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

Okay. Good morning, everybody, and welcome to Expeditors Ocean Market Update Webinar. This is our first Americas webinar of the year. So we appreciate everyone joining today. We do have a large audience with us, and please bear with us throughout the webinar. We have about 45 minutes of presentation material, and about 15 or 10 minutes depending on how long it goes at the end to go through any questions that you may have. [Operator Instructions] If we don't get to your questions during the webinar, we will follow up afterwards and ensure that we get you an answer to your question. There will also be a quick survey feedback that will be sent out after the webinar via e-mail. I'll be sending that survey out. We do appreciate your feedback. And in return, you will get a copy of the presentation material that's linked to the survey. With that, I'm going to move on to the next slide here. You will see a couple of QR codes. Now the first one here, this is the QR code to sign up to receive any market update e-mails from Expeditors and local and Americas event invites. The second QR code, you will see a list of all of our upcoming events for the month, and we do encourage you to subscribe, sign up and monitor those on a regular basis. You can get the latest information from Expeditors. Now with that, I'm going to go ahead and introduce our speakers today. We have Adam Kord with us, Director of Ocean Cargo Services; and we have Mike Barba, Director of Ocean Business Development. So without further ado, I'll pass it on to them to kick us off with the webinar. _

Thanks, Nicole. For any of you that are -- that haven't joined our webinars, Adam and I, although it looks like we're not in the same office, I can hear him through the wall. We're in offices right next door to each other, but we wanted to have access to the Q&A box on both computers so we could get and ensure that we answer as much -- as many questions as possible during the presentation.

Mike, also, what I see is that they say that COVID took a toll on a lot of people, but by the looks of those last pictures, we haven't aged a bit. That's the way it's in that ages, we can -- I can use pictures from when I had a full head of hair about 10 years. We got that going for us. _

And for sure. Before we get going, I just -- as we always do, this is just a disclaimer. We're ensuring that you understand, to the best of our ability, we've vetted the information that we're going to show you this morning. I will tell you as well, the information is not proprietary. It's information domiciled in the public domain. We do our best to ensure that it's accurate, but we don't warrant the contents of the -- or the accuracy of it. And I would tell you just look at the information, we try to vet it as much as possible, and then we draw conclusions. And we're showing that to you and hopefully, we'll both draw the same conclusions. So without any further ado, I'm going to turn it over to Adam.

All right. Thanks, Mike. So for those of you over the past 3 years that have attended Mike and [ I's ] seminars, we typically talk about the current events and what's on the horizon, and we're surely going to get there. But Mike and I, we spent some time together, and we were reflecting back about really what's happened over not only the past 3 years, but even take it back further. So we want to start out today with just kind of a reminder of how we got here. What most of us working in some semblance if you guys are attending the seminar is supply chain. And supply chain has been [ manic ], to say the least. I've worked at Expeditors and in and out of Ocean Freight for 25 years. Mike has been working with Ocean Freight for 40 years in some capacity, and we've seen a lot. But the last 6, 7 years has been absolutely wild. So just to level set, we wanted to take -- to start with a little trip down memory lane of what we've all been dealing with and dealing with collectively. Starting back in 2016, Mike and I are part of the group here at Expeditors that participate. We do our global negotiations, engaging with carriers globally. And we were happened to be on a trip in Hong Kong, and we got the word that Hanjin wasn't going to make it, and they went bankrupt. Hanjin at the time was the sixth largest carrier in the world. There was a lot of talk and uncertainty, but everybody said they were too big to go under. And they went bankrupt. And what that did is it set off some shock waves throughout the industry. There's a lot of reasons and people speculate why Hanjin went bankrupt. Mike and myself and many others have studied this, and a lot of it came back through the entire landscape of the Ocean Market and came back to supply and demand. The available supply exceeded -- or capacity exceeded demand that was out there. So what did the carriers do, they were on a rash of consolidation. And at that time, there were about 16 global carriers and the carriers in our 4 alliances. Coming out of that bankruptcy, the carriers made some massive changes, shrinking the alliances from 4 down to 3 and ultimately, that carrier base from 16 to where we sit today at about 9 global carriers. And some legacy names that have been there forever disappeared. So as we move along and we work through that new landscape of fewer sailing options, consolidations, things of that nature, there was a large administration change in the U.S., and there was