Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Thank you. Thank you, Toby, and thank you for everyone's participation. So yes, as you see on the poll, nearshoring. So definitely hot topic, we're seeing this more often than we have seen it in the past. Newshoring many companies do their manufacturing outsource, as we already know, mostly in Asian countries just because of the low cost that this might represent. However, we have seen some specific industries, some specific customers that they are suffering some challenges that definitely outweigh the initial savings probably that they have in mind when doing this manufacturing in the other side of the globe. So some of these challenges are related to lead times just because of how the volatile, I'm going to say, the ocean market probably is, which is the main mode of transportation when they're moving from these other countries into North America. So just the impact in lead times, language barriers, the difference in time zones. So those things have really been pushing, I'll say, this year for companies to just think twice if it makes sense to do any nearshoring. And definitely, there are mechanisms that are trying to make these more efficient negotiations and eliminate trade barriers just as we have the USMCA in North America. So that's just a great example. So because of this and because other variables and decisions that have been affecting the company since the pandemic, nearshoring in Mexico is having lots of advantages for the U.S. shippers. And we see, again, many industries now opting for this option. So there's been a lot of, I'm going to say, positives on doing this newshoring in Mexico. There's definitely a competitive low wages transit time reductions. They have concerns sometimes related to intellectual property. And Mexico, it's known to be a country that these side of things really protect them as needed. Probably, we haven't seen that in other countries like Asian countries overall. The proximity to the U.S., easier and faster communication, the way that probably they can react to urgency. So these are some of the positive things that the companies have seen or the U.S. shippers have identified to be having nearshoring in Mexico. We have seen a lot of in investment in Mexico that has been continuously growing this year. Actually, there has been a lot of investment, for example, in the north part of the country. One of the main states, it's Nuevo Leon, which is the Monterrey area. A lot of Chinese investment in that side of the country. They have been investing in the last months more than $1.1 million. So definitely, there's a lot of industries growing. So another thing that we recently saw is due to the whole crisis on chips and semiconductors that we have globally, the U.S. recently have bill approval that is called the CHIPS Act. So with these put in place, the U.S. is going to be pushing for the semiconductors for chips to be made in North America, and definitely Mexico will be a major partner just to strengthen the supply chain because of the low production cost, because of the proximity to the U.S. So experts do foresee that because of all the things going on just in the world and because of this type of approvals, these bill changes, so they expect for demand and trade to increase between Mexico and the U.S. And again, a lot of this is because of the nearshoring of U.S. shippers having their suppliers base just within North America. Okay? So as a response to these newshoring strategies, there are solutions that could be available, and some of these -- well, the first one that we have, if we can go to the next slide, please, is just a network that we have, right? So the market is pushing for options and gets you look into other type of services, for example, the LTL. So pushing cargo from Mexico across the border into a really well-structured network has -- have been an effective manner of just having the supply chains running as they should. So even if it just be LTL shipments or actually breaking down a truckload into smaller shipments, obviously, if it makes sense for you, it can have a really positive impact of just having the shipments flowing across the border. So these LTL shipments, they move in a dedicated fleet. It's managed by Expeditors. We connect with the major house in the country. With our -- all of our branches, our offices in Mexico and in the U.S., they handle the local pickup, they handle the local delivery. So we can basically have and ship them away across the border within this network. So it's been proven that with this dedicated network of the claims and the damage, they practically eliminate -- we maintain our integrity. If there's any scale in your operations, we do have the operating leverage to respond to it. It's a great option here, I think, in -- I mean, just how the current market has been kept volatile. So this could be a really good option, if it makes sense, for your supply chain, your industry, your type of commodity. Okay? So besides this LTL network, we do have other type of solutions. If we can move to the next slide, please. So these are just examples of customer solutions that are available in just at your fingertips when navigating through Mexico and the southern border. Obviously, I'm not going to go through all of this, but maybe just a few. Working with all the major industries has given us the leverage to scale solutions in accordance to your needs, right? So a good example, it's just working with major electronic industry leaders; we deliver across the U.S.; we assure this customer experience for the ultimate users; the solutions that we have in place, we're picking up in Mexico, we move it across the border; we manage these door-to-door services with -- beyond the activities of destination. That's just one example. Another one is for retail industry, we do as to replenishments; we move, again, in bulk shipments from the U.S. into Mexico; we do the consolidations in our warehouses, in our facilities; we do inside deliveries in the stores directly. So we do have value adds implemented in these just to minimize risk when it comes to security, making sure the shipments are traveling as safe as possible. We have system integration, that is just the EDI connectivity. And obviously, this is just a big addition as to share all the information that it needs to for this specific industry. And I mean, we cannot forget about automotive. It's a major industry in the country. So running expedite, time-definite shipments through all the OEM vendors across the country in Mexico and also in the U.S. So we're definitely up to the rush of these type of operations and just what the operational demands when we are dealing with this type of businesses or this type of industry. So again, these are just a few examples. We have adequate analysis on improvement areas that we have done, solutions that we feel that fit based on the customer needs and based on the customers' business model. It's not just about moving cargo, but just putting in front of you valuable ideas for you that we know that we're going to be able to execute, and they will have obviously a positive impact in your supply chains. So again, with everything being nearshoring and trying to cope with the demand and the capacity and just the market struggles that we currently have, these are solutions that have been proven that can have a turnaround and deal with those type of volatile variables that we have nowadays. So we share these solutions for you. So I guess, with this, we're going to move to, I'll say, overall the last part of the content of the webinar, which is related to regulations. So we mentioned in the market update, we have 2 main regulations. The first one is at Carta Porte. So implemented since the beginning of the year, most of you might already know. The purpose of this regulation, the Carta Porte, is just to make sure that all the freight that is moving within Mexico is moving legally, just to have an adequate traceability of the goods in Mexico. So this is a requirement that is for all modes of transportation, either air, ocean, ground or even rail. If the shipment is moving within Mexico, we need to comply with the Carta Porte. So it's basically consists of carriers doing an electronic transmission to the authorities through their BL or their bill of lading, which in Spanish is called La Carta Porte. That's why it comes the name infra. And this electronic transmission is on to the Mexican tax administration. That is the Mexican entity that oversees this new regulation. And within this electronic transmission, they