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

Well, welcome back, everybody, and we're continuing our day 2 of our 16th Annual Global Transportation Conference. And we are honored and privileged to have with us today, C.H. Robinson. And then we have Dave here, who is the new CEO; and Mike who's the CFO. And so we're going to ask them some questions and we can open it up to the audience. But gentlemen, welcome. Thank you very much for coming down and spending time with us and our investors.

But I guess I'll start with you. You sort of held the keys and castle since June. So I guess, where has most of your time been so far? And what are your largest areas of focus been?

Yes. Well, first of all, Jason, good seeing you. Thanks for having us and pleasure to look forward to meeting everyone here. Some of you I've already met. So I appreciate it. The -- super excited then. It's been 2 months and really hit the ground running here at Robinson. I can tell you after 2 months, it validated my decision, super happy to be here because the opportunities are great and I've dove in real hard. Short answer, I spend it on 3 areas: investors, I spent it with customers, and I've spent it with our employees. I step back, it really comes down to a simple question for me, and that is the question that says, what's the case of C.H. Robinson getting back to be a secular growth company. And my answer and our answer is it's simple, right? And it's delighting our customer and our carriers and building the lowest cost to serve, will drive that secular growth period. And there's a way of doing that. And you do that through our delighting our customers is going to happen. Table stakes is great customer service, which Robinson has a, obviously, a reputation to do, using technology as a force multiplier, making sure customers have in visibility, going up the value chain, showing services that we can use, expanding our overall coverage. I mean we are the company that can take you from China's ports to the middle of the U.S., and we can do that, and we do that pretty consistently. But putting the technology in place, making sure you're part of the customers, making sure their solutions, they're asking me that as I go along. Dave, we appreciate the partnerships. You've been there in the tough times. We'll take even more, solve our hard problems. And that's what we'll do. So I've heard that. I've been on a roll. I've done that, I spent time in dealing with that. For our employees, it's going in deeper. I'm a lean practitioner, Jason. We'll talk a little bit about that. But driving in and having my eyes wide open, I eliminate waste, that's what I do. And I try to drive bottom line, better cash, better results for companies, and I've worked for some pretty good ones in the past in doing that. That's no different in Robinson. We can do better at Robinson around how we identify problems, how we are faster in our ability to make decisions and drive things. And we started that right away. I'm diagnosing, as you know, put the big rocks in the company. I call it my 4 Ps: diagnosing people, diagnosing products, processes and portfolio. And I'll obviously come back when I'm done and have a bigger strategy that I'll share out in doing that. But that doesn't mean that we're not doing things right now, and that's about speed. And I've talked about clock speed before, but it's really about executing. And this is a team that can do it, and we've got the scale to do it. I love the balance sheet. Balance sheet is that is making money in a really tough cycle right now, and that's an advantage because we were able to invest during the cycle -- during a tough cycle in here. I spent that time going around with investors, within customers, with our employees, and I feel pretty good about where we are right now. It's a lot of work to do, but I'm on it and have fun doing it. And I've validated myself as I was going through the process. I finally said in 2 months in and I said, hey, I feel super good that I made this choice because the opportunities are there, the opportunities are there for growth. As we continue to build out and scale our models, everyone's looking and saying, hey, who's going to be ready for a rebound? Well, we're going to be ready for a rebound. And we could have done better. This company could have done better in the last cycle in doing that. Left some demand on the table. That's the thing that we're being very, very disciplined about in doing that, separating out that headcount growth that we do, keeping those expenses really competitive, while really driving the tools in place, to give us that demand, and we'll be able to hit the demand while keeping the expenses low. That gives me optionality, optionality for pricing, optionality for market share. And those are the things that I'm getting the company laser-focused on to do that. So super excited about where we are, great opportunities, glad to be in the chair. Super glad to be here.

Well, let's talk a little bit about some costs because you called that on the 2Q call a little bit and sort of at least where we are with some of the near-term costs and then maybe we can expand into lean and what you think it means for C.H. Robinson because I think a lot of transportation investors really aren't as familiar with it, unless they cover maybe some of the other industrial manufacturing companies.

Yes. Just overall cost. Your question is like where we are on.

Yes, because you talked about some near-term costs on the 2Q call and then I think let's talk about what lean means for C.H. Robinson.