also boiling tensions with China over a multitude of things, a lot of it had to do with intellectual property in fairness and overall trade. So what happened at the time in 2018, our administration put out tariffs. It started out with about 25% tariffs in 2018 on roughly $16 billion worth of Chinese imported goods. Later on in that year, they added an additional 10% tariffs on $200 billion of imported Chinese goods. And in 2019, we raised that 10% to 25%. What happened? We started to see a migration, some changing of importing patterns. We saw cargo pull away from China. Those numbers go down. And we saw an explosion of growth in other markets, including Southeast Asia. What happened is, with those looming tariffs and I talked about how the tariffs in 2018, there was a threat that, that 10% tariff was going to go to 25%. Well, what did that do? That, as I said, it exacerbated the challenges throughout the landscape, and we saw a lot of importers into the U.S. to start pulling inventories forward, which caused congestion, congestion that we had to work through in 2019. We saw a big push. I say many times that rates are products, it's macroeconomics, rates are product of supply and demand. There's a big need as people in late 2018, 2019, were trying to get the jump and push ahead of these, so some inventory levels raised. But again, the market got tight. Then something none of us were prepared for. I have managed through, Mike has done the same. Many of us on this webinar today have managed through many situations from labor situations to natural disasters, but the pandemic was something that we haven't dealt with before. Economy has really changed. We saw it in the first quarter of 2020. We saw industrial production globally slow down, consumer consumption really stop. Where Mike and I sit here at our corporate headquarters in Seattle, we were having strategy meetings about, oh, my goodness, if there's no cargo to move, the carrier mix just shrank from 16 to 9 global carriers, who's the next carrier that's going to go bankrupt? How are we going to support our carriers if something happens? And then what was astonishing was rates didn't fall. Carriers didn't go bankrupt. Why not? Can you go back one more real quick, Mike? And the reason why they didn't is because the carriers removed in part capacity. So that consolidation they did paid off. They were able to work together within those 3 alliances and they quickly removed capacity from the market. Now what you see here, this is a snapshot I pulled from trade publication, Alphaliner, and it shows that in May of 2020, there were more than 2.6 million container positions that are on the sideline idle. So that was idle in May and then what happened? Well, American consumers and European consumers, for that matter as well, started to spend rather than with the inability to go out, go on vacations, go to movies, go to concerts, a lot of people started remodeling homes, buying durable goods was huge. The government, because people aren't working, injected billions of dollars into not only the U.S. economy but other economies around the world were injecting money. Demand absolutely surged. So the carriers needed to get that capacity back in. So what did they do? They quickly, in a very short period of time, they interjected that capacity back into the market. So that 2.6 million that was on the sidelines in May, by October, it was down to 400,000. There was an additional 2.2 million container positions that were put back in. Well, what happened? You don't build a highway for a hurricane evacuation, the U.S. infrastructure went on meltdown. Terminal congestion, rail congestion, all types of things, that was the real start of it in Q3 2020. From there, just record-setting volumes. The demand surge continued. We saw capacity move from other trades into the head haul trades from Asia, Europe, Asia to the U.S. There was an imbalance, right? There were so many containers rushing in. There were containers moving out. There's container shortages. There is infrastructure as we talked about how there wasn't enough truckers to pick up the goods. There wasn't enough chassis. There weren't enough people working to unload and load containers. So much of 2021, it was triage -- operational triage driven by a consumer boom and e-commerce boom and there were record-setting volumes. From there, much of 2022 for Q1 to Q3, there were backlogs. There was the Delta variant. We were hopeful that we were out of COVID, and there was a lot of people going back to work. And then in Q1, the Delta variant spiked. Many people that were back in warehouses and the office had to go home. There was that resurgence. The ILWU, there was a contract which was still not through and Mike is going to talk a little bit about that. There were fears that there could be a strike or there could be a shutdown, and we saw more and more cargo migrate away from the West Coast to the East Coast. So another big change. Then we get into Q4 2022. Well, what happens? Inflation absolutely surging, have been building, building, building. Inflation back and global inflation back and in the U.S. back in 2019 and the years prior, was under 2%. By Q4, inflation had risen to just under 9%. The governments had to do something. They were started raising interest rates. In addition to that, with congestion easing at the terminals, there was a rush of cargo that came in. Importers that have been front-loading