dig into that. But maybe even just at a macro level right now, I think a big debate at this conference I've been asking every transportation company, just about what's going on with inflation. Obviously, interest rates coming up. How is that impacting your customers? Are inventories low on the retail side? Because I think that's a question mark here too. Maybe industrial inventory is a little bit higher. What are you seeing more macro-wise right now?

It does feel we're overexposed probably to the consumer versus the industrial, just given our portfolio. And it does feel like inventories do continue to remain on the low side there. Clearly, there was some pull forward leading in to where we sit today. But we just don't see any slowdown in demand on that side that's really consumer exposed. And so we think that's a strong tailwind for us really through the balance of this year. From an inflation standpoint, this discussion of what is normal, I've heard oftentimes people kind of use 2019 as that baseline pre-pandemic. Is normal getting back to that? And I would contend I don't think that's where we're going. I think that through the full course of the last couple of years with supply chain disruption, with the pandemic, the focus on supply chain and the criticality of supply chain performance has likely put us at a point where the transportation providers, whether that be steamship lines, the trucks, the 3PL environment, there's a bit more ability to impact price longer term that I think sets up well for us.

Okay. And you did touch on -- was it normalization in freight forwarding? Or how much of an impact do you think that could have going forward on earnings?

Well, we stayed steadfast in our guidance that we think that Global Forwarding can and will deliver operating margins at 30% is kind of the target range that we've shared publicly. We're over-earning that today. I think last quarter, it was north of 50%. That business for us in the past has typically been more in the teens to the 20% range. We do -- we don't think that the business will go back to that point. Today, we're staying with that target of 30%, but we'll continue to explore as things kind of step down over time, where we think that will ultimately land.

Right. And investors ask this all the time because every quarter, it's better. So what's changed that you think structurally, that can be a higher earning business?

The customer mix has evolved over the course of the past couple of years. We're working with many larger customers with larger awards. That in itself creates some efficiencies in the business. But for the past 2 years, we've talked about global process uniformity. And so you think about the acquisitions that we've done from Phoenix to APC to Milgram to Space Cargo. Each of those have unique cultures. Each of them have unique systems, bringing together one global operating model across each of our offices, each of our functions across the globe. That in itself drives tremendous efficiency as well. There's been technology investment that's helped bring those things together, getting them all on the same platform as well as some underlying labor arbitrage work that's been done as well. So a number of signals there that indicate that, that business will operate at a much higher profitability level than it has in the past.

And what's -- maybe more globally, but where do you see the supply chain constraints today? And then are we going to see those alleviate anytime soon?

Well, in the simplest sense to me here domestically, I mean -- well, start globally, we've got capacity constraints in the water. That's the obvious thing. We've got capacity constraints in the air. And neither of those 2 things seem to be solving for themselves very quickly. I mean there's some liner capacity that we would expect to come on in the back half of 2023. But if you look in the trans-Pacific eastbound lane that we talked about, half of cargo typically moves in the belly of passenger air crafts. And the number of direct flights between China and the U.S. that used to be, what, 60, 70 today is now, I think, 2. So we've got a little bit of room to go there before we really start to get any meaningful capacity back into the air freight space. Domestically, we've just -- all we have to solve for is chassis availability, labor participation rates and a truck driver shortage. If we can solve for those, I think the market will just clear right up. But those are real constraints for us that I don't see dissipating in the first quarter or second quarter.

So we're in a new world of higher costs. Is that right?

I believe that we will, whatever normal looks like, we'll settle out at higher pricing for transportation into the future than what we entered the pandemic with.

All right. And Bob, I remember you were here as a new CEO in 2019. I appreciate you coming back, by the way. But I guess, I asked the question then. Historically, in your North American brokerage business, right, it's very people intensive. You have a carrier desk, you're sourcing capacity. You have a shipper desk, right, or a customer desk where you kept sourcing the freight. And I think even back then, you guys had moved to a more centralized platform and management system. So can you talk to how that business has evolved over time?

