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

Hello, everyone. We are about a minute past the hour now, so I think it's time we get started. My name is Justin, and I will be the host for today's Principles of Supply Chain Security webinar. Thank you all for joining us today, and now I will cover a few ground rules. Everybody is automatically on mute and your cameras are off. This means if you have any questions, you can type them into the Q&A box at the bottom of your screen. Please avoid typing questions into the chat box as we may miss those. We will address questions at the end of the webinar during our question period. Please stick around at the very end, not only for any leftover questions, but we will also have a QR code that you're able to scan and sign up for our communications. At some point after the webinar, everyone that registered for this webinar will receive a follow-up e-mail that includes the survey. Filling out the survey will give you access to a copy of the slides used today. But please note that there will be no recording available. Next, I'd like to introduce our speaker for today. And Patrick, if you could please flip the slide over. Thank you. So Patrick Birnie is the regional security manager for Canada. Patrick has over 20 years of industry experience in air, ocean and road transportation and he's now been with Expeditors for over 7 years. With that, I will hand it off to Patrick to take over.

Thank you, Justin, and good afternoon, everyone, and thank you again for participating in today's webinar, where our topic of discussion will be centered around supply chain security. So since last year, cases of cargo theft have increased nearly 80% in Canada and the U.S. Maersk Cargo Net reports that they still approximately $223 million worth of freight in 2022 alone, which with the highest increase coming from trucking-related fraud cases, which are up a staggering 700%. Now according to Bryan Gast, who's the Vice President of Investigative Services at Équité Association, in Canada alone, reported cargo losses increased 29.8% last year compared with 2021. And so I'm just curious if there's any guess as to where the majority of thefts in Canada occur. Well, Toronto, Ontario, continues to see the highest activity for cargo theft in the country, and they're accounting for 62% of all total recorded cargo thefts in Canada. The problem is large enough that the Peel Regional Police services is the only police task force in Canada that have a dedicated cargo theft task force. Now cargo theft occurs across Canada and targets various types of products. Obviously, it was impacted by the pandemic from what was being stolen to where and how those products were being sold. But historically, Canada has a record of low reporting, industry-wide reporting trails behind the U.S., yet organized crime thieves in Canada are just as sophisticated in Canada as they are in the U.S. So we're just over 5.5 months into 2023, and I can tell you it's already been a very, very busy year. While Ontario's Peel region remains a hotspot with Brampton and Mississauga as one of those top areas for cargo thefts in North America, statistics are showing that these cargo crimes are cascading beyond the GTA and into Quebec, Montreal, Calgary, Edmonton Suri and even in Winnipeg. Most of today's cargo -- most of today's targeted cargo includes mixed loads, groceries and automotive loads. And while thieves tend to operate in major industrial hubs with dense populations and lots of commerce, a lot of crimes were provoked by park loads, especially during COVID-19. So remember earlier when we said the 700% uptick in fraudulent pickups, these are now expanding their networks by setting up dispatch centers in different countries, making it hard for law enforcement and prosecutors to serve the subpoenas, search or arrest warnings or simply conduct an interview. A carrier recently approached us to become an approved service providers with Expeditors and their e-mail address ended in I-O. Any guesses where IO is? The Indian Ocean. Yes, properly -- so properly vetting your carrier or AKA doing your due diligence, can avoid such unnecessary risks. As we say on our team, the best way to fix a problem is avoid making one to begin with, and it's always much easier to explain a delay than it is a theft. So a few years ago, electronics was the #2 item being stolen. As the landscape has shifted, so has that target. And according to Garry Robertson, who's the Claims Director of the Special Investigation unit at Northbridge Insurance. The trends that we saw in 2017, '18 and '19 were pretty consistent across the country. Cargo theft was common with criminals going after products that they could get rid of very quickly. Over the last 2 years or 3 years, there's been a drop in electronics, but an increase in the daily consumables. As supply chain issues occur, these are going to continue to change their focus. And according to Équité, the #1 cause of load stolen across Canada is trailers left unattended. Again, these stats are what is being reported. The scope of the actual problem remains a moving target. These statistics here were provided by Dan Kerr from Équité. And Équité changed their branding as the cargo theft team was branded under IBC previously, which was the Insurance Board of Canada. While still a division of the IBC, they've gotten under the name of Équité. So as mentioned, historically, electronics was the #1 target. But now as we saw on the previous slide, food stocks, followed by auto parts, building and industrial equipment, home and garden and personal care items have all increased. A significant increase in pharmaceuticals as well, which included PPE, masks and sanitizer and drugs was one of the problem. Over the last 2 years, there's been a drop in electronics, but an increase in the daily consumables. Again, these are stats that is reported to Équité. So the scope of the actual problem remains a moving target. So during a recent discussion with Dan, he advised that we're continuing to see more cargo thefts outside of the GTA. And we're seeing that shift to Southwestern Ontario, all the way to the Windsor Water between Toronto and Windsor. And again, these commodities are ever changing. But right now, daily