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

All right. I'm going to go ahead and get started with respect to time here as we only have 60 minutes. My name is Nicole Gallanis and I'm going to be the host and facilitator for the webinar today. We're going to be going through a Domestic Market Update webinar. And we are going to have about 45 to 50 minutes of content. And at the end, we will get to any Q&A that comes through in the Q&A window. You will see that at the bottom of your screen, the Q&A window. You can put any questions that you have into that window, and we will answer that at the end of the session. If for some reason, we can't answer any questions, we will follow up after the webinar. After the webinar, you will also receive an e-mail from me with a link to a survey. If you complete that survey, you will receive a copy of the slides that you see today. So no need to take frantic notes throughout the session. Feel free to just tune in, and we will send out the material upon completion of the survey link. You'll be directed to a new window where you can download a PDF of the slide. So now I'm going to go ahead and introduce our speakers today. We have some of our Transcon leadership team from the Americas with us that are -- they're going to be going through the domestic market update. So we have John Sekulich, Manager for Transcon Services for The Americas; Carolina Galindo, Manager for Transcon Services through Mexico and U.S. Southern Border; John Butler, Director of Ground Network Services; Gary Ernest, Regional Manager for Cross-Border Solutions; and Angi Varga, Director of Transcon Services for The Americas. So I'm going to go ahead and pass it on to them so they can kick us off with the content. Thank you.

Awesome. Thanks, Nicole. So we'll run through the agenda real quick. We're going to talk -- as Nicole alluded to, I'll give you a quick update on the domestic air market. John Batter is going to talk to us about the domestic trucking landscape right now. We'll talk about the Expeditors' dedicated ground LTL services. Caroline will give us an update on the market in Mexico. Gary will do the same for our friends up north in Canada. And then Angi will close us out with the market outlook, and then we'll take questions as we talked about. So kicking it off, we'll jump into the domestic air and what's happening in the domestic air market. So as you may have seen in the news, things like that, the summer travel season brought a large crush of passengers back to the carriers, which has been fantastic for them. There have still been struggles in some of the areas. I think you saw last week, United had a stoppage in their network. There's been some challenges, but they've overcome those, and they seem to be getting back to normal. So one of the concerns that they have right now is the return of the business travel. Now that the summer travel season is over and we're getting into fall, the carriers have a concern about the return of the business travel because that's really their bread and butter. So we're going to be watching that pretty closely to see what happens there. And that is what contributes to the health of the carriers, right? Some of the other concerns that the carriers have or things that are happening in that market is the labor talks, which are ongoing between a lot of the carriers and their flight crews. You may have seen recently that Delta and American both settled with their pilots in the last few weeks with record-breaking contracts. American Airlines, the Flight Attendants Union voted on August 30 to authorize the strike, if necessary as they go through their contract negotiations. And cargo facilities as a whole are back up to full capacity. In some areas, they're still struggling a little bit with staffing issues. That's primarily in the tertiary and secondary markets, that they struggle to have the staffing in place to handle the business that they have. And that's caused cutbacks in hours of operation and things like that, which impact the ability to service some of those markets as reliably as we may have done pre-pandemic. One of the other things that's hitting the market right now on September 1, Southwest Airlines was one of the primary domestic cargo carriers, eliminated or retired their rush priority cargo product. And that's going to impact service and cost options into many of those secondary and tertiary markets that they service. They were one of the primary carriers of benefit of Southwest versus some of the bigger carriers like United, American or Delta, is that they're serving those secondary and tertiary markets with larger aircraft, which will give us more capacity into those markets. With the elimination of that rush priority cargo product, that's going to restrict that capacity a little bit and drive costs up. So that's one thing that we don't know the full impact of that yet. The domestic air market right now is pretty flat. So once things pick up a little bit, we'll have a better feel for what that's going to do. I think the biggest thing that's hitting the carriers right now, the domestic air carriers is fuel costs. Fuel is the largest operational cost that carriers have. And you'll see a slide in just a minute that kind of outlines and illustrates that point. Cost control is the name of the game for the carriers right now with the labor talks and the fuel costs and things like that. Those are the things that they want to -- they're working hard to control and use to strengthen their bottom line. And if we look at -- if you hit the animation real quick, I keep an index of the stock of the big 5 U.S. commercial carriers. And this is year-to-date 2023. And you can see based on the trend line, that in January, the combined price of the stock for those carriers was right around $175. And now it's hovering around $190 as of the end of August. So not a lot of fluctuation. And I think that's reflective of a cautionary stance that is being taken on the industry overall and the recovery state that they're in. If we look at the next slide, this illustrates the fuel costs and where we're at. So you can see the big dip. That's obviously when the pandemic really hit the industry hard. And you can see that the green line is the fuel consumption and then the cost. Fuel consumption has remained somewhat consistent since late 2021 with where it was pre-pandemic. But if you look at the gap between the green and the red starting in 2022, the cost has just gone up enormously. And that, again, is the main driver for cost for the carriers. So just kind of illustrates that point of where their consumption is and where the cost is compared to the pre-pandemic, it's risen dramatically. If you look at the last slide that I've got for the domestic air, this is the carrier enplanement. So this is the number of people traveling. And you can see that in mid-2022, it approached the prepandemic levels where we were at. And in late 2023, starting in about April, it started to peak above those numbers in 2019, so the prepandemic numbers, which is fantastic. But you see that slight decline in August that's happening. This is where we're -- they're being cautionary and looking at what is going to happen with the fall travel seasons and things like that. Are people coming back? I know that over the Labor Day weekend, the local news here talked a lot about that being the heaviest travel day for the Seattle airport. We'll see what the future brings. So there's a lot of -- still a lot of unknowns in the air market, the domestic air market, but there's -- capacity remains available, more so between the trunk markets. The secondary and tertiary markets are still absolutely serviceable. We have capacity available to them. They are a little bit more restrictive around hours that we can recover in tender cargo in those markets. And then the other thing, just watching the cost controls that the carriers do and what they're doing. So that's what's happening in the domestic air market right now. If you have any questions, please put them in the chat. I'll answer them at the end. And I'm going to turn the call now over to John Butler for the ground update. Thank you.