orders, those orders started showing up. What happened? There was an inventory surge. The lack of inventory that folks have been fighting with for years, it came to a head. There's a warehouse space shortage. The ongoing ILW concerns were there. And there was a lot of congestion that started to ease because inventories were full. And then what happened? Supply and demand, as demand started to fall, head haul rates started to fall. We started to see those record high rates that we saw from the months prior start falling in a hurry in the head haul trades. So then we start our new year. Q1 2023, what's going on? Demand has fallen, right? Mike and I talked to a lot of folks and there's still a lot of inventory out there. There's still ongoing labor concerns. And the carriers, just as they did back in 2020, have started to implement plans to balance out supply and demand through blank sailings, service [ strength ] suspensions. And that really sets the table for another year of fun. So just after I've laid out a little bit of history, I'm going to turn it over to Mike, and he's going to talk about where we're at today and what we see in the future. Mike? _

Are you tired of being on the merry-go-round? If you are, we're not quite off the ride yet, we don't think. But there is some positives in here as well, and our hope is that we get some stabilization. Any of you that have been on our webinars, you know that we talk about market levers and these levers drive behavior of the asset owners, the carriers in the marketplace. They drive behavior in the marketplace in general. And the levers have not changed. The levers remain the same. Capacity, which is supply, that's the amount of space that's available in any given moment. Demand, the amount of throughput that comes through. And when supply and demand, Adam showed you and we'll show you some other charts as well. Supply and demand has just been, for lack of a better description, a roller coaster, okay, where it is not balancing. It never seems to get to a point where it comes into balance and we get some stabilization. And so those first 2 levers, they drive operating expense. The carrier -- supply and demand are out of whack and operating expenses -- operating expenses typically, they don't move as much as the other levers, right? And they have a tendency to go up year-over-year. When that happens, it drives the financial performance of the carrier and the carrier behaves a heck of a lot different when they're making money versus when they're losing money. And then finally, outside factors, and Adam hit on a few of those. There's lots of outside factors that create behavior in the marketplace. Labor is a big one, but not just labor. There's political outside factors. There's change in administrations. There's regulatory outside factors. There's a tremendous amount of scrutiny that's come into the marketplace here in the last year by not just the Federal Maritime Commission in the United States, but the European Union as well and as well, the Ministry of Transportation in China. Make no mistake, okay, these regulatory bodies, they are more involved than they've ever been in the industry. And that creates these ripple effects in the marketplace and drives behavior. So what are the indicators -- the question we get asked, I chuckle a little bit about it because the first question that everybody says is, well, what are the rates going to do? If we could predict the future, if we could tell you the future, we would. We can only look at the indicators and the indicators, okay, are telling us right now the rates, they're compressing. And it goes back to Adam's opening comments, supply and demand is now back out of balance. We are back into more of a buyer's market versus the seller's market. And because of that, each side now is kind of a staring that we're in -- we're almost in a staring contest there where have the rates bottomed out. Or is anybody in a hurry to contract rates? No, both the sellers and the buyers are not in a hurry at the moment to contract rates because you have this tremendous amount of rate compression that's happening. And I just showed you one example. This is an example of Shanghai to New York and Shanghai to Los Angeles, don't get hung up on the number. Just look at the graph. And so what do we do? Typically, we look to other ways to validate, okay, what the data is telling us. And so we go to indices, right? We go -- there are a tremendous amount of index participants that create indices out in the marketplace. And again, I would tell you, it's interesting because you look at these 2 indexes, right, and you see the number in green on where the level is at the end of December. And again, don't get hung up, okay, on the number. It's the graph that's the key here. This is the index, China to North America. The key here is that the index is down since 2021. So let's just say, quarter 4 of 2021, anywhere from 85% to 95%. That's how much the rate has come down. And that's just in a little over a year, about an 18-month window. Same thing, China to the East Coast of the United States, East Coast of North America. And again, we just took 2 indices. We took the Baltic, and we took Drewry in. Just -- and again, always to satisfy ourselves, right, that we're looking at this the right way. The graph doesn't lie. The data doesn't lie. The rates are -- have compressed tremendously, right? And again, you look at that window from fourth