have all the information of what is actually moving within the trucks. This transmission is related on all the system that is put related to electronic invoicing in Mexico. So La Carta Porte is just like an annex or a complement of this invoicing that happens between the carriers and the logistics service providers. So authorities, definitely, they have an adequate visibility of transportation activities. They make sure and avoid that there's no any illegal freight wondering around the country. And they make sure to have the adequate control, adequate visibility also of all the taxes, the value-added and income that again happens between the services of transportation and logistics service providers. So in a daily basis, how this new regulation works. So let's move to the next slide. So basically, everything starts with the customer, providing information of their goods. They provide most of them a database on their part numbers that they're moving on the regular shipments. Either they can provide a database or they can provide this information on a shipment basis. So this information they provide is in accordance to coding to description to a specific information that the authorities, they build a specific catalog for shippers to use. So all the information that we get from our customers is already in compliance to the type of requirements that the authorities they need to. So we receive this information from our shippers. Expeditors will upload the information in our system, in our internal tools. And when we have all the information from the shipment, we just share it with our carriers. So our carriers are able to complete this information with other details like the driver's name, plates of the truck, of the trailer, a few details that they need also to add information to it. And with this, they do the electronic transmission to the authorities. Once this happens, the carrier receives, I'm going to say, an approval that everything was just made it successful. And when they have these, I'm going to say, go from the authorities that everything was transmitted successfully, then is the moment when a shipment can start being put in transit within Mexico. So definitely, all the parties involved, they know the timings of this. Everyone is pushing for things to happen as fast as possible, comply with all the information that we need to just to avoid any gaps or avoid any waiting time and just keep the shipment flowing. So the important update on this regulation is that as of October 1, the authorities will start applying penalties, applying fines to those entities not being compliant in traveling with Carta Porte. So it's been mandatory since the beginning of the year. The change is that as of October 1, if you are not being compliant for any reason, now you're going to have a penalty or a fine from the authority. So definitely now more than ever is important for you to focus. If you are not in compliant at all with this, just talk to your logistic service provider and make sure that things are going in the right direction because October 1, things will definitely have a confluence. Okay. So second important update on regulation. If we can move to the next slide, please. It's called Aviso de Cruce. So what is Aviso de Cruce? Aviso de cruce is a new process that is implemented for the Mexican borders for all shipments either northbound or inbound. This was -- it's implemented and it's applicable to all the customs ports either if it's air, if it's ocean, if it's ground. Every Mexican customs that we have within the country or at the borders for obvious reasons will need to abide to these new process. So there was the recent creation of an agency that it's called -- on its short name, it's ANAM. So this agency was created just to coordinate all the customs operations. I'm going to say, on their behalf, of the Ministry of Defense and maybe in Mexico. So since recently, the customs -- Mexican customs, they go now under the Ministry of Defense and the Navy. There wasn't a specific agency for them to handle everything related to bust. So the purpose of this new process is just to have an adequate organization of the customs inspections, make sure that everything that is moving across the border is in compliance to the regulations of the country, making sure that also there's an adequate collection of duties and taxes if shipment -- when shipments are crossing, again, through customs, and just making sure that any illegal freight is crossing into the country. So this is -- that -- I mean, again, this is a regulation just to make sure that everything that is moving within the country, we know what it is, it's nothing illegal, and all the processes are being followed and all the parties are being compliant to the customs-related requirements. So this is what is Aviso de Cruce, but how it will happen on a daily basis. So if we move to the next slide, please. The main parties that are having a change in this -- with this new process are the broker and the drayage carrier. So the broker, they need to register. They need to create a user, a specific user in a specific website. And the drayage carrier, now, they need to have a tag number. This tag number is going to be a device that is going to be placed within their windshields. And basically, this tag is going to carry all the customs information that the brokers will file electronically through the customs portals. So for every operations, a tag number from the drayage company will need to be shared with the broker. So at the time when the broker files for the entry or for the pedimento, they need to declare this tag number as identifying the carrier that is going to be crossing the shipment across the border. So we can move to the next slide, please. Okay. So when the broker is filling the customs paperwork, they will declare this tag number, as I already mentioned. They will upload all the information related to the shipment. And also, at this point, they will also declare end of load information regarding the Carta Porte. So this is where both regulations met the Carta Porte and the Aviso de Cruce. So Aviso de Cruce will be the way that the brokers electronically will let know the customs authorities this shipment is going to the border, this shipment is crossing the border, here is the Carta Porte, here is the tag number that from the carrier is going to be doing the actual physical border crossing, and here is all the shipment information. So again, the purpose of this is just to have all the information transmitted in an efficient way and most important, electronically. So if we move to the next slide, please. So as you can see in the right-side image, the -- yes, the right side image, all the information will be managed electronically. The truck, when passes through the border, everything will be read in this tag device. There are specific companies in Mexico that have been authorized to actually distribute these tag devices to the trucking companies. They aren't so many. So the process of the carriers obtaining these tags has not been as fast as we would like. There have been some delays. All the carriers are in the process or doing the due diligences of acquiring these tag devices. We're just waiting for the process to follow the natural steps, and they receive this tags. So this became effective August 1. Definitely, the implementation has been gradual. The first week started with certain ports. Then the following week, they added a few others and so on. However, an important thing right now is that the brokers, they do have mechanisms to be clearing shipments without the need to be declaring these tag numbers. So because of all the process that the carriers need to follow when they get this tag, that's why the brokers, they have these mechanisms to actually be clear in shipments, and just letting know the authorities we still do not have the tag number. So this is -- that's why you haven't seen an impact in your operations because right now, everything is flowing naturally as it should across the quarter. But again, the carriers are in the process of obtaining these tags. And eventually, in, I'll say, a few months, it's definitely going to be mandatory to -- for all shipments that are crossing across the border. They manage this tag device and just share the information with the broker and with all the adequate tariffs. So I guess with this slide, we have ended the actual content of the webinar. Thank you very much for the time. I'm going to turn it over to Toby, so we can jump into the Q&A questions -- to a Q&A section, I'm sorry. Thank you.