Thanks, John. Good morning, everybody. So trucking cycles come and go, highs and lows, if you will, in terms of rates, capacity. And a couple of years ago, we were in an elongated boom cycle for the carriers where the rates were high, capacity was tight, and that went on for an extended period of time during COVID. And since then, it's flipped the other way around, and it's now looking like it's on the extended -- are longer than history cycles would tell us on the downside. So I want to look at -- first at the macroeconomic level. I'm not going to talk about cars and some of the industrial commodities moving, but just want to let you know some of the factors that are absolutely impacting carriers, big and small, on all modes related to ground transportation. The first is inflation. Everybody on the call should be somewhat familiar with what's been happening there. The wholesale price index came out today, and that was a distant pointing increase over the prior months. So it's -- while the pace is down, it is still up versus targets and versus history and its wreaking havoc with a number of shippers. And obviously, that trickles down into a number of the carriers, year-over-year inflation at 4.7%. I'll talk a little bit about carriers and how they're adapting to some of that stuff. Labor is another issue. We do have the driver shortage, which was so pronounced during COVID is not the same. There are plenty of drivers, but getting them back into the cabs and into the capacity to support, it's still a bit of an issue. The job openings just -- those are declining. The labor force is expanding, but there's still a shortage of drivers just about everywhere, particularly in some of the longer haul truck routes. Let's go to the next slide. So transportation is always going to be driven by either first the consumer, the industrial sector or the government spending. As far as the productivity from the industrial sector, just about the only commodity or the only vertical market that is right now expanding is the auto and some of the machinery. Everybody else is pretty much contracted and are -- is not producing at levels that they did before. The purchaser manager index did go down last quarter. So you can see the charts on the right. That kind of inflects everybody's shifting a little bit less, but the cost, that's another story. As far as trade goes, I've mentioned automobiles, inventory and parts and suppliers who feed that vertical. Things are moving, but not so much on the other ones. Parcel carrier. We don't normally talk about that as trade, but that became so prominent during COVID. That's cooled off a little bit. It's not going to go anywhere, but it's certainly not at the pace and growth than it was before. Let's go on to the next slide, right. So inventories. So I left this out of the first slide, this made a lot of headlines, and I think this is probably one of the underlying disruptors over the last year. When retailers and everybody had too much inventory on their hands, it really slowed down shipping and I think due to a couple of issues. One, the amount of hard goods sold back in 2021, '22, that shifted a little bit. And now going forward, with the inflationary pressures, what you're seeing is the personal savings rates have been cut in half what they were just a few years ago. So shippers have too much -- excuse me, retailers have too much inventory and consumers have less real purchasing power to purchase that existing inventory. So less of it's moving as fast as retailers would like to move it. But nonetheless, it is coming down, and it's coming down at a fairly fast pace. Almost everything that I've read or have been part of the presentation on is it's about where it should be or it's about where it was pre-pandemic levels. However, what we're left with is retailers have got a lot clever about forward stocking, about rightsizing their inventories and they're better adjust -- they're better able to adjust consumption and demand -- excuse me, demand and consumption with electronics. They very much understand what their forecasts are, very much understand how to replenish their stock vis-a-vis technology and buyer habits much better than before, and it's been a little bit of a disruptor, but nonetheless, inventories are coming back. But they are plagued a little bit just simply because not all cargo is moving due to the decrease in purchasing power, but it is on the right track. Next slide, please. So I mentioned at the kick off, trucking always goes through cycles. You have your move cycles, where the capacity is tight, rates go up, carriers come into the market, carriers purchase new equipment. As things slide -- start to cycle down the other way, you go through a period of equilibrium and then you get to the bottom of the market. The bottom of the market is just the opposite. Capacity exits the market, rates plummet, certainly on the spot market. I got a slide for that. And that's what we've seen for the longest period of time, probably since back in the first quarter of 2002. Back then, the spot rates were excessively high. A lot of capacity was going into that spot market. That was pulling up some of the contract rates. And once that flipped, what you started to see is that capacity started to exit the market, shipping started to really cool off. You had a number of new entrants who came into the marketplace, small trucking companies with 1 truck, 2 truck, 5 trucks. Those have started to -- well, those have been exiting the market now for about 18 months but not quite at a pace that set the supply and demand for truck capacity back at equilibrium. But the spot rates, which so notably went up there in the pandemic, when capacity got tight, they increased exponentially versus out of contract rates. When capacity gets pretty loose, they fall exponentially. And that's what we've seen, a sharp decrease in these rates. What's particularly interesting about the freight recession is there's still a decent amount of volumes moving and it probably mirrors that in terms of shipments and activity say pre-pandemic, but the excess capacity that came into the market has taken 18 months to kind of flesh out. So are we at the bottom yet? So on the next slide, we're going to talk a little about spot rates, and I think that's probably the leading indicator of where we're at in those cycles. Nope, actually, I've got 1 more slide. Tender rejects -- let's go back here. Tender rejection rates. These have actually increased. During the height of the pandemic, they're probably in the 20-some percent range. At the bottom here a few months ago, maybe it was April, May in terms of the cycle, those fell to about 1% or 2%. They're now creeping back up to about 4%, whether that's volumes increase or capacity extraction, hard to say. But the indexes indicate that we are -- maybe hit bottom and started to go back up just a little bit. But if capacity continues to leave the market, and we have any amount of expansion. Obviously, that could put some upward pressures on rates. And we saw that last month. I wouldn't say it's -- we haven't seen it month after month quite yet. It -- things did recover a little bit in June from the April lows and then -- but August went back downhill the other way. Just a little note too, and this is -- it impacts consumers and shippers and certainly carriers is as diesel has creeped back up, obviously, that influences a lot of decision-making, a lot of costs. It's now at $4.54 a gallon, up $0.78 since beginning of July. So that's something to watch. If carriers who are financially hard hit, struggling to break even start to take on higher fuel costs, that will accelerate the exit or contraction of some of the smaller carriers or maybe a lease with some of the larger fleets. So interesting to see where that's going to go, but it's -- absolutely can accelerate or decelerate the capacity from the marketplace. Let's take a look at the next slide. So this is the spot market. So I'm speaking in terms of band freight, certainly, spot markets exist for [ refurbs ] and bulk and flatbeds and every one of those, but I just -- for simplicity, just listed the -- some of the well published numbers regarding the band freight. So the map on the left, if you go back a year ago, you could see some red states and you'd see some bright, shiny orange states where the truck counts -- excuse me, where the load counts were very much heavier than the truck counts available. You don't see that now. You see capacity is pretty wide open. I don't think there's too many places, even though you have some seasonality impacts of some, say, agriculture or some other commodities can be short-term disruptions out of a certain state or into a certain state. Right now, capacity remains widely available. The national load-to-truck ratio -- and this is the national average, so I don't know if all this applies to everybody. But that's changed rather dramatically just in the last month. So something to keep an eye on. The chart on the right, obviously, it takes a look at where that has been year-over-year, and you can see right now, it's below that of any other year. So I mentioned fuel. We mentioned the impacts of inflation. But what's -- when you pull some of those numbers back to a carrier who's got -- they've got driver wages, they've got equipment costs. They've got escalating fuel costs. They got systems and overheads and everything else any business would. Year-over-year, the costs all together have been ticking up quite a bit. The cost to operate for a motor carrier Class 8 vehicle right now, about -- excuse me, about $2.25 a mile. The reason that's quite significant now is when you look at the spot market, the spot market, the yield per mile in most lanes or for most areas, if you will, overall, have dipped below that number. So you've got a number of carriers, a number of trucks who are now just because of supply and demand, forced to operate or take loads that don't even cover their cost. That can't continue on for too long. I think the -- some of the industry executives in the larger fleets have been a little bit taken back by the staying power of some of these smaller fleets, to stay alive and continue on versus leave the marketplace given the higher cost. But something's got to give. Either the -- cost probably won't go down, but you've got to get a tightening capacity or demand to increase the rates and start to cover some of those costs or we could continue to see the exodus. So shippers, what can shippers do with that? Well, you know rates are going to probably go up. So common with practice now, people are doing smaller mini bids or continuous bids versus, say, the big RFP. And shippers are also with much success starting to link indexes to rates and changes in prices, whether it be a consumer price index or some indexes like the thread. So obviously, when you're at the bottom of the cycle it's only going to go up. So everybody should start thinking about how they're going to manage it when it does flip. Don't know when, but we just know it will. Next slide. Right. So truckload rates. The truckload rates have been fairly stable or ticking down lately. So the operating costs are up, the capacity is down. So we have seen an increase. I think all shippers, just about everybody has been doing bids. Carriers are inundated with RFPs, continuous RFPs. This has really changed the buying cycle. We're doing sometimes RFPs every few months or several times a year [ are in many ] goods. So the spot rates in the market back in the -- prior the pandemic, that was accounting for probably -- I don't remember the number, but I want to say about double the amount of loads it typically would. That number has come back down as carriers have converted back over to contracted rates. The spot rates, I mentioned before that they rise and fall exponentially compared to that of contract rates. The contract rates appear -- excuse me, the spot rates appear to have hit the bottom and started to pull down some of the contract rates. I think we're probably about at the bottom just because we've been toggling back and forth between up and down in the last few months, but we haven't necessarily seen it translate into increasing contract rates, and there's no signs on the horizon that that's going to happen anytime too soon. Just to put in perspective that the spot rates since the beginning of the year are down 17%. They were down greater than that, almost about 30% the prior year. So if you had a truck and you were not -- and you were playing the market 2 years ago, it's a completely different scenario right now. So we do see a lot of carriers hanging