quarter of 2021 through Q4 of 2022. And these East Coast rates are down anywhere from 75%, let's say, 75%, close to 90%. If you look at -- the interesting piece in this whole exercise when we started looking at this data was the split, okay, between the East Coast rates and the West Coast rates. So typically, the East Coast port rates were -- ran in the vicinity of about $1,500 higher versus the West Coast rate. So if you had -- I'll use this example, you had a $1,500 rate from China-based ports to the West Coast of the United States. The China-based ports to the East Coast ports in the United States was around $3,000. And again, don't get hung up too much to the number, but the gap was there. In the second half and a lot of 2022, that gap got as high as $6,000 a box. So if the rate to the West Coast was 10, okay, the rate to the East Coast all [ order ] was 16. It's a huge difference. And a lot of that, again, go back to what Adam touched on, right, that's an outside factor that's pushing on that lever, okay? That's the fear of a labor disruption -- 2 labor disruptions, actually. One was the labor disruption, which we avoided, which was the rail labor disruption that surfaced probably in October, November of this year and fortunately for us, the Biden administration served themselves, and so they came to contract. But the ILWU, which is the longshore workers union that represents the West Coast longshore workers, they are still working without a contract since July. And that is creating some fear in the marketplace. We'll talk a little bit about that. And then I always want to make sure that we don't always just focus on the transpacific, right? This is -- as an example, this is the Drewry Index, Rotterdam to New York. And here's an example, okay, where the opposite is true. Now is that rate under pressure? Yes, it is, okay? The party might be over. We're not sure yet because there's a lot of capacity now in that North Europe and Mediterranean trade to the North America East Coast. And if you look at that, right, the capacity that's coming in there, which is being pushed from other areas, that could grow as much as 25% to 30% by mid-February from where it was in 2019. You measure it against 2019. So as that capacity goes up, you are going to get, if we're correct on the demand side, and we'll show you some demand slides here in a few moments. If we're correct, that will begin to push down on that rate level. And it has not gone graphically the same way as the rates from the transpacific into the North American ports. So just an interesting index. What we did see, and this kind of goes back to the point I made before, there is absolutely a shift to East Coast and Gulf Coast gateways. And so we took it. We had the opportunity. This was -- we got this out of peers and S&P Global. We cite our sources where we can. So again, what I'm showing you is not -- is information in the public domain. But you look at that and the market share, okay, to the East and the Gulf is growing. And it's growing every year, beginning probably at about 2014 forward. On slow growth, but in 2022, we saw the most growth that has happened in a long time, right, where that market share is changing. Supply chains are beginning to adapt, I think, differently, okay, as these market levers continue to kind of move all over the place, right? And again, you have this outside factor of the fear of a labor disruption. And so you've had this shift in the market. Is capacity -- is overcapacity predicted to return? No question. And when it does, okay, it typically -- as overcapacity returns, you see the rates begin to crash. And this graph shows that. Just this graph as an example, just shows the China Containerized Freight Index and shows the Shanghai Containerized Freight Index, okay? And it represents export containers that come out of China. Again, don't get hung up. The point here is the graph, okay? And what's interesting in this graph is that the Alphaliner Index, which measures charter rates. And why are we interested in charter rates? Well, more than half of the carrier's fleet, in most cases, there are a couple of exceptions, but in most cases, more than 50% of the carrier's fleet is chartered. And so as those charter rates begin to start to crash, okay, you potentially could see capacity getting pushed back into the marketplace as charters come to an end. Charter's like a leased car, okay? When you're done with the lease, you can lease it again if you want. But if there's no need for capacity, you're going to get excess capacity pushed back into the charter market, and we're already seeing the charter rates start to crash. So I keep on the -- we're still in the first lever. I mean we've gotten through capacity. This is capacity as of December 1, 2022, okay? And you can see year-over-year capacity grew. So in 12 months, it only grew 4.19%. Cellular ships is what we're interested in because that's what typically moves most of the cargo that we touched, not all of it, but I'm going to say, 98% of it, 96% of it, okay. Year-over-year increase, 4.15%. What I mentioned before, the chartered fleet, okay, 45% of that fleet is chartered, okay? The key here is look what's on the order books, look what's coming at us, okay? So if the fleet is 26 million Ts, another 29% of that 26 million or 7.5 million TEUs in capacity is coming at us, okay? And there wasn't much that came at us in 2022, again, it was about, let's say, 4.2%. Not much