Yes. I mean, Robinson is a people-centric business, third-party logistics, logistics in general, depending on what party you are. People are a critical component to this. I mean we've got complex supply chain problems that we're helping customers deal with every single day. Our model is, as you said, we've got one team that's facing our customers, right? That team is for our business, generating demand, getting that demand on system. But more importantly, not just delivering transactional service to those customers, excuse me, but working upstream or helping them solve problems, delivering different services, integrating our different business models on their behalf, bringing our forwarding business and NAST business together as an example to deliver an end-to-end global door-to-door solution. On the other side, we have carrier management, right, carrier procurement, managing the carrier relationships. Those are what we call the carrier reps or carrier account managers. Both are critically important to kind of the 2-sided marketplace that we live within in NAST. We have centralized some of that. Our old model was 150 offices acting independently kind of on a local basis. As procurement has changed in our industry, as things become more centralized with our customers, we've reacted to that to bring together these 2 really strong functional teams. We've been underlaying a lot of technology, digital capabilities to help scale that business. And we really look at 2022 as being a pivotal year where we'll really see some of those capabilities come to life, both our customer people and our carrier teams and how they interact to scale that business.

And just correct me if I'm wrong. But historically, I always heard, hey, it's great you start at C.H. Robinson young and you get your book of business, and then you maybe move up to an office manager position. And you were taking commissions off that. Has the incentive structure changed?

The incentive structure has evolved. I wouldn't say that it's changed, but the incentive structure has evolved to try to drive -- the old Wayne Gretzky now would be like, skate to where the puck is going, not where it is. And so we've tried to use incentives to really move our people to where we believe the puck is going, so to speak. And so we're incenting people to adapt digital tools. We're incenting people to not be thinking about the old way of doing business but the new way about of doing business. The idea of kind of orienting around an office, a local office, has evolved into really orienting around customer groups, customer types, orienting around a vertical, so that we can ensure that we're delivering the right kind of talent to the right customers at the right time.

Okay. Do you want to talk about Navisphere?

Yes, I think we have -- we get questions for Navisphere from investors all the time about what differentiates Navisphere. Why is it the platform that you think both the shipper and the carrier are going to want to interact with? What is your value proposition on Navisphere relative to your competition?

Yes. So Navisphere is just one piece of it, right? And we could sit up here for the next 18 minutes and talk about what's better, Android or Apple, right? But both of them are highly functional and one camp loves Apple, one camp loves Android. I think that the piece that gets missed oftentimes when we talk about Navisphere or the technology is that it's -- that's just one layer of the overall system, right? If you stood up just the technology and compared it to some of our competitors, I'm sure you'd see strengths in ours and strength in theirs. And at some point, someone could make a determination of which one is "better." What makes us different, what makes us unique, which makes us really competitive in the market, is how the whole system comes together. The technology is built in order to scale the transactional layer of the business, right? How do we get as much demand on the system, how do we attract that demand, how do we contain that demand, how do we grow that demand in a scalable way? You see examples of that on what we've delivered around like the API pricing engine, the API booking engines, really making sure that, that side of the network is the most connected supply chain platform. The other side, on the carrier side, I'd like to talk about the same thing. How do we facilitate the most automated bookings so that, that channel could be really, really scalable? But on top of that Navisphere technology base layer, we layer on great people, right? Those people you talked about that we hire, we pay them a commission, they grow up with the company. They become supply chain experts. We couple that with the global capabilities that we have, our ability to deliver an end-to-end global solution for our customers and the scale advantage and the database that we have. So it's all those things that come together that I think position us really uniquely in the marketplace relative to our competitors. Navisphere is good technology. It's great. But it, on its own, isn't going to solve the problems that our customers need us to solve.

You have a global forwarding competitor that had a cybersecurity issue recently. Can you just talk about what you are doing to try to keep your cybersecurity intact? And whether you think that could actually be something that you can market as a differentiating factor with your customers?

Yes. Look, our -- certainly, our thoughts are out for the team at that competitor, and we hope them a speedy recovery through this. Nobody wishes this on anyone. We've invested significantly in our cyber defenses and cyber capabilities. I feel that we're in a much better place today than we've been at any point in our past. I mean it's been significant more investments. Every day, we're testing those defenses and improving those defenses, working with internal experts and external experts to make sure that we have the best defenses that we have. But as important to that, that we're able to react and respond accordingly should something -- should a threat actor come into play within our ecosystem. And so we do talk -- when we talk to our customers about information security, about data privacy, about data security as being a very clear area of focus for us, it's something that the leadership team is focused on. Obviously, our audit committee is very focused on. So yes, we think it's a strength for us. But it's a challenging world out there, as we know, on a lot of levels, especially in that cyberspace.