it up or leasing onto other fleets. We do see capacity actually in the market. And that forecast in the future holds, and it's going to be an elongated recovery, that will continue to see some contraction in capacity. Next slide, please. All right. So I was preparing for this presentation and these were 2 hot topics that we talked about a year or 2 or 3, 4 because they were really impacting operations back in '20 and '21. Carriers had a hard time getting their equipment -- hands on trailers, in particular, tractors, but also all of the parts for breakdowns and all of the other supply chain crises everybody heard about. That has largely corrected itself. What we're left at now is trailers are double-digit higher than -- excuse me, tractors, about double digits higher than, say, last year. Trailers escalated in price a tremendous amount. And I think that gets back to some of the buying habits and supply chain networks adjustments. But nonetheless, the tractors and trailers, parts are not the problem it was, equipment's available, and there's new activity and new orders going on. It's kind of a business return to normal. Drivers, listen, this is probably always going to be the case. Hard to continue to seat drivers. But what has happened is we have seen the return of teams. I know in our network, we'll talk about that in a second. We use a lot of teams. Those were hard to find a couple of years ago. They are not hard to find now, and that's good news for people who need expedited freight. And certainly in our networks, we use a lot of teams. So that has been a pleasant return to normal. One little note, too. While these -- there's about 1 million motor carriers out there. And a lot of these carriers is, if they do exit the market, they don't necessarily park the truck or sell the truck. They might just forgo renewing their operating authority and lease onto some of the larger fleets that do have access to abundance of freight and some of those stability factors. So you don't necessarily see all the drivers leaving the market. You just see them shifting companies. And I know talking to a lot of the larger fleets, they're having some pretty good successes recruiting, which you can't say that every year. So I guess, good news there. Next slide, please. I'm just going to go through just a couple of modes, truckload and LTL, and I want to talk about intermodal this time around, just because some news there. There isn't much news on the truckload side of the equation. Things have been downcycle and pretty stagnated for a long period of time, but there's a few headlines going on right now. We're seeing some consolidations with some of the larger fleets buying some smaller fleets, more so than I think we've ever -- certainly seen in the last 20 years. But we're also seeing larger fleets diversify their portfolios of carriers and they're taking on specialized carriers or contract logistics firms offering final mile deliveries or even installs. And part of that intention is to balance out that portfolio, so you can minimize some of the impacts of these highs and lows that we've seen in the last number of years. So I think you're going to continue to see some of those acquisitions that don't always look like acquisitions in the past continue on. As far as volume growth over this next year, everything I'm reading and everything I'm -- been talking to, it's going to be pretty low key, maybe just 1%, and I don't think we're going to see any crazy swings like we've seen before. And everybody is making those plans, expecting a modest, slow, elongated recovery. The impact of diesel could accelerate that or could decelerate that. But things are pretty much status quo, which is good. I think after the crazy roller coaster ride everybody has been on, it is a little bit of a welcome relief that things will be a little bit more normalized, at least for me. Finally, nearshore. I'm not going to talk too much about what's going on in Mexico because I've got a section coming up on that. But the nearshoring that is going on is absolutely impacting carriers, where carriers want to go, where carriers need to go. The imbalances in and out of Mexico are phenomenal. I think right now, it's 4:1 or 5:1. I think people are forecasting is going to 6:1. So that's impacting not just straight in and out of Mexico and through the border crossings, but places like Dallas and Houston anywhere near the border, it has changed the availability, the rates, the capacities and we need it. Finally, one last note on the truckload piece. A lot of talk, a lot of headlines about alternative fuel vehicles, whether it be battery or CNG. There isn't really a lot happening there in terms of impacts in the truckload space, the technology to move a Class 8 across country or even across state -- state to state, it just simply isn't there. So it's making some headlines. So it will be interesting to see where that goes. I think everybody is trying to take on some of this equipment to understand the operating costs, some of the maintenance associated with some of this equipment, but it's not having an impact on the market or any carrier at this point. All right. So LTL. there's more headlights right now going on in the LTL sector than in the truckload sector, which is usually not the case. About a year ago or maybe it was 2 years ago, Swift bought AAA Cooper, and we started to see some other consolidations in the LTL industry. That was big news at the time, but the big news this year has obviously been the bankruptcy surrounding Yellow. Yellow had 9% of the LTL market, just about that. Depending on how you look at the LTL market, it's $75 million, maybe $100 million, depending on what you want to throw in there. But there probably is enough capacity with the other providers to completely absorb the Yellow tonnages. However, the displacement disruption impact of such a large surge of new LTL business across the other, say, a few dozen carriers is going to have an impact. It's going to cause and it probably is already causing some shipping delays, missed pickups, missed deliveries, delays in transits, as the carriers capacity -- excuse me, utilization within those trailers increase, it's a good thing, but it can lead to damages and claims. By all estimates, it's going to take a few shifts or a few trades, several months for that capacity to be absorbed. So some of that stuff is sort of corrected amongst all the other carriers because they're all seeing a surge of freight. You have about 30,000 employees, most of them drivers, of course, who are displaced. Some of them or most of them if they choose to probably get absorbed with the expansion of some of the other fleets. But nonetheless, the LTL industry is not having the driver shortage it once had, just the opposite. Just like in truckload, obviously, Class 8 vehicles, trailers. Trailers are up double digits -- excuse me, tractors up double digits for them. Trailers, of course, up considerably more. Outlook. The LTL carriers as a whole took low single-digit increases first half of the year. Second half of the year, all estimates, the high single digits should be a normal expectation. But more so, the disruption and some of the impacts of the shifting freight, particularly related to the Yellow bankruptcy, will probably lead to some singular or location-specific or lane-specific rate adjustments. As carriers try to rightsize the network and when that 9% of the LTL capacity goes out to everybody else, it doesn't come at all lanes and all carriers equally. So the carriers are pretty small about targeting where they need to take increases to handle volumes or perhaps just rightsize the volumes or running balances caused by this big disruption. Finally, one last note. Carriers, LTL carriers continue to invest a lot of money and technology, not necessarily on equipment, but related to sortation and automation to minimize some of the impact and costs associated with the labor. So there's advancement going on in that sector. All right. One last sector, I want to talk about intermodal real quick. I don't normally talk about intermodal. We use that very little in terms of our network here. But the nearshore in which I talked about a few slides earlier is absolutely having an impact on what's going on in the Class I railroads. We've now got direct trains from Chicago to say San Luis Potosí. You've got some alliances and you've actually got some carriers merging, such as the Kansas City Southern just merged. And you can see some of the maps, they now got through service from Canada through the U.S., deep into Mexico. You've got the alliances with the Canadian National, the Union Pacific, North Fork Southern and Canadian National just signed a new intermodal service agreement not too long ago, a few days, a few weeks ago. So these are maps that are relatively new that kind of demonstrate the need or the demand to have that through service through all parts of North America. And that's just probably going to go on for a number of years. The rail volumes right now for the intermodal are down. They're down considerably. Capacity is widely available, even chassis. So that's not making the headlines. The spot rates exist in the rail sector for intermodal, just like they do in the truckload sector. Those are down, as you would expect. But what's particularly interesting is the cheap spot rates and the excess equipment on the truckload sector is now competing for intermodal containers because the rates on the trucks are so cheap. That can't go on forever, and I'm pretty sure once the capacity rightsizes or the yields on the spot market flip up, you'll start to see some of that return to intermodal. But the big final thing I'll mention is we're seeing a shift. Imports are way down, the containers are way down, and that impacts a lot of the road traffic as well as a lot of rail traffic. But what's happening now as we speak, is you're also seeing a shift from a lot of containers from Asia start to shift to other ports other than the West Coast ports. So that will, in time, and as we speak, change sort of the supply/demand, the in and out rates to and from the West Coast ports as well as the intermodal loads. So if you don't track intermodal, things don't happen fast in terms of changes on the train, but they're happening fast in terms of the North American coverage a little bit quicker than we typically see. So I just want to throw that in there. And I think we're going to talk about Mexico next, so I don't see anything else, but that's all I got. Thanks for everybody's time. I forgot one more slide. All right. So we put this slide. This is a picture of our network. We refer to it internally as GNS or Ground Network Services. It's a pretty robust consolidation strategy. It's basically an LTL network with 11 hubs. So I thought I'd just put this in here. So we don't really -- this network operates on a dedicated truckload basis. So obviously, not only -- so we're buying a lot of truckload services and managing a lot of truckloads to support, to build their own LTL network. I wanted to let you know how these market conditions and what we're seeing, how it's impacting our behavior and how it's impacting our network. Like I said, things are pretty stagnant. We did take some contraction early in the year to rightsize our capacity. We've added some hubs to sort of -- what I would say, as teams come back in the market and it changes some of the dynamics, how we'd like to run freight, we've been able to take advantage of that. So we've expanded some operations in Columbus, Charlotte and Memphis. Those are secondary hubs to our larger points. But the increase -- the decrease in rates for the truckload, the increase of availability, the teams has allowed us to expand some new service points that were on the map or on the drawing board a few years ago, but we couldn't action until now. So we're holding good for volumes. We've seen a shift from less international traffic on the trucks, but more domestic traffic on the trucks. And what that's allowed us to do is expand and offer some new services like Chicago to Calgary direct or Albuquerque to and from El Paso that simply were not too feasible just a year or 2 ago. So when the market does cool off a little bit, some of that stuff becomes more attractive. And so we've been expanding our network despite the stagnation in some of the volumes simply because the truck rates, the available drivers and equipment are much more favorable now to do so than it was just a year or 2 ago. So that's all I'm going to say about that, and I'm going to talk about -- we're going to turn it over to talk about Mexico now.