on the scraps. But look at the new orders, January to November, that they have on the books. Again, 2.6 million TEUs. And so you slap them, you slap supply and demand together. This was the roller coaster I talked about and Adam talked about it in the beginning. And it has since 2001, which is as far back as we can measure it, we got this from Alphaliner. It's been just a roller coaster. It never gets itself aligned. Couple of points in time were to align, back in 2011, 2012, probably for about a 9-month window, it was -- supply and demand were aligned. The market was pretty stable. But beyond that, you look at the annual capacity growth and the throughput growth, and it just doesn't align. And so what's going to come at us in 2023 and 2024? I showed you before, right, 300 deliveries. So this is what it's anticipated to be delivered in 2023, 354 vessels. A high percentage of those, okay, are up in the big vessel category, right? So this breaks it down by -- you look at 12,000 and above, right? And there's a high percentage of the capacity is going to be in those big vessels. But what's on the horizon beyond that, 2023, an 8.2% growth in capacity and 2024, an 8.5% growth in capacity. Now that's before deletions, that's before scrapping. We don't know yet how much that will impact it. But typically, it's not going to impact it enough -- appreciably enough to make a difference. Capacity is absolutely going to outstrip demand and years where we get into the demand piece of the presentation, right? This is Seabury, this is a subscription service that we buy. This is a snapshot in time. And this is -- the numbers represent a percentage of cargo growth -- containerized cargo growth year-over-year. So this is a snapshot of 2021. You can see in 2021, we talked about this, there was tremendous growth in almost every single lane globally. 9.6% global containerized growth, okay? Look at as an example, the trades, typically the East-West trades, Asia to the Americas, 14%. Southeast Asia to LatAm, 33%. European theater to North America, 15%. North-South trades, both ways into and out of the United States, into and out of North America, 10% and 12%. Just stunning growth, okay? But you move forward and you take another snapshot and you look at now, July, okay, through September. So July, August and September, a 3-month window, a quarter in 2022, and you compare it to 2021 and look at the deceleration on the demand side, it's unbelievable. And remember, we talked a little bit before about that index from Rotterdam to New York, look at the percentage of growth there. That's still in the green, and that's still pretty healthy. At 4%, that's still pretty good. But look at the Asia, okay, back to the Americas, it's 1%. So what's happening? Demand is stalling, okay? In that quarter, it went down 1.2%. And in the month of September, if we just take a 1-month snapshot in September 2022, and this is about as far as we have in terms of data so far comparing 2022 to 2021. Globally, 3.5%. But the head haul lanes, they're crushing. Again, with the exception of the European theater back into the Americas. But just unbelievable crash on the demand side. So remember, all the slides we show you on the capacity slide. Now you have this crash coming on the demand side. And we looked at it in sectors. So again, when I showed you 2021, where was the growth? We took -- some industries we took verticals, right? So where was the big growth? Adam hit on it right in the beginning of the presentation, personal consumer goods and household consumer goods, staggering. Just staggering amount of growth in 2021 compared to 2020. Consumer goods up in that time period, okay, over 1 million TEUs, unbelievable. But you get to the third quarter, what's not moving? What has now gone? Consumer spending, we think because of inflation and lots of other things that are happening out there, but overstocked inventories from just lots of reasons why that consumer spending went way down in that quarter. And then, okay, October, okay, to September so you look at a 1-year window. So you look at this 1-year period, it's down, it's unbelievable. Every sector, September, in the month of September, again, household goods, personal consumer goods, just everything is crashing. Meanwhile, okay, so we talked about supply, we talked about demand. What about profitability? What about operating costs and profitability? Well, the profitability continues to be very healthy for all the liner companies right now. Look at their EBITDA margin by quarter. It's never -- record highs beginning, okay, back in 2020, okay, as we started to climb out of this COVID era, all the way through 2021, okay? And first quarter 2022, you begin to see it start to stall because you begin to see compression on the rate side, okay, you can get to see rising costs, infrastructure costs going up, okay? Their profit margins are starting to fall. And this is concerning because I think that they're going to be under a tremendous amount of pressure not to get back down into this area -- into this roller coaster, barely making any profit and in many years, losing tremendous amounts of money. I think the carriers' behavior will be driven by their need to continue to be above that line. I don't think they'll be at those record levels, but I do believe they will not let themselves go beyond that line, and that's Adam alluded to that a little bit before, that requires removal of capacity. We don't