essentials are remaining high on those lists. So now that we're on with information regarding the reported impact of cargo crime. What should we be looking for when we're choosing a supply chain partner? Well, first and foremost, understanding where your risk lies is a key component to mitigating those losses, reducing those claims and closing any possible security gaps. Conducting a risk assessment can go a long way in mitigating those risks, not only with carriers, but also within your own organizations. So in order for any security program to be effective, it needs to rely on multiple layers. It's been reported that up to 70% of theft is an inside job, the best way to avoid a problem is by not hiring one. Employees are the first line of defense. Do the companies you work with have HR policies and procedures to get those candidates? Is there a hiring process that checks checklist and subsequently a termination checklist that's reviewed for each new hire? What are your hiring protocols, reference checks? Do they do any criminal background checks, does your company or your service provider have employee ID badges? Do warehouse workers were different color Hi-Viz vest. So that they can be -- so this can be an important detail when reviewing CCTV within your facilities as it can help separate your employees from any temp agencies that are -- temp agents that are assigned to work there. As I mentioned, our people are first line of defense, so ensuring they get the proper training is a key component to a comprehensive security program. When vetting your carriers, ask what type of courses and training is offered to their people. A lot of people hire for attitude and trained for success. This goes in a lot of different industries. So where does training fall on their list of priorities. Giving people the basic understanding of why these are important, helps reinforce why the policy or training was implemented to begin with. So on the screen here is a list of trainings that we found to be extremely beneficial. For us, it all starts on day 1 with an employee orientation. And obviously, annual refreshers help reinforce that learning as well. Trainings on access control, so why it's important that we wear our ID badge or don't leave the dock door open or even the door house -- warehouse door propped open, protecting confidential information. The impact to an organization's reputation can be severely impacted should they divulge confidential information, lobby response. Summed up, don't be a hero. Insurance can replace assets, but they can't replace people. An incident reporting, simply put, if you see something, say something, how can you correct an issue if no one reported it? Remember the slides above, according to the Peel Police, cargo crime costs, Canadian is approximately $5 billion a year, while the reports into the IBC it could take -- show a significantly smaller number. So does your carrier have a reporting process and requirements that all losses are reported, do they review their claims to understand where and how those losses occur? Access control. Through the use of our electronic access control system, we manage each and every visitor that enters our facilities, visitor badges have escorts, make sure your visitors have escorts so no visitors go unescorted throughout your facility. This can avoid them wondering the parts of the facility that they have no reason to be in or looking at documents, they should have no access to. A similar visitor control issued for drivers picking up or delivering freight, making sure you're validating drivers upon each and every visit. Make sure that you get reference numbers, truck and trailer numbers as well to be captured in their visitor logs. In the event of a security incident, all of this information can be shared with local law enforcement to aid in their investigation. And most importantly, avoid public load boards, include Loadlink. While there are great intentions of the public load boards, providing access to more capacity, carriers have an ability to handle shipments to someone and for thieves, public load boards can act as a shopping list. The information shared can be used to paint a target on a load of manufacturer or a third-party shipper. Keeping drivers off the warehouse floor not only reduce the risk of the safety incident, but it also helps in advertently divulging information about what is being stored in your warehouse. Understandably, some drivers require access to the dock in order to account store or load their vehicles. And in those instances, the drivers should be escorted to and from the dock door to ensure one, that they don't wander a lot and 2, that they don't pose a safety risk, whether that's being struck by something or slipping and falling on something. It's important to note that truckers must be restricted for mentoring the warehouse or dock unless escorted. So to ensure your facility integrity, does your carrier have a closed dock-door policy? Are dock doors closed and latched when not in use and all dock doors locked after hours. Summertime can present a particular challenge with heated and temperatures and doors climbing rapidly. To combat this and ensure the health and safety of our warehouse teams, there are various solutions included including the scissor gates that we've shown here on the right-hand side of our slide. A temperature-controlled warehouse is ideal, but requires a large capital investment. The use of large industrial fans can also reduce the risk of heat-related illnesses. When working with their truckers. It's important that the trucker verified that the cab is locked and the goods are properly secured at all time. So simple question. Do your carriers use locks or seals? Do the tractors or the trailers have GPS on them or both? Are they actively being watched or are they possibly being monitored? Is it -- do their drivers have to report any unscheduled stops? Does the carrier complete a risk analysis of the route? Do they know where to stop and rest along the way? For instance, Gary, Indiana is a place that we don't allow any of our truckers to tap through simply because of the higher reporting of crime against trucks in that particular area. It's important to do your risk analysis. It's also important