Yes. Well, first of all, I could talk all day only, and we're not going to do that because we have a few minutes to do that. But let me just explain. It's really about continuous improvement. And I'll start with -- I've cut my teeth way back at Harley and hone my lean skill is really within Caterpillar driving within Amazon and even within Ford for that last year or so in doing that. That is a lift and shift. I mean that skill set is coming in Robinson is real simple. How do you eliminate friction in the process, reduce manual touches, order to cash, making that a lot more faster and free flowing in here. Company is good. It's done a lot of good things, but I see opportunities, right, where we can eliminate waste, and we're doing that by eliminating those touches. When you eliminate those touches, you take your cost to serve down. Lean helps you do that. I'll give you an example. I just put out a challenge to the entire company and which I called it was your impede or speed challenge. I asked every employee in the company. Tell me what's impeding you from doing your job faster or better and give me an idea of how we can change that. I was prepared to respond to 345 people and thank them for doing that. I received 3,400 ideas, off of 2,400 unique employees. What does that say? This is a company that has people in it that want to win, they like to win, they like to speak up and they have ideas to help with. We're using technology like generative AI to take a lot of those -- that feedback, put it dramatically for us to execute and act on -- and we're already acting on some of those things. You're not going to be able to do all of them, but there are some pearls in there to do it. And at the end of the day, you get technology with me as well. Lean and continuous improvement, along with the use of technology, and I'm a big use of technology, I think large language models for a company like Robinson, it's a game changing. And we're leaning into that pretty **** hard on what we're doing. And if you think about the amount of information we get on a daily basis, amount of orders we get, imperfect data. Today, those are humans that can look at that and make that clean data. Tomorrow, best large language models to do it in a fraction of the time. It's very accurate, and it reduces waste manual touches lowest at cost to serve, big opportunity for us going forward, especially at our scale.

How long will it take you to...

Mike, do you want to add?

Just going to jump in on the cost part. So if you go back to -- after our Q3 call last year, we identified the need to get after some costs in a more aggressive manner. And we said, hey, if you take that Q3 run rate from last year, annualize it, we're going to be $150 million better than that. And we've overachieved on that goal. We're now -- we upped that $150 million of savings to $300 million of savings and we're trending better than that to date. And you can see that in our productivity metrics, trending better than the $300 million. And so when you -- and the majority of that expense is systemic long-term benefit to the model. When you look at our productivity commitment this year, we said we can take 15% out in terms of productivity. We talked after our Q2 call that we are already at 12%. And that's the momentum, I think, that we've got going on a lot of the initiatives, as Dave was talking about, take touches out, make our system more efficient and really continue that investment here during a tough part of the market because we still generate cash flow and get us in a position to be even stronger when we come out.

Interesting. I wanted to follow up on, David, something you said you mentioned that some of these things could be game changers in terms of increasing your productivity. What's the time frame between now and when we get there for C.H. Robinson?

I think it's happening now, Jason. That's one of the things that you'll see as a difference in Robinson is the clock speed or the speed to implement and we're implementing a lot of these things right now. My expectation for the team is we will be in a very good pole position on the turnaround to put us in even a more competitive position than we already are. And so it's happening right now. Now when you're talking continuous improvement, that's a journey. I would say I would answer this question even if it was a high-side market, there's always still room for continuous improvement. And we will continue to do that. That's the DNA that's going to be in this company is that you don't just improve in a soft market, you're going to improve all the way through on high side, low side because it's a DNA, it's a culture of improvement that you will constantly do as a company.

A few years back, C.H. Robinson doubled its tech spend. Where are we at on that? And are we spending enough now for where you want to get on the technology side?

Yes, I think we are. One of the really nice tools in the toolbox that Dave talked about generative AI or a large language model that gives us some benefit is that historically, when we were trying to drive automation through system engineering, we are doing it inside of our Navisphere software. And that takes a little more time. There's a little more complexity with it. But the nice thing about generative AI and large language model is that we can work outside of Navisphere with Navisphere on automation and efficiency improvements and we're doing that with our own people. And those tend to be quicker, easier. And so I think we can achieve our goals without increasing spending on tech.

And is this going to be a situation where we start being able to leverage technology and not having to add headcount into the future but add a lot more business?

That is definitely where we're going for. And it's -- what we talked about a lot is separating out headcount growth, right, from this capacity growth that we do. So when we -- when you separate out that headcount growth and keep it at a competitive rate of where we are, but you're building the systems in to satisfy that demand, that's only a tailwind of competitiveness, and it's a reduction in cost to serve. That is -- we're laser-focused on that's the bar of where we're going. I don't know if you'd...

Yes. I think investors want to see proof points that when the demand comes back, that we can satisfy that demand without significant increase in headcount and that's a scalable operating model that we're talking about. That's our pursuit. And our efforts have changed in terms of focusing more closely on manual touches as a way to ensure that we don't need to bring the kind of headcount back that we did last time when the demand comes back.