think demand is going to skyrocket. I mean here's as an example. Is the party over? It very well could be. It just -- this came out of Alphaliner. We just looked at it. You look at just 3 carriers. We looked at the Maersk Group. We looked at Hapag-Lloyd and we looked at ZIM. And those forecasts, okay, for quarter 4, the quarter 4 results are not out yet, that's dismal. That's way down from what they were doing. And this is just 2022. So what continues to plague us in the industry? I mean you do have schedule reliability concerns that although they are getting better, so global schedule reliability and average delay of vessels. So the average delay of vessels is coming down, okay, where it was at a high at one point in January, okay, of 2022 was a high of almost 8 days was the average delay for a late vessel, was 8 days behind schedule. It's back down to 5. Is that good? No. It's definitely not good. The schedule reliability is, let's just say, for argument sake, right, it's at about 57%. Is that better than it was? Absolutely, okay? It was at a low -- it was at 30%, okay, in the beginning of the year. So it's getting better, and a lot of it has to do with the backlogs being cleared. A definite drop in demand doesn't hurt the schedule reliability, it gets them back on schedule. And then so we just took another look at this in a different angle. We looked at the alliance schedule reliability. I wonder, are all the alliances the same as their schedule reliability, all that bad? Yes, they're all that bad. No one is a shining star here. And so you look at it again, 56.6% arrived on time in November. That's the highest it's been since 2020. It's a big improvement, but we're definitely -- does that help us, the importers and the shippers on the supply chain side, not really. I mean when you have a reliability factor that says only in rough numbers are rounded down. Half the time, it's on time. That's not really good. What about outside factors? We get asked this question a lot. What about the ILWU? We gave you some hyperlinks to some articles from the World Street Journal and from the Journal of Commerce. There are some issues that are prolonging the West Coast longshore labor talks. There's some issues actually right here in Seattle, right in our hometown. There's an issue that cropped up between Electrical Machinist Union and the ILWU as to whose work it is to do work on the terminals, on electrical systems as well as plug-in the ships. I don't want to go into a whole bunch of detail on it. It's just -- each side, okay, seems to kind of rattle their savers every once in a while. There was some vessel delays in operations at Oakland, okay, due to some "safety issues". So both sides, okay, although both sides are declining to comment, both sides, they're -- it's getting a little order right now. We don't know where this is going. And this union-to-union dispute, this was from the Wall Street Journal. If you're interested, you can read through it. It explains the inter-union dispute between the Port of Seattle and the ILWU and the Machinist Union. It's now in front of the National Labor Relations Board. We could spend a whole another webinar talking about this, but -- I find it very interesting, but again, just take a look at the hyperlinks. I think tensions are rising in this theater, and we're not sure where that's going to go yet. Our hope is that they can come to a resolution that we'd not have a labor disruption. So you bring it all back, okay? And you basically, to summarize, right, as congestion eased, okay, the vessels that were all queued up outside the ports anchored for 7 days, 14 days, 21 days, okay, that's down significantly. Meanwhile, the order book on the capacity side is really high, okay, around 28, I cited 28%, 29%. So unchecked, okay, capacity we showed in the slide is going to grow through 2025 anywhere from 8% to 10%. But meanwhile, global demand is stalled. It's maybe at around 1% in 2022. I think when all the numbers come in globally, it will be somewhere in the neighborhood of 1%, could be negative. Raw materials and perishables are going down and consumer goods are absolutely -- we showed you in the slides from Seabury, they're decelerating. And meanwhile, okay, the inventory to sales ratios and the stocking in inventories, particularly here in the United States, is high, okay? There's a lot of inventory available. From an operating expense perspective, there is a fear on the labor side. I mean, that contract, I don't think that's -- it's going to -- the rate is going to go down, right, I don't -- we don't foresee that. And there's questions in relation to fuel and infrastructure as well as environmental issues. There's a lot of speculation on how that environment, the IMO 2023 CO2 emissions, how is that going to impact it. From a financial performance perspective, although the carriers are making money, their profitability is eroding very quickly. And the fuel costs, which is their #1 operating expense is fuel for those ships, that could go up, okay, as the environmental restrictions begin to get enforced. So the outside factor is the consumer confidence is eroding. The market growth is some -- I think they're being very optimistic saying that it will be less than 3%. We may see no market growth. But meanwhile, capacity is up 8%. Spot rates and -- they're decelerating. It is creating a negative impact on carrier profitability. So I'm going to hand it back over to Adam.