Thanks, Carolina. I hope you can all hear me well. Yes, we have some interesting questions here. But just so you know, anything that's in the Q&A box will not be published. It's anonymous, so please feel free to keep those coming. Our first one here is, Carolina, do you -- both in the data provided, we should consider the new process of Carta Porte is something administered by SAT, which is Mexico customs. It's controlled by SAT. They may be subject to lead times, no expectations about the fine maybe applied. So I think the question is, what's the lead time expectation? And what are the potential fines if it's breached?

Sure. Yes. So this part, as I mentioned within the question, the Carta Porte is controlled by the SAT, which is the Mexican tax administration. It's not really related to customs. However, it can affect lead times in the sense if there's waiting time when it comes to receiving the information from our customers, because remember, we need information from the customers, and then we need it to provide to the carers. So the carriers do the electronic transmission. So if we make sure that this information is provided in a timely manner, most important when probably the shipment is being loaded into the truck or even before, that would be like the perfect scenario, because we will be having the information and the loading time will be the efficient time to be used to be doing this transmission. So it can affect lead times based on how much time we take for gathering the information, receiving it from our shippers, and then carried during the electronic transmission. And the fines, definitely, they have different, I'm going to say, amount that they can charge because of nothing compliant. But I guess, the foremost and most important impact is that they can take over the cargo and just keep the cargo until they decide that you are being complying with the Carta Porte. So definitely, that does impact you of just having your freight been taken by the authorities in the meantime that you get in compliant with Carta Porte.