Thank you, John. Good morning, everyone. So yes, I mean, as John mentioned, nearshoring, right now, it's having a lot of impact just between both countries, Mexico and the U.S. Specifically in the economic side of things, nearshoring is having or has created a boom in the manufacturing in Mexico. And most important is now strengthening the peso. So the Mexican peso right now has been cataloged as one of the fastest-growing currencies in the world. And when we have the situation where the peso it's been -- it's appreciating against the U.S. dollar, definitely impacts shippers and carriers in the industry just because of the negotiations they go through when we have any cross-border operations. Either it's going across the border or to or from the border into Mexico or the other way around. So carriers typically in this type of business or in this type of lanes, they are paid in U.S. dollars. And now they're having all their operating costs in pesos, so that's the difference that carriers need to make up for. So right now, the immediate effect that we're seeing is that carriers are actually raising the rates in this type of shipments or in these type of operations. So definitely something that we're going to keep seeing as long as we see this appreciation between the currencies, the Mexican peso and the U.S. dollar. So moving into regulatory. As you already know or probably have heard, Carta Porte is something that became mandatory since 2022. The authorities since then, they have had a waiting period, this waving period or waiver period has been specific to just avoiding all penalties and fines. When you have any incomplete or [ Rumpl ] data transmitted to them. So this waiver period will eventually end. They are expected to have it ended by December 31 of this year. So as we move into the next year, we expect for any [ Rumpl ] information that there might be transmitted to the authorities now have an impact and now have consequences in those having any penalties or fines because of this. So again, this does not mean that we can travel without Carta Porte. We need to travel with Carta Porte. It just means that there's not going to be any consequences if, for any reason there is like any [ Rumpl ] data being translated to the authorities. Another important topic, which you might have heard a couple of weeks ago was about a possible strike that was to take place in Mexico nationwide. There is the Mexican Truckers Association that it's name is AMOTAC. They were planning to have a strike and blockades just across Mexico. However, luckily this was suspended. The reason behind this strike was basically truckers demanding safer conditions in the roads to the authorities just because the levels of insecurity have increased. So a few days before that strike where the planned date for the strike to take place, the association was able to have conversations with authorities, they come to good negotiations, they come into good agreements and that is saying in that moment that they have decided to suspend the strike. They will be following up into those actions that they have agreed upon. They will follow up on them in the following 3 months. So based on that and making sure that everything is being compliant with to what they agreed, they will just keep suspending that strike. So right now, we're going to just keep an eye on this topic. Definitely, if something changes, we will communicate this to you. But as of now, everything seems to be under control. Moving into the trucking side of things. [ LTL ] volumes in the southern border, they are still down. We are above at least 10% year-over-year down. We have not reached those levels that we have pre-pandemic. The spot rates have also decreased a few cents. And as we already saw in a few last slides, the fuel has had minor spikes throughout the last couple of months. So nothing has changed a lot in that specific market, let's say, in the southern border into the U.S. However, in Mexico, that domestic market, just because of the nearshoring that we have spoken about. Although there's still supply available, we have seen volume increase, right? And also many shippers more specific and most commonly in the automotive industry, they have a forecast of just keep growing as we are moving towards the end of the year. So we're just making sure that there's a good balance between the equipment availability. And also this revision in rates that we have been talking about because of exchange rate, because of just the cost that carriers, they usually are going up, specifically into insurance and other maintenance costs. Also, this has been having an effect on these rates, again, being revised priority. So what things are happening in Mexico definitely are going to [ concept ] provisions different to what we see in a more balanced market probably within the U.S. Now another important thing is that Laredo has been one of the major ports and right now, it's been the #1 port of just having trade between Mexico and the U.S., and this is above the other gateways that we have across the U.S. So a lot of planning, a lot of conversations have been going between both governments into Mexico and the U.S. side. All the, I'll say, associations and government agencies, they are really putting all their efforts into having an adequate planning as to be prepared to everything that is coming due to the nearshoring. So the DOT actually released a master plan that's called the Texas-Mexico Border Transportation Master Plan. This is basically to improve the capacity and just infrastructure that we have across the Southern border. So in the existing commercial bridge, the most important one, which is the World Trade Bridge, they have a couple of things being implemented. They have nonintrusive inspection areas right now being under construction to be ready probably by -- as we end 2024 and beginning of -- I'm sorry, the ending of 2023 and beginning of 2024. And also, they are even planning on constructing an additional bridge, Bridge #5 for commercial use as well. Obviously, this bridge is probably going to be ready between 3 to 4 years as of now. But I mean, a lot of things are going on besides this expansion or construction of additional lanes within the existing bridges in [ Laredo ]. We also have the Colombia Bridge, and that's another one that also in the Mexico side, they have been adding some lanes. So infrastructure-wise, the operatives are pushing and planning everything just to be able to support all these nearshoring that we're seeing and the increase in volume that we expect in the following months and also in the following years. So that's what we have for Mexico. I'm going to turn it over to Gary to go through the -- Canada. Thank you.