to call out that a checklist or similar document must be used and maintained with shipment records. There's different types of checklists that should be used depending on the mode of transport and the type of IIT or instrument of international traffic. These are all required for all shipments traveling over the border. The updated minimum security criteria for CTPAT now includes an agricultural requirement to ensure their ecosystem is not endangered by foreign entities as well. So is your carrier completing these checklist to ensure the integrity of the equipment that's being used? Inspecting prior to your load. Are you checking the container above, under, inside looking for any false walls? The best practice is to take photos of cargo doors when sealing and the doors are closed. Cargo being moved to be a non-containerized methods in other words are not suitable pursuing must be visually inspected as well. These are also depicted in the pictures for any agricultural containments as you can see on the bottom left. This is something that wouldn't be allowed to go into the U.S. So it only takes 5 minutes for a trucker or trailer to disappear. 30 minutes is a long time. So as to see written container/ trailer security procedures, talk through this part of your policy. One important part of this piece of the policy is left off about. So while the goods are awaiting transfer to another location, never leave your truck unlocked and unattended at any time. And if you do, you need to be confident that your service provider has a solid and enforced policy that mirrors this and extends to their subcontractors as well. Remember that #1 cause of cargo theft, unattended equipment. It doesn't take long to steal a cargo. So simply don't provide anybody with the opportunity to do so. Does your carrier manage their steel inventories as well? Is there a controlled access to the logs for the seals? Any seal changes that occur along the line must be reported promptly so that the receiver can be notified in advance to receive any [indiscernible] whether that's being inspected at the border by customs or simply by a Ministry of Transport Inspector. Anybody who changes the seal must be notified really to the dispatch. So the conversation is understood that when the seal get -- whether the trailer container gets to the destination, the seal number is, in fact, valid. I don't remember, only Customs and Ministry of Transportation Officers are allowed to remove that seal. The driver is never allowed to break the seal unless under direct supervision from the receiver. This helps remove any doubt regarding their involvement in any particular seal anomaly. Do they use the VVTT method before unsealing? And do they investigate seal anomaly? So VVTT, view, verify, tug and twist. View means is the seal on the container or the trailer. Verify, does the number match. You tug on the ball seal to ensure the integrity of it and you twist and turn it to make sure that it hasn't been put together with glue or gum. These are all important steps in verifying and validating any seals used on any of your journeys. Back to training and threat awareness. Does your carrier have a policy that any incident is reported? Remember those first few slides, Canada has a history of underreporting and changing that culture to provides a better picture into the actual scope of the problem in mitigating those risks. So much like an after-action review, the carrier can use the lessons learned to ensure missteps are repeated. But in the event that something does happen, never let a good incident go to waste, always learn from it. Our industry has been aggressively targeted by the online community. Reports of cybersecurity incidents in Canada continue to rise. Therefore, it's important to ask your carrier about what they're doing to protect their systems and more importantly, your information. Last but not least, what certification should be you looking for when you're looking for a partner. Well, CTPAT, any member of CTPAT, that's a good start. In Canada, we have the Partners of Protection. Worldwide, there's also an organization called TAPA. They're very, very good at providing insights into electronic -- protection for electronic equipment. And outside of North America, there is the AEO program as well. Now here's some good news. Expeditors has been a certified member of CTPAT since February 2003. We are strongly committed to the CTPAT program. We became a member in 2003, we're validated in 2004, revalidated in 2007, '12, '15 and June of 2019. Now with CTPAT, we, Expeditors has 2 categories of membership. We're a broker and airfreight consolidator as well as in ocean transportation intermediary or an NVOCC and we're also a CTPAT broker. In Canada -- oh sorry, last but not least, we are also Tier 2, which is the highest level possible for a 3PL. In Canada, we've been members of PIP since 2003 as well, and we revalidated in March of this year. So for additional details around the various country AEO programs and the features and benefits, you can access the World Customs Organization, compendium of authorized economic operator program's website. WCO compendium of authorized economic operator programs. As you can see, we are part of these throughout the world and throughout our network. Of the various programs in which we participate, CTPAT has the highest standards of all security programs. And as I mentioned before, those MSCs, minimum security criteria, those were updated in 2019. And your carriers still CTPAT, make sure that they're in line with those new updates. It's important to note that this was the first significant increase in CTPAT requirements since the program's inception in 2003. Expeditors has also has its own security standards, and these are largely based on those MSCs and are adopted throughout our entire global network with adjustments for local laws and regulations, of course. So much like our customers expect a certain level of vigilance, we also expect the same from our service providers with whom we work. Our operations teams are only allowed to use approved service providers. To be an improved service provider means that we have a contract in place with them. We have a statement of work that outlines the expectations and the