All right. Thanks, Mike. So what's on the horizon? Mike gave you some information to peer into the crystal ball a little bit and draw some conclusions. And there's a couple of things that I wanted to touch upon. We look at consumer confidence, what we buy, what manufacturers consume drives that demand. On the way in this morning, I heard that the consumer price index dropped for the first time in quite some time, which is, in some cases, depending where you're at, could be a good sign that we could stop to see some of those inflation woes and interest rate increases by the government, we'll watch it really close. And you see a bubble there that says OSRA, the Ocean Shipping Reform Act. So June 16, President Biden signed an amendment to the existing shipping act which was some new legislation that really broadens the regulatory powers of the Federal Maritime Commission. And really, the intent was to increase monitoring of ocean transportation and to initiate some rule-making to protect fair export process practices. So really, it's set out to do 4 things, and it is. They're enforcing the carriers' obligations to support U.S. exports throughout the COVID time. There were some examples and many complaints about export bookings being denied in order to quickly reposition cargo. The act established new rules to deal with detention and demerge, which was a massive problem that many of us wrestled with for the past couple of years. It improved oversight in enforcement initiatives to just protect the overall American consumer. And then also provided a bunch of new resources, just under $200 million for the FMC to add additional tools, hire new agents so that they can analyze market conditions. So this is a big impact, and we'll see how that -- all of that plays out with the new resources of the FMC. Other thing that's been a big change on the horizon, and we see a bubble there of green in fuel. So IMO 2023, and Mike and I could talk hours on this topic. So I'll just brush upon it really quick. Back in 2019, Mike and I spent a lot of time just talking about IMO 2020, which is where the International Maritime Organization put in new regulations and they're adopted based off of the fuel, the type of fuel that could be earned in marine vessels and the standard, the amount of sulfur that was burned and heavyweight fuel oil burned by the vessels. Well, the next iteration of that is IMO 2023, and we're here. And really what that does is, it looks at 2 items. There's an Energy Efficient Existing Ship Index, which is known as the EEXI. And really what that does, it's a new rating system that is going to look at the actual ship specifications. So it's going to give a rating to the ships to see how much pollution or what they could be putting out into the atmosphere. Coupled with that, there's a new measure, which is called the Carbon Intensity Indicator, the CII. And this is where ships are actually going to get a grade of an A through which would be very good, through E of core, based off of the amount of emissions that they put into the atmosphere. So as far as compliance, what's going to happen? Well, a lot of it remains to be seen because the IMO is still working on what's going to be defined as penalties. But ships will have to get a certification. Ships will be rated starting in 2023. And in order to comply, there's talks of slowing down the ships so they put out less emissions. There's talks of upgrading engines and there's also talks of scrapping. So all of this will play into that supply and demand balance. As far as the others, Mike talked about the amount of money that the carriers spent and the new capacity coming into the market. These ships are bigger, and we have seen that supply and demand pendulum control carrier behavior. And as this new capacity comes into the market, we're just going to have to watch it. We're going to watch it really close. And then lastly, certain things that we can't control are more of those macroeconomic issues and a lot of political issues. There's still a lot of strike along the world. There are still a lot of threats of inflation. And we'll see what happens with regards to new government regulations and political disruptions that could alter what we do every day in a hurry. And lastly, just to close out, starting back when we opened up to 2016, the markets have been extremely, extremely turbulent. Supply and demand has bounced up and down. We've had carriers disappear from the market. We've had labor issues, all types of things. But collectively, we're all still here. Many of us have had a lot of success. We've worked through these issues, and we've worked through it together. And that's really the core of Expeditors' strategy. And our strategy, as we move into 2023 and work through whatever challenges we have existing and what we on the horizon are not going to change. From an Expeditors' ocean perspective, we're going to keep our wide carrier footprint, which has always been one of our core philosophies so that we have options when blank sailings arise, when service suspensions happens so that we ensure that we have not only the capacity, but we have the options for our customers to keep cargo moving. We'll continue to link our products together to offer end-to-end options, whether it be through order management services, to customs brokerage, demand-driven logistics, methods in order to quickly switch from truck to ocean to air. But I think most importantly, and what I want to highlight out is just a big thank you to all the Expeditors folks and also for you, guys. And our ability to engage with not only you, our customer base, but also with our service providers globally through that local support. And that strategy is not going to go away. Expeditors were at 331 locations globally. And those are locations that as these problems arise, as the markets change that we can engage not only with terminals, but truckers and carriers, but also you to work through issues and deliver solutions. So just a big thank you for the past few years. And we'll tackle whatever 2023, 2024 and beyond throws at us. So at this time, I think Mike and I are going to get into the questions and see what you guys have asked of us and see what we can answer for you. And again, a reminder, I know Nicole put that out. If you have a question, put in the chat box and we'll have at it.