Thanks, Carolina. Good day, everyone. So on the Canadian front, the economic look is -- yes, actually, the Canadian economy has proven itself time and time again to be extremely resilient to these economic downturns. They're obviously feeling the pinch like we are in the United States, but Canadians continue to purchase at very high levels. So we continue to see that trend. Canada has also signed many free trade agreements, which has made trade with Canada even more lucrative. There's a bunch, but like the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. That's like a tongue twister. For example, it provides duty-free treatment for many products from 10 countries in the Euro Pacific like Vietnam, Malaysia, Singapore, et cetera. So we have excellent resources on those, on the trade agreements in specific. So obviously, not time to go into those very much here. So if you'd like additional information on any of those, just reach out. And while not expected cross-border volumes back in 2022 were up nearly 10% from their '21 volumes of nearly $828 billion, which was a record-setting year. And 2023 has seen some decreases over the record-setting numbers, however, remains on pace with a 2019 pre-COVID number correlation. On the regulatory front, CARM is the big -- one of the big items. So CARM stands for the Canadian Border Service Agency or the CBSA's assessment and revenue management program. This is a brand-new initiative program to provide online direct collection of duties and taxes for goods imported into Canada. CARM will have a client portal, they'll call the CCP. It's likely to be the key interface for all importers enhancing the accuracy of trade data and providing improved compliance in an easier basically, method of collecting duties and taxes. Importers will be able to review and pay their transaction balances through the CCP and have visibility to duty and tax information that really you've never had available before. So spoiler alert, it will not have your historic or pre-CARM data, however. So CARM is a mandatory requirement for every single importer. The next version release has been delayed all the way to next year in October. However, even with this later deadline, you must still be prudent and registered before all the rush in delays and for [indiscernible] can start looking at it now, if you have not. So no longer will an importer be able to also use their customs brokers bond. So that's a huge item for a lot of customers. All importers must have security bonds in place when that goes into effect. Also, importers must delegate their authority to their customs broker. On another front, the ELDs pretty common for us in the U.S. for a long time now, electronic log devices for commercial drivers, announced that when domestic Canada enforcement began just in January of this year that it would ramp up. In fact, the Canadian Trucking Alliance recently posted that they've been advised by the Canadian Council of Motor Transport that the provinces and territories were firmly committed to enforcing the ELD mandates. So aka, they're going to be checking. So you're saying, "Hey, how could this affect me? That's the carriers." So simply by ensuring you're using a vetted service provider and using caution with what I would call load brokers, just because they can show you a certificate of insurance doesn't mean that they're a compliant carrier option for you. And we are seeing a lot more items from a cross-border standpoint into and out of Canada leaning on the compliance side of things. Again, on the trucking side of things, as John had said, diesel prices had been coming off some of the highest levels in history, however, headed back up. Capacity is abundant, FTL rates are stabilizing with pockets of volatility still dependent on the lane sector. One of the things I would caution you as many carriers have what they call all-in rates. So basically, they have their lane price with the fuel price all bundled into one little price. So if you have that, I would make sure you're taking a close look at it because many customers have told us they didn't see a reduction, yet the fuel price had come way down and they should have. So something to take a look at for sure. LTL with many carriers exiting the market, like John said again, latest YRC. The analysts predicted impacts of 25% to 40% increases as consumers looked to replace all of those lanes. And we still see many people still shifting from one carrier to another after that sudden debacle of YRC going out. Lastly on the outlook side of things. The outlook for Canada for the remainder of 2023 still remains optimistic. However, expectations are indeed lower than what we saw in 2022. After dealing with their largest economic contraction since 1945, which was approximately 5.5% of the GDP, the economy is predicted to grow, albeit modestly, if a recession can still be held off, which so far so good. Lastly, e-commerce and what we call international zone skipping programs from U.S. to Canada, Canada/U.S. We're one of the top supply chain programs in 2022, and we've seen a continued need and implementation for this program offering for all of '23. So if you're interested in more about that, also reach out to us. And I think that's all I have. And Angi, you want to finalize?