Thanks, Carolina. Just want to encourage all of you, if you want to come off mute and ask a question, please feel free to do so, but I've got a few more written questions here. One regarding capacity management, Carolina. What are we doing to deal with the lack of capacity? How are we going to mitigate that?

Sure. So Expeditors definitely has a reliable network when it comes to service providers or carrier trucking companies. We definitely leverage with our regional volumes just with the network that we have these national carriers in the U.S., Mexico and also in Canada, just across North America. So we do leverage with volume, and that really makes us efficient to have an adequate capacity and have these commitments with our service providers just to service your needs, right, your daily shipments that you might have. Another thing is we have been really focusing with customers on having efficiencies in the process, just managing and minimizing loading and unloading times, just having things run around the clock just to make sure all the resources are moving back and forth as fast as we could, as fast as possible to make sure, again, you have an equipment available at your door when you request it.

Okay. Thank you. Another one here. A couple about capacity, which you've answered. Costs, okay. What are you doing -- what are Expeditors doing to mitigate the cost increases that we're seeing?

Yes. Well, I mean, we haven't been the exception on cost increases. Again, this is a market -- carriers are facing 2 fuel increases. There are 2 other variables that we know are affecting the cost. What we are doing right now is trying to manage a broader aspect of your operations. If we have any normal shipments, we also are offering inbound. So we can, again, manage to have a more controlled environment when it comes to cost because we have an important volume. So that is one side of things. Another thing is just making sure that we do revisions on the rates. Probably just every 2, 3 months, just making sure things are adequate when it comes to costs. Sometimes, there are no changes. We're just making sure if we do any, I'll say, just adequate based on how the deal has been changing. But basically, those are things that are taking place right now regarding costs.

Thank you. And there's a couple about costs, and I have one about carrier management. So how does Expeditors -- how often do Expeditors review the current carrier base? That's a 2-part question, sorry, Carolina. Have you got a pen and paper?

It's okay.

And how would you control service? So how often do you review our carrier base, and how do we control service to Expeditors?

Sure. Yes. I mean, just having a new service provider, onboarding Expeditors, definitely, there is a program in place that is called the service provider management program. We do conduct fares of, I'm going to say, requirements within these requirements, there are audits that take place on a yearly basis. However, besides these audits or risk reviews that are done with our service providers, we do have monthly evaluations with them regarding key performance indicators, regarding just the overall service evaluations. There might be specific operations that instead of being on a monthly basis, they're required to be in a shorter period of time. So definitely, we can have some adjustments based on specific operations that we have with them. And that's basically -- we have also structure that is specific to service providers. There are managers specific that they handle all this communication, supported by the Transcon teams. But yes, I mean, that's basically the model that we have. And when we have any new service provider, it's just a way of having -- because of a strategy, if we have any new lanes or we have any type of business that we need to bring on board new service providers, we also do the due diligence of having them be added to our network, again, following all the audit and all the requirements for them to be a part of the service providers for Expeditors.

Thank you. Just to add to that, we have a regional supplier management team as well to assist Carolina. So we're very much focused on managing our suppliers and making sure they're compliant. And obviously, in regards to cost, Expeditors has a rule in regards to cost that we're not allowed to go above a certain amount so -- in terms of margins. So that's something that very few companies do. I'm looking at some of the other questions, most of them, they're all -- that's about it, I think. So is anybody out there got one -- got a question for us before we wrap it up and say goodbye? If so, now is the time. Okay. On behalf of myself and Carolina here in Mexico and El Paso, I'd like to just to say thank you so much for attending. We really appreciate -- we really appreciate it. Thank you for your support, and have a fantastic day. I hand over to Samantha.

Thank you, Toby. I appreciate that. And Carolina, thank you for the great conversation and presentation on the market updates and regulatory changes that's impacting a lot of supply chains. Just quickly mention other webinars that we have coming up before we let you all go. We do have a U.S. domestic market update coming next week as well as a webinar focused on how to save on duty cost in the U.S. using Chapter 98 classification. So we'll go through some of the parameters in order to make those classifications work for your supply chain. And then we'll have a few more focused on the air updates. And I apologize that says August 23, that should be September 23 for the Q3 air market. So those invites will be coming out if you get our regular e-mails. If you don't, the market and industry updates here on the right side of the screen is a way to make sure that you get all of the invites from our region, for those webinars as well as our biweekly newsletter that will give you industry updates. So by all means, scan that QR code if you're not subscribed. There is a lot of valuable information in those updates for you. But again, to Toby's point, we appreciate you all joining and sticking with us. We will send the presentation and recording out to you guys within the next day. Thank you so much.

Thank you.

Thank you.