Just thinking about the technology spend and build-out that you've done, it seems looking to us like the compensation that you're paying out to personnel has been, call it, less variable in the last 3 years. It seems like you have fewer people that are on the commission structure and more people that are on flat pay, I guess. Is that giving you confidence in the margin targets that you've discussed as you have a little bit better idea of what you're going to be paying out in labor moving forward?

There's a lot to unpack in that question, especially if you consider the last couple of years. And so if you look at 2019 and 2020, we underperformed our targets in those 2 years. And so there wasn't a lot of variable comp payouts in terms of short-term incentive or bonus in those years. And there was very little, if any, performance-based equity that vested. In 2021, obviously, we had a really strong year, right? EPS, up significantly. All of our financial metrics, volumetrics, up significantly. And so there was a tremendous catch-up in terms of equity payout or equity investing that occurred, over 80% of like 4 outstanding years. So the difference in our equity compensation payouts in '21 versus '20 was just north of, I think, $90 million. And so that was a huge impact to the personnel expense line for NAST, specifically, but for the enterprise last year. That really won't happen again just based on the way the amount of equity that's been vested and in the way that the programs accrue moving forward. So the personnel expense across the organization has become a bit more fixed, but it's due more primarily to the mix. The forwarding business tends to have a more fixed personnel expense just based on the fact that it's a global workforce and there's more task-oriented work in there. But within that, the variability of the compensation plans are actually pretty similar. It should ebb and flow. As it relates to the question around operating margins, we're very confident in kind of our publicly stated operating margin targets of 40% for NAST, north of 30% for the enterprise. And we think that the compensation incentive plans are built to help us achieve that.

On personnel, yes, it seems to us like you took a pretty conservative approach during the pandemic, really trying to maintain shareholder capital and train some personnel. At least from the outside looking in, it seems like maybe that has impacted volumes moving forward. I guess, are you thinking differently about how to manage your pandemic -- manage your personnel through the cycle moving forward based on that experience?

Yes, the gift of hindsight is great, right? I mean if I could go back to May of 2020 and know what I know today, we likely would have made different decisions there, right? But as I go back to mid-2020 and we're dealing with a number of unknowns around what is the impact of COVID, we're watching literally economic impacts, economic blackouts rolling across the country at the time. Nobody is certain what the impact of the variants is going to be on society. And so we had a responsibility to our shareholders to react and to take some aggressive steps to cut costs so that we could deliver results. Much of that came through reduction in personnel expense through things like 401(k) match, et cetera, as well as reduction in some heads. We had a belief at that point, as people were debating whether it was a Y-shaped or V-shaped or a swoop-shaped recovery, we had a belief that volumes in our core truckload business were likely going to go down. And so we made those decisions. Lo and behold, that wasn't the case, right? And the economy came roaring back. And so we have -- I think we persevered well through that time, but it became clear kind of midpoint last year that there was opportunity that we're likely leaving on the table based on our ability to respond to demand. And so we started down the path of recruiting and onboarding additional people specifically to carrier job family and a few other areas, excuse me, within NAST to really respond to that demand.

And Bob, just remind me, the 40% margin target, where are you today?

We finished fourth quarter at 32.6%, I want to say, was the final number, top of head. That was negatively impacted last year on kind of the performance-based equity conversation that we had by about 350 bps. So if -- you could adjust it however you want, but 32.6% is the GAAP number that was reported last year.

And what's the trajectory to get back to that target?

The formula is pretty simple. The first part of the formula is fix the earnings power of the contract business that we have, which makes up on any given quarter between 55% and 75% of our volume in NAST truckload, right? And so how do you fix that? Well, that book of business has been under pressure for the last 6 quarters, so we've seen the rising cost of purchase transportation. So we're constantly repricing that business. We'll reprice 60% of that portfolio between fourth quarter of last year and first quarter of this year. And so naturally, in an environment where costs stop pricing at the ridiculous rates that they have been, you start engineering profits back into that business by engineering losses out and kind of rightsizing the contracts to market. So that's underway. That will be a huge kind of contributor to that. The second component to that equation is continuing to scale that transactional layer of digital freight and moving more and more freight through that model in the most highly efficient manner in which we can. We believe those 2 things, coupled with diligence around cost control and just general expense management, gets us back to that in relative short older.