Yes. Thanks, Gary. All right. I just got a little bit more content for everyone. So as we close out here, just to summarize, overall, when we think about going into Q4, coming into our retail season, kind of summarizing the economy, really manufacturing is somewhat soft but the automotive sector is still thriving, but who can't go with Q4 without having some disruption, right? AW is potentially threatening striking. So if anybody has listened to the news today, we'll see what happens with that. But what's interesting about the automotive sector is it's still thriving even with interest rates being high. And it's no secret that with labor reshuffling that we've seen, companies are still working to reshuffle and replace employees with technology and machinery. And what's interesting is our labor, we've got one of the oldest labor market that we've got out there today, with employers even trying to bring back folks that have retired. So interesting dynamics that we're dealing with. And then even going into next year just with the higher borrowing costs, are impeding consumer businesses in spending with an uncertainty going into next year. So just to add to what everyone's talked about as far as first capacity, the active truck utilization is expected to remain strong with elevated freight demand and that greater drop in driver capacity. And really just to add to what John Butler talked about, we've seen the surge of carriers exiting the market. And that's year-to-date July, to-date has been 55,000 carriers. And that number -- that's with fleets of 6 trucks or less. And that's really been driven by spot rates decreasing and fuel going up. So the market's changed. And really, when we talk about that, we want to keep an eye on that with it being soft demand right now, not as big, but we want to watch how drivers leave because that also impacts capacity. And then two, we also talked about capacity on the LTL side of the house right now, with LTL demand being -- our capacity being soft, we were able to absorb -- the LTL was able to absorb that all that capacity. So we'll see how that materializes as time goes by. But as John mentioned, we'll kind of see how freight is handled throughout the networks. And then moving over to cost. So I think when we look at carriers costs are still super high with carriers, insurance costs, wages and equipment, it's no different for us on a personal basis. Our costs are going up and even in your own businesses, your costs are going up. So carriers are getting hit with that. And we mentioned that because it's also a contract season. So that's one thing to talk about. And if you give me just a minute, we're going to talk about that in my next slide on ways we can help mitigate some of that stuff. 2 spot rates have likely bottomed out. And then back to this whole Yellow piece, how that's going to impact rates as we go into contract negotiation season, especially on the LTL common carrier side of the house. And then two, just talking about some of the solutions. So when we look at our network, especially on the LTL side, while expediters are very multimode, all modes we do support and expediters. But speaking specifically to the LTL side of the house, we do have simplified pricing. So we don't necessarily participate with some of the classification sides that you see with the LTL, we've got zone-based or state to state. And then to that first and final mile piece, which is equally as critical. We've got those 26-foot straight trucks that are much more nimble getting in and out of those local deliveries. And we can also provide the value-added deliveries. And then 2 other areas we can save money is we consolidate those orders. If we've got same -- multiple shipments going into the same deliveries or same companies. And then to like Gary and Carolina had talked about, we do combine the customs brokerage for the cross-border activities and we've got the transportation, we can run the both customs brokerage along with the transportation. So with that, I've got one more slide I want to talk about. So knowing that cost for our carriers, all carriers are going up, it really takes us into this new area of how do we talk to our folks and our management because everyone is accountable to cost. So how do we quantify service speed, savings visibility. I want to talk about a few areas where we can help support a couple of different models. There's forward stocking. This is something new we've introduced to customers over the past 3 to 4 years, but really getting a product closer to your end customer and leveraging our 70 office footprint. All of those offices have got a warehouse behind them, but it's offering short-term storage, getting product closer to your end customer, offering faster delivery times, reducing your transportation costs, even merging products and then also minimizing storage costs and handling cost. And then with that, we've got a complementary kind of web-based interactive inventory system. This one I want to talk about. So when you think about -- this is a beautiful love story between procurement and our logistics folks. So this is an actual case study where an individual company was using LTL common carriers and sometimes there's handling challenges with products. So this is one where the pure total [ land to ] costs were completely impacted by damaged freights -- damage freight, excuse me. And the customer was actually having -- it was reduced sales and they had imbalanced in inventory because they had to continue to replace goods. They also had to have increased cost to repair the goods. They had to expedite the shipping of these goods, and then they also had to -- their brand image was completely tarnished. So with this, they actually -- the procurement team, the logistics team actually got together, they actually had a minimum of 20 e-mails and went back and forth to the claims team. So they actually got together, talked about our program, paid a little bit extra with our LTL network that John talked about. We were able to put this all together. And it was a fantastic union and now they've actually reduced their [ land to ] cost and increase sales. And then lastly, I want to share -- talk about an inbound better management program. This is a big one because usually folks that have inbound vendors, multiple vendors, sometimes a couple of hundred vendors. A lot to manage, so we can actually own that tactical management of those shipments and provide visibility to that PO or the sales order which also helps support kind of internal cost allocation of those transportation costs that come in. And then to provide SOP management or business rules to help manage even not only exception management, but we've also found that folks are actually incurring up -- shipments that are upgraded service levels are paying expedited transportation fees. The other piece here is there's usually some inbound plants or locations or maybe own DCs that get bulk orders, so we can actually have consolidated deliveries into those locations versus receiving multiple shipments on a daily basis. And then two, we tie that with continuous improvement initiatives. But overall, the general message is we can actually support -- tying these into remessaging things and actually tying in the savings initiatives outside of -- if you're more challenged this year with trying to get savings with general contract negotiations, which that's where things are going. How can we repackage the entire program with initiatives like this to help support you guys in your overall ways of showing the value that you're bringing into your organization. So with that, this is going to close out our webinar for the day. And Nicole, do we have any questions for our panelists today as part of this?