For a complete electronic touch between a customer and a carrier, it's always seemed to me that the adoption of technology is quicker on the customer side, slower on some of the carrier side because you're dealing with a lot of smaller carriers. What are you guys doing to increase that adoption with the carrier side?

Well, Mike, you can answer if you want. There's a number of things that we're doing on that and some proof points as well. I mean just take track and trace for example, within the company. I mean, as you -- if you're going to continue to drive technology in here, you also have to have an SLA, service level agreement and expectations that you have, say for your carriers in doing that. I think the company was really on a position where it was wondering, how do you go and do that and balance the risk in doing that? And I think you have to be pretty definitive. If you're going to build a system, it has to have some discipline for it to work and then all tied to work. And I think the company just did that in really driving those kind of expectations. If you're going to be on the platform, if you're going to work with this, these are the kind of rules you have to do. That makes it the technology as a multiplier in doing that. And guess what, we've seen extremely high adoption rates from carriers in doing that. We're not going to stop there, right? We're going to continue to build out our technology and doing that. But I think it's very, very important to know the advantage that Robinson has. We're in a market that is imperfect, right? I mean, let's just say freight has exceptions in what you do. How you solve for those exceptions as well as using technology, this is the company that has that advantage to do that. And so we understand that, and we balance that, and we have the experience to do that. And that's something that I would say we're going to continue to improve.

Yes. I think that track and trace example is a great example for us. And several months ago, as Dave said, we rolled that out. It's our Carrier Advantage Program. And it wasn't as much about tech as it was about adoption and compliance to policy associated with the tech that we had developed. And that is part of our story here, too. We feel pretty confident that we can get the tech where we need it to be. And we've also got to get the adoption and compliance and the policy that comes with it. And that's what we did with carriers and helping us understand where loads were. We require. And I think that was a change that really is indicative of some of the changes that we've got in the pipeline, self-service, compliance, utilization, just making sure we're our best because we're utilizing the tech that we built.

So the tech was there, you just didn't really push for the adoption maybe as hard as you should have before?

We chose to -- the choice that have the biggest benefit for us was to require carriers to give us location information as a requirement to getting preferred status inside of our Carrier Advantage Program.

And obviously, increases visibility through the supply chain, helps you in terms of with your customer base?

Absolutely. And it's just -- and customers want that and it delights the customer. And Jason, I got to tell you, I mean, one of the things as I came on is I do something -- I've talked about this a bit on the calls, but it takes a little bit of time going there and try to explain it very quickly. But I do a thing called [ Gemba ], which is really a go see and it means go see. And I, as a CEO of the company, I have gone out there and I have sat with our employees for 2 hours and watch them work and just ask questions. It allows me to understand [ air states ], waste, how our employees are actually doing their work. And it's a powerful thing. And I'm requiring my leaders to do that, actually go work in path, actually go do the work that you're actually leading, it allows you to be better at driving waste out. But just to show you how dynamic this is, as I'm working with an individual and they're booking freight and they're doing a fantastic job when they're doing that. He turns to me and he talks and he says, Mr. Bozeman, this is how we're doing X, then he says, pardon me, turns around and says, "I've got to take that booking off." and I said why? He said because that freight won't work. I said "Well, how do you know that?" and he said, because I know. I know that carry. This is a loose load. If I book this, it's not going to work. Someone's going to show up. It's not going to fit. That's going to be waste, double pay but he just knew that. That's pretty powerful. A digital booking would not have picked that up, right? So we have to really kind of understand that this is a story that you have to drive, we're doing both. We understand that touch. We understand that change that everything is not imperfect or perfect, but we also understand the power of technology and how it can be a force multiplier to take away those little tasks that our employees really should have to do.

I really expect that Gemba thing that you talked about because back in the day, I worked in freight. The first thing I did when I was managing drivers was I literally went on all the runs with them. So that's the first thing I want to do is understand what they went through and how I could help going forward. You really -- I didn't even know I was going back then but you really can't understand it until you sit down. Let's talk a little bit more in depth about what we're seeing in the markets now. I think for a while, there was the thought that all these e-brokers are going to come in and take all this business. And now we've seen bankruptcies, you've seen a major one that's trying to sell themselves because clearly, they're not making enough money or making any money. Where does that leave the market for you? And does that just put you in a much better position?