And do you think we can be there by the end of the year or...

I won't commit to it this year. I mean anything is -- never say never, but the commitment isn't there necessarily to say that we'll achieve it this year. Couldn't we get there this year? Sure. Would it be the best thing for the business in 2023 and 2024? Likely not. And so we'll continue to take that longer-term view and maintain the level of investments that we're making on things that we think will, again, help us kind of skate to where the puck is going.

Yes. We're going to have XPO on stage here in a little bit. Knight was here earlier, J.B. Hunt. And I know they're all relatively small in the brokerage space but obviously becoming bigger competitors of yours. How do you view this quasi-asset asset-light model longer term? And how is that impacting your business? How do you compete with that?

I don't really see this as a competitive change in terms of what we -- in how we go to the market. For as long as I've been at Robinson, we've competed as much with -- directly with the asset-based carriers as we have with the 3PLs, given our position in the contractual market. And so I really don't see as much of a change in the competitive dynamics.

Okay. They're all pushing this idea of power-only brokerage model, and they're giving very big growth rates in that market. For those that don't know, this is where a tractor and a driver will show up and, for instance, Knight would then provide them with a trailer. You guys have been doing this for a long time, right?

Yes. I mean drop trailer makes up about 12% of our total business, which is essentially power only, and we're [ getting ] to change agreements. We have a fleet of our own leased trailers. We've called it Power+. It's 800 to 850 trailers at any given time. We'll continue to ramp that up. But our drop trailer business has been growing at a rate of about 40% a year for the last 4 years. So yes, it's a critical part. I think it's becoming -- another way that's becoming more mainstream to add capacity in and try to address some of the fluidity challenges of the supply chain, right? I mean there's -- many shippers would prefer drop versus live load because it helps them to plan and execute better.

Yes. And by the way, if there's any audience questions, you can type them in or you can just raise your hand. We'd get you a mic. So what about the pure digital competitors too? I mean, this business takes people, right? I think a lot of folks don't understand that when they get into it. But then quickly, you do.

Yes. I think fast forward a few years, and I think this line between what are pure-play digital players, what are asset-light, asset-heavy kind of integrated services operators, what are more legacy 3PLs like us, what have we evolved into, I think that line is going to be pretty gray. I don't know that if we're sitting here at this conference in 2024 that we're talking about the digital guys and the legacy guys. I mean, look, there's going to be pressure. The world is changing. The entire industry is going through a significant digital transformation. Even the folks that you mentioned earlier, that Knight, J.B. Hunt, Knight, XPO, clearly, they're investing in technology as well. It's not just about having a brokerage and an asset division. So the entire industry is going through incredible transformation right now. And we'd like to say that we're going to continue to lead that transformation and be an active participant in it. So a couple of years out, you probably got additional consolidation. You've got additional capabilities that each of us have developed. But we still feel like that competitive differentiator that I shared earlier, David, to you, is going to help keep us in the forefront of that.

And the question we get all the time is, do you think you can maintain the profitability levels and the return levels in the business, even as some of these folks get bigger in the market?

We do. I mean even as these other folks get bigger in the market, we're the largest player in the North American surface transportation market, and we represent 3% of the market, right? And you can look at all the data that says 3PL is continuing to gain market share, right? Everyone quotes the Armstrong & Associates data. It's probably like the most famous chart that they've ever put out. But it continues to show that 3PL is going to gain share. So we're in a growing market, a huge total addressable market. We're in a market-leading position. What's -- over the next couple of years, are we going to see more price transparency? Yes, probably. Is there going to be continued democratization of data? Yes, probably so. Will those things likely put downward pressure on our margins in our brokerage business? Yes, probably so. I mean it's happened in every other brokerage business since the beginning of time. And so we're working hard to build those capabilities underneath in the cost layer. So if and when we start to feel that downward pressure on margins, that we're able to respond appropriately and still deliver the appropriate shareholder returns that you expect from us. I mean I've said that for the last decade, in one way or another, whether it was Coyote's entering the market and they're going to put downward pressure on margins, and is Robinson going to be able to respond? And XPO is going to come out, are we then able to respond? And so you can kind of go through these 5-year tranches over the past 20 years and whether it was the Internet or Coyote or XPO , the pure-play digitals, what's been consistent is actually the adjusted gross profit per load that we actually make in our brokerage business. And today, we're at or above the 10-year average and the 5-year average in those earnings, so I think our model is very responsive.