Yes. Thank you, Angi, and all the speakers with the great content today. We do have a few questions that came in. I'm going to go ahead and try to get through all of them, but we might have to reach back out or follow up after on some of these as we are a little bit short on time, only 4 minutes, I want to be respectful. So I'll go ahead and start pitching these out. I know, John, we have one -- we have a couple or one for you maybe around the air market in terms of the -- what is the current status of SAF coming into the market? Are we still several years of before it's available or used?

Yes. No, that's a great question. For those who don't know, SAF is sustainable aviation fuel. So just to put it in context, between 2016 and 2021, the production of SAF has gone from about 1.7 million gallons a year to about 5.1 million gallons a year. In 2022, it reached a level of 15.8 million gallons in production. But put in context, right, the aviation industry in the U.S. used 17.5 billion gallons of petroleum. So it's a tiny percentage, it's growing. But as the production increases, the cost will come down currently. SAF is about 4x more expensive than Petroleum. That cost will come down as production increases. So as production increases, adoption will become more readily available and done as the cost comes down as well. So that kind of covers what's happening with SAF. I'm going to grab the last one that came in to on the capacity constraints in and out of California or any carriers applying surcharge in and out of California. To be clear, Expeditors is not being hit with any surcharges. There are carriers in the marketplace that are applying surcharges in and out of California. They've started that during the pandemic. And while capacity has loosened in that market greatly, those surcharges still remain in place. However, we have been immune to that to this point with our carriers. So I'm just going to grab those 2 very quick if you want to flip some of the others.