parameters of our relationship. We maintain insurance documents for each of our carriers to ensure appropriate levels of coverage. We also annually inspect our service providers to inspect what we expect. We go on site and conduct a risk review annually with each and every carrier that is carried out in person at the carriers facilities. Our risk review is comprised of fundamental requirements, which are based on those CTPAT MSCs. We also have best practices, which are not considered as a required element but more of an opportunity for improvement and to close gaps in their security programs. The difference for us is that CTPAT inspects their members once every 4 years, we go out and do it annually. So whether the carriers based locally or at a province, we travel the country to inspect what we expect. We're not a company of minimums. Our goal is to go above and beyond than minimum which is what we also expect from our trusted partners as well. So I mentioned at the top that an effective security program requires layers. Expeditors also has a subsidiary called Cargo Signal. They offer sensor-based logistics as a better way to manage logistics because technology can give us faster, more accurate information to make decisions on. So these market-leading sensors we make -- we are hardware-agnostic, I guess, you could say, and open to using any sensor available on the market today. There's many new companies offering sensors in the space and we're constantly testing and evaluating their performance in the logistics market. We ensure they provide real-time data. This information is used to provide accurate updates about the location and condition of the cargo. We want to make the cargo smarter. So it tells us the status instead of having people call and ask the status of the cargo, brings down phone calls and e-mails. I don't think anybody has a problem with that. This is where real-time locations and layers like weather and traffic are combined to enable real-time decisions making like rerouting cargo or reordering based on uncontrollable factors. When it comes to business rules and judgment, we're going to take your business rules as a customer like an acceptable temperature range, safe rooting for a truck to follow or required departure date of a vessel and assign them to a shipment in our software. Then our 24/7 monitoring team will monitor for any alarms that break your business rules and follow a set of escalation protocols that you help define with us. Our team's experience -- the team's experience is in the sensor technology, logistics and law enforcement. They really are professionals of what they do, and they do a wonderful job of keeping our cargo safe. On the different service offerings -- well, the 3 service offerings that can benefit different groups in your organization like risk management, security, loss prevention, even quality assurance or quality control. They help with sales, customer service, and they can be a showcase feature for your end customers. Through a web-based dashboard or right from your phone, you can have real-time visibility into your shipments that may need an extra set of eyes on it. So please feel free to reach out to any of your local account reps, sales contacts or myself, and we can arrange to provide more information with our team of cargo security professionals at Cargo Signal. Last but not least, I work with an amazing team across Canada. In Montreal, we have Sheela Raju, who is our Security Health and Safety Manager. Toronto, we have Mr. Mark Jablonski, in Calgary, Jackie Ferguson and in Vancouver, Sylvester Wrzesinski. I got to tell you, it's a pleasure working with these guys and girls, they do a wonderful job and take your cargo and our clients' cargo very seriously each and every day.

Thanks, Patrick. Now everyone, if you have any questions, please go ahead and ask us now. While we wait for those questions to come in, we do have 1 or 2 that have come in during the presentation, so we can address those right now. The first question we have is there are some service quality gaps in developing countries such as Vietnam, India, et cetera. How can you maintain the service level or security level with local vendors. So I assume that this question means is in those developing countries, how can we make sure that our cargo is still secure?

Yes, absolutely. We follow the same standards worldwide in each and every one of our offices, whether that's here in Canada, the U.S., Vietnam or India. We manage our Expeditors' security standards based on all those different organizations and the highest of them. So we ensure that the cargo integrity is safe, whether you're in Vietnam, India, Canada, New Finland or down in Miami.

Awesome. Thanks, Patrick. We don't have any further questions. So while we wait for any last ones to come in, would you mind flipping to the last slide we have. So again, while we wait, here is the QR code available. Please scan the QR code shown here to receive market updates, insights, newsletters and of course, invitations of further webinars. I've also put a message in the chat that includes a link if you prefer that as well as the link to the upcoming Canada events page for more webinars. As mentioned, everyone will receive a follow-up e-mail so keep your eyes out for that. Looks like we have one more question that's come in, so let me pull that up. Is there a separate team that conducts risk analysis for that routing? Or is it all tech based?

That's a great question. It's a bit of both, to be honest with you. We have dedicated professionals who are constantly looking at this. Our Cargo Signal team, obviously, is looking at crime statistics in local areas as well, specifically looking for cargo crime, separate that from the human -- from any violent crime that may be occurring. And so it's dual based. It is sensor, but it's also a human-driven as well. But it all sort of boils down to that reporting, right? If you don't report it to your insurance company or you don't report it to the police, they may not know that there's a problem in a particular area. So if you're seeing problems with your freight in one particular area, you should definitely report it to the police, especially if you get a freight stolen or something happened to it.