Okay. And strategically, I know we focused a lot on brokerage. But where do you want to see the mix of your business 4 or 5 years out?

We've been very intentional about the balanced nature of our business. When we went and aggressively acquired Phoenix International in 2012, they were the leading privately held brokerage here or privately held freight forwarder here in the U.S. And we had a vision then. We hold it now today that those companies that can effectively integrate door-to-door solutions on a global basis will win, right? And so we've invested a lot of capital in that business through acquisition, organic growth initiatives. So us maintaining that healthy balance between global services and domestic services is one tenet to that. I want us to be in markets where we can have a differentiated value proposition and be kind of #1, 2 or 3 in that market. And so we're not going to just kind of enter areas just to dip the toe in the water. People often ask, hey, what about final mile? There's market leaders there, and I don't think that's necessarily our place today to just dive into that pond without a real differentiated value proposition. So that's kind of the mindset that we take when we're thinking about acquisitions, we're thinking about areas where we're going to invest capital as kind of the backdrop.

And I wanted to ask about capital, too. So what are the priorities for you? Is it -- are acquisitions high in the list?

Acquisition is always part of the conversation. I mean, we start, first and foremost, with we're committed to maintaining an investment-grade rating in our debt. From there, it's what can we invest in, in terms of things that are close in, that we can measure high returns on a risk-adjusted return basis. We're really committed to the dividend, which we've committed to continue to increase with the rate of EBITDA growth. We get a nice increase in the dividend last year. And then we start looking at, okay, what else is there? Is there acquisitions? Are there things that can help us to scale globally in other companies? Are there acquisition opportunities that might add technology talent? And if whatever is left over, we look at opportunistic share buybacks from a capital return standpoint.

And outside of Navisphere, what are you doing more broadly in technology? Don't you have some partnerships as well to develop?

Excuse me, yes. We do. I mean, Navisphere is our base, Navisphere is our core. But any decision we make around technology, the filter is always, should we build, buy or align, right? And so we've made announcements on partnerships with Microsoft, with Intel, several different transportation management systems, several different ERP systems. Last week, we announced a partnership with Waymo, which we think is a really exciting foray for us into the autonomous vehicle space. We've been in conversations with those folks for well over 5 years. I think we can bring an interesting point of view to them, the voice of a small carrier, and we can also help them to gain access to the over 3 million lanes that we're moving freight in any single day.

I mean what is the future on autonomous? Where do you see this going? How soon? How are you going to fit into that market?

So our goal is to stay as agnostic as possible for the future of autonomy. We've got a great partnership with Waymo. We'll talk to the other folks as well. But if I think about the benefit of autonomy, it's removing the bias of the driver, right? I mean small carriers have got 25% empty miles. Large best-run carriers have got 10% to 15% empty miles. And a lot of that is driven by the fact that the driver needs to go home. The driver needs or wants to go somewhere. So if we remove that bias in that driver, you start to think about the unlock of capacity that's in our existing network today. There is not a more liquid marketplace in transportation than that of C.H. Robinson. And so as we think about dropping autonomy into kind of the freight flow of Robinson as that being a clearinghouse for moving autonomous vehicles, we think there's a very natural extension for us in the $20-some billion in freight that we have under management.

If anything, then you might become more valuable to your customers in that regard. Is that right?

Yes.

Okay. And lastly, we're running out of time. I could keep going on for a long time here. But ESG, it's bigger and bigger mandate for investors. How is this impacting your business? Are folks coming to you?

Yes. I think the challenges of ESG are now becoming supply chain challenges, right? I mean when we talked to our customers last year, we said, what are the 3 most important things? And they said, access to capacity, controlling the price and sustainability. And so we've really reacted to that. One example of how we're helping customers in the ESG space is with Emissions IQ, which is a product that we developed at our Robinson Labs last year that we're implementing with hundreds of customers that are helping them to manage -- to measure and manage the Scope 3 emissions of their supply chains. So we work with them as a consultant. But for the first time, they've got a way to really measure that impact of their supply chain to the environment.

All right, Bob. Well, I really appreciate you guys coming down. It's great to be in person.

Yes, thank you. Great to see you. Yes, thanks.

Thanks.