There was a good question in the chat box and I would be remiss if I didn't say, I mean, we talked a lot about imports. We showed you a lot of imports, but the export market is behaving much the same as the import market. From a price perspective, there's a tremendous amount of pressure, okay, on the rates. Is there the drastic swings on the rate side on the export side? No. The export market has struggled more with -- especially in the past year, equipment being out of balance, okay, in all the wrong places and infrastructure woes. And so we had a lot of oversight from the Federal Maritime Commission on -- particularly on U.S. exports in the ag sector that came into play in 2022. But I suspect that, again, these levers will create the same behavior in the export market as they do in the import market. As capacity gets artificially constructed or manipulated, you will begin to see pressure start to come in the import market, right, which takes the containers and then makes the equipment available for the export market for the backhaul trade lead. So I want to make sure that you may get a point of saying that it does -- these levers apply to both imports and exports. It's a great question. I didn't want to overlook it.

See, the first question we had was from Jeff asking about different factors impacting pricing? Where do we see the optimal rate range? Yes. And that's a tough one. And it's going to vary carrier by carrier, right? The carriers, most of them are public. But it really varies by P&L to P&L. And Mike talked about one of the big impacts are their assets, how they procure their assets that they use to move containers and are they getting them on the charter market, those rates could be higher versus owned assets. We know that labor costs have went up. We know that fuel costs have went up. What is that optimum range? I don't know. I'm not going to speculate. Mike pulled up, which is a really interesting graph that he pulled from Alphaliner showing that carrier, their operating margin over the past 1.5 years was around 50%. Is that too high? One could speculate. I guess, if I was on the board at a liner company, I probably think it was great. But my perspective, I think that's too high. Is a 1% to 2% or a negative operating margin, what they dealt with between much of 2009 and 2010 and back in 2015? No. So I'm not sure, but rates absolutely have come down. I'm sure rates will go back up, and there'll be ebbs and flows with supply and demand. But I'm really hopeful that we don't have an aggravated market like we had to deal with for the past couple of years.

Yes. There was a good question that came up is like, can you rely on NVOCCs to adjust their rates to shippers to ensure competitive market rates? Thank you for that question. But that plays into an NVO, our NVO strategy, I can't speak for every NVO in the marketplace. But we move with the market. And so as the rates compress, okay, we move with the market. We don't own the asset, okay, and we'll move up and down. When the rates were going up, we had to move up, but we had access to space. It's the beauty of doing business with an NVO. I mean I know that there was another question as well in there about is the party officially over? Well I guess I'd have to ask what party, but what do you see the future of aggregators. I'm assuming you mean by aggregators, non-asset owners, which are the NVOs, there's a very bright future for, I mean, certainly for our organization, I believe. And I think that, again, we are a factor. No one is bigger than the market. Adam has used this phrase over the course of the years with any of you that have been on any of our webinars. No one is bigger than the market. So as the market moves and shifts, okay? We'll continue to move and shift. The overall value of the NVOCC is what we -- our value proposition, which we're showing you on the screen right now, it's financial stability. It's that wide carrier footprint, it's local support. We think we have the right mousetrap.