I mean if you look at it, look, this market has been tough for a number of people. I think from a competitor perspective, I'm sure people are going to be -- competitors are going to be more cost conscious around where they are, right, because of the soft market. I mean, more people going out of the industry. I mean things [indiscernible] short answer, of course, that helps us in a sense in doing that. But the key thing for us is to just stay focused on what we're doing. And that is driving a better system of lower cost to serve, employee -- customers who are delighted, carriers who are delighted. When we can continue to stay focused on that, the market is going to be what it's going to be, how do we position ourselves to be in the absolute best position on the turnaround so that existing customers give us more wallet share, new customers give us more business, carriers are happier to do business with us. We think we have all those elements in play and the competitors have to deal with the market that they have to deal with. And we like kind of where we are, right? And then again, at the end of the day, we have a balance sheet that is making money and it affords us to invest in this soft market. And we don't take that lightly. I don't know, Mike, if you would...

Yes, I may add a couple of thoughts there and maybe reinforce one. I'm glad you asked, and I'm glad you highlighted other brokers, digitals and whatnot because that -- a lot of folks felt like there's a lot of win there. And while I think we respect a lot of that work and have, in many ways, emulated some of those strategies ourselves and our -- that is on our track. One of the things to point out is if you go ask customers, what do you like about Robinson? What you hear is you guys are there for us. You guys understand our business. You know how to book loads the way we want to. You're solving problems for us. And we want you to keep doing that. And quite frankly, they're rooting on us to be better so that we can continue to do that. What's important to your question in this regard is that when you make the choice to go after automation to help your employees and help with your customers, you've got to do it in the right way with the right stuff. And shame on us with the closeness that we have to customers if we can't be selecting the right things to be automating to give the most advantage to customers. And so that's point 1. Point 2, Dave hit, which is I think if you're struggling to make money in this environment, you're probably making tough choices about investment, too. We continue to invest through the cycle. We haven't pulled back because of the cycle. And so I think on a relative sense, that gives us a good -- puts us in a good place here now and for a rebound.

Well, let's talk about current conditions for some investors, and we'd be focused on that. It's I think on the 2Q call, you guys thought that we were seeing sort of a bottom on the TL side. Maybe talk about that and maybe also what you're seeing on the freight forwarding side.

Yes, sure. We've had so much volatility in the marketplace over the past 5 years. And I think what's different about the current state is it has been bouncing along the bottom here for quite some time, and it continues to. And I think we're now -- on the truckload side, we're now passed back to school. We didn't see a meaningful seasonal bump up that you might see in the past. We're well into holiday. And I think we'll see some sequential increase as we always do with holiday, but I think the consensus is that it's a muted holiday season, sequentially a little bump up and not the kind of strong holiday that you would hope for to see an indicator that demand is coming back. And so the next proof point might be Chinese New Year, early in '24. If we can see some demand coming back, then that might be a time for an inflection. But I think at this point, in terms of strength on the truckload side, we're looking at '24 more than we are in this year from a meaningful kind of enhancement. When you're over on the forwarding side, it's similar stories. You look at demand, you look at supply. On the demand side, I think a lot of our customers had a lot of inventories. And they started to work through those inventories. But while they were doing that, demand continued to remain soft, and so they had to kind of back off their expectations on demand, which meant they still had too much inventory. And so Phase 1 get rid of the inventory, Phase 2, readjust demand down even further to make sure you get through inventory. I think customers are in a better place now with inventories. And so that probably puts us in a better position when demand comes back and we believe it will. But right now, you still see that softness out there in the marketplace. On the capacity side, on truckload, I think there's some interesting stuff going on there. Based on history and where the market has been along the bottom, I would have expected more carriers to come out of the market. But I think there are some differences about this phase that weren't around in the past. A few of them, one being they made -- I think the carriers made so much money a year ago that they stocked away some money, they might have paid off the debt on the truck that they had.

Their balance sheets were a lot better.

A lot better. Yes, lower their operating costs. They might have had some pandemic relief funding that came into them. So I think they were more prepared coming into this downturn to be successful for longer instead a park in the truck and go in to work in construction or whatever. On the ocean side, a lot of talk out there about the capacity on the ocean side. And I think the carriers are doing their best to manage that capacity and the -- whether it's slow sailings or not sail full, full loads or redeploying vessels into other markets. They've got a lot of tactics to try to manage that, but that capacity is certainly a down force that needs to get offset by an increase in demand.

The other thing, I think, on the capacity side for the truck is from January to late July, diesel just kept dropping and so I think it helps a smaller trucker than diesel prices falling. And now we've seen sort of a hockey stick curve up since late July, it's up over 20-some percent. Have you seen capacity start coming out of the market with the rise in diesel?

Yes, I think capacity is coming up, but at this point, it's not a meaningful driver of us off the bottom, honestly, in the market. So I think we still got to wait and see on that.