Great. Next question, is there a difference in tender rejections and tender volume index values between LTL and FTL?

Yes. Just on the LTL tender, everybody has got the route guide set up. I'm not familiar, I haven't seen any numbers on tender rejections on the LTL versus out of truckload. Yes, I would have to reach back out and send that question how those are measured. But I don't have any data on the LTL tender rejection rates. I don't even know if there is that in the same deal, but the tender rejection rates on the truckloads, I mentioned were way up, went way down. And I'll have to see you how those indexes are created after the call.

Sounds great. We'll follow up on that one. Let's see here. Carolina, I know it looks like you might be answering one here with the Mexico border, with El Paso and compared to the Laredo. Anything specifically noteworthy at that crossing?

Yes. I mean in regards to volume, obviously, El Paso obviously is another important port. However, volumes, although they had a good amount of trade, are not that comparable to the ones in Laredo. So there are the options of [ linked ] commercial bridges through this area, whereas El Paso. As of now, there's nothing being worthy of making it or expanding or doing some sort of things through that border presence -- border port. So [indiscernible] down there.

Great. Thank you. Well, with that, we are about at time here. So I'm going to go ahead and conclude the webinar today. But I just want to say thank you to everyone who joined and your continued participation in our webinar here at Expeditors. Please check out further webinars on expeditors.com/event. You'll see all of our upcoming webinars and you can register right there on our website. I will be following up with, again, a thank you e-mail with the survey link where you could take our survey and then access all the material that you saw today in the webinar. Thank you again to our presenters with all the valuable information and to everyone for joining. Thank you.

Thank you.

Thank you, everyone.

Thank you.