Class 8 bookings as well, watching that.

Let me ask a sort of a longer-term question. So if we looked at C.H. Robinson 3 to 5 years from now, what would the differences be? Or would we still see sort of the 3 pillars of NAST and Global Forwarding and Fresh or could it look different than it does now.

I mean, it could look different, Jason. That's 3 to 5 years out, right? I mean there's things that I'm going to take a look at, that the company is going to continue to improve on. I mean that it could, right, in doing that. But I would hope that in 3 to 5 years, what you'll see is you'll see a company that, number one, has a culture that does better at solving problems versus admiring problems. You'll see a company that has a much faster clock speed when it comes to innovations, decision-making and being flexible in what it does. You'll see a company that has leveraged large language model type technologies, and it will be something in 3 years in technology. That's a lifetime, there'll be something else that happens. This won't be a company that waits until the company on the forefront at really adopting and using technology. But it will be a company that does that. That's only going to do that. It will be a company that has a lower cost to serve and, therefore, delighting its customers and its carriers. And it will be a company that people desire to come work for to be quite honest with you because it has an engaged culture. It has a winning attitude and it's prepared for cycles, both high and low and we're going to be pretty consistent on that. That's what my bar is. That's what we're driving. And if I had to go into the future, that's what I hope to see around.

Excellent. Well, let me give the audience a chance here. I think they have a question upfront.

Okay. Thanks for joining us, first of all. So you said in 3 to 5 years kind of culture, technology, lowest cost. On the culture side, has your leadership yet gone through? Or are they currently going through all the training necessary for learning Lean or Kaizen, going to Gemba for all that expertise?

Yes. Thanks for the question. Short answer is yes. And I'd say in my first 2 weeks, that was pretty clear to the leadership team around how I felt about lean. Put some resources in front of them in which they jumped on pretty fast. And I'd say in the last several weeks, we are moving fast on specific resources to come in and help them take that journey further. It's not something you can microwave. It's something that you have to really learn but I can also tell you what I see them actually implementing within their business lines, I'm pretty happy about because it's a direct learning of understanding how to see waste, value stream mapping. I mean these are things that I've never seen anyone go through a value stream map and not come out with opportunities to reduce waste. The leadership team is really adopting that and we're actually going through that process. So a lot more to talk about, but I get the essence of your question, short answer is yes.

It's continuous, right. It's a continuous learning.

It's continuous learning. And even when you think that you're a practitioner on it, you're still a student.

Yes. And then on the technology side, you mentioned the e-brokers, Jason. Let's just say, a lot of them had middling success, but have you -- like what are the things that they tried and failed or tried and succeeded that you've been able to take from them in your own business or look to implement later?

Yes. Like I said, they started from a different place, right? I mean we started from really great folks who know the industry really well, close to the customers. And we've been working our way towards getting those manual touches out, figuring out what to automate, figuring out how to make our business better, closer to the customer upsell, cross-sell through that model. They came from a position, I think, that was more, let's try to standardize and automate a set and coming from the other way. And I think they can speak for their own business models, but we also, inside of Navisphere, as I referenced, have done a lot to try to use machine learning to automate some of the manual tasks that we had. I think one of the things that plays uniquely for Robinson because of where we came from, that may not be as relevant for the e-brokers, as you say, is the advancements that are allowed by generative AI. All of -- being closer to the customer means more e-mails, more stuff comes in that kind of a mechanism today to convert information and order or necessary changes or exceptions, whatever it may be. If that comes in an e-mail today, we've got a person who receives that, knows what information is relevant out of the e-mail, knows how to fill the blanks about the other stuff that wasn't there by going into Navisphere, putting it all together and orders off and running. A lot of that is busy work. A lot of that can be done by generative AI or large language models, very effectively, very fast interactions into Navisphere, back to the customer to some of our folks, fill in the gaps, take the history, clarify the points that we're missing and get that all done. So our folks can get more engaged with the customer, more focused on cross-selling, upselling. And I think that's where the value is added.

That's the real answer. And then the last question on the cost side. If the ambition is lower cost, is the ambition also lowest bid?

Are you talking about on an RFP? I think the way we think about that is the importance of cost to serve and getting to that scalable operating model is the ability to give us optionality. And the optionality in a hugely fragmented marketplace to take pricing to a place where we can start getting to secular growth that Dave was talking about and still maintaining our margins.

And I would just add, secular profitable growth.

That's right. Any further questions? I know we're out of time. I think, listen, everyone, please join me in thanking C.H. Robinson.