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

Hello, everyone. Thank you so much for joining Expeditors market update in the Northeast. My name is Gina Soriano, and I am the Customer Retention and Development Manager. I'm located in the Pittsburgh branch and I will be our host today. Before we get started, I do just have a couple of ground rules that I wanted to work through. Today's webinar will be recorded. All of the attendees are anonymous and will be placed on mute. If you do have a question at anytime please feel free to ask it in the Q&A box. All of our questions will be answered at the end of the presentation. You will also receive an e-mail in the next few days containing a link to the materials presented today as well as a survey. Your feedback is very valuable to us, and we do ask that you complete our surveys so that we can improve any future events. So for today's agenda, we are going to cover multiple topics. First, we're going to have introductions, then we will discuss our domestic product market updates, followed by air. And I'm sure everyone is anticipating the ocean market updates with everything going on. Then we will have our Q&A and finally, the closing. So for the speakers today, as I mentioned, I will be the host, Nick Joy is our TransCon manager, providing the domestic updates, Ben Kable is the air export manager. Julia Ferris is the import transportation manager, and Angela is the ocean export manager. So with that being said, I will go ahead and pass it over to our first speaker.

Thank you, Gina, and good morning to everyone. My name is Nick Joy. I am the Pittsburgh TransCon Manager. Okay. I'd start with the first slide there. Yes. Perfect. So the domestic market in and around the Pittsburgh area has been quiet over the past few months. We currently show no capacity restraints, when it comes to full truckload carriers, our GNS and LTL carriers. And currently, we are not seeing any labor issues as well. Shipment counts and tonnage remained down year-over-year, along with adding driver capacity in the United States and other regions around us. Slide, please. So focusing in on less than truckload/LTL, early GRIs, which are general rate increases have been announced and are ranging from 4.9% to 7.5%. As mentioned earlier, shipment counts and tonnage are down in the LTL market, plus average weight of shipments continue to fall, due to the e-commerce demands that the LTL market primarily handles. Moving over to full truckload. New cancellations in December 2023 rose to the highest number since May with just over 7,400 service providers leaving the marketplace. Trailer volumes continue to remain flat year-over-year and month-over-month. The loads to truck ratio for December averaged 2.12 loads per every truck. So looking to increase trucker availability in the marketplace, the last year, the U.S. Department of Transportation, Federal Motor Carrier Safety admin announced it would award approximately $48 million in grant funding to increase CDL driver training opportunities and to continue to improve the process to obtain a CDL -- his funding aims to improve our national supply chain resilience and strengthen America's trucking workforce. So all in all, things are all quiet here in the Pittsburgh area and capacity remains strong. Thanks again for your time today. I will now pass it over to Ben Kable and Julia Ferris for your air market updates.

Thanks, Nick. HI, everybody. Good morning. My name is Ben Kable, and I am the Air Export Manager in the Pittsburgh branch. Can you go to the next slide, please. So as Nick mentioned, things are relatively quiet as well from the air export standpoint in Pittsburgh. As you can see here on this slide, this is Expeditors Red Lake, greenlight, yellow light diagram. And as you can see here, every region is green, which means demand and capacity are at normal levels. So what I'll do is I'll touch on each region, just go through. So starting with LatAm, demand to LatAm has normalized. We're not seeing any demand outpace capacity. But I will suggest, if you have anything urgent to reach out to your local contact and just request that pricing out of the Northeast region, where from a rate perspective, we moved the majority of our cargo through Miami, which allows us to get better pricing versus moving out of the Northeast. From UR perspective, capacity is there and demand is not outweighing, so no restrictions going into Europe. And then the same was going to India, North Asia and South Asia. So if you have any big project I still recommend you reach out to your local contacts. But for the most part, shipments are moving smoothly and dwell time is minimized. Next slide, please. So this is just our Air market insight page. So I'll start on the left with supply. And as I mentioned, our capacity is growing. It grew 3.5% from November 6 through December 3, 2023 versus 2019. And we're just comparing pre-covid levels to where we are now. So supply is there and demand is down. So demand did decline 4.4% since October. So again, we're comparing precoded levels to where we are now. From a performance perspective, our GHAs are back to normal congestion has eased, which allows us to tender more cargo to the airlines on any given day where we are seeing constraints of 5- to 6-hour dwell time, where we're now waiting maybe 1 to 2 hours max, which has again allows us to tender and keep our flights on track. We're not seeing really any labor challenges from an Air expert perspective. Julia and Angela might touch more of on the import side. And then as far as spend goes, airlines are now honoring rates for a longer time frame. We began negotiating with our year-long rates, which will be established early Q2. And the fuel cost trends remain to fluctuate just depending on our carrier, but they're relatively stable at this point. And then lastly, again, as I mentioned on the plan side, if you have any big projects in the pipeline, I suggest that you just reach out to your local Air export manager. And just any forecast will help, it will help to keep rates in line and will help keep our service throughout the year. And then last slide, please. So this is just a slide that gives you a good visual of each region on the global air demand and it transitions into air import -- so on the left, it's Asia Pacific to North America, where you can see capacity is up 7% and trade is down 10%. In the middle, you can see Asia Pacific to Asia Pacific, where capacity is up 11% and trade is down 7%. And then on the far right, North America to Europe, where capacity is up 2% and trade is down 17.3%. So now I'll turn it over to Julia, who will touch base on the air import and ocean import market.

So I am Julia Ferris, the Air and Ocean Import Manager here in Pittsburgh. We're going to take a quick look at the inbound market from Asia. Taking off 2024, we are seeing smooth transits out of Central and South China without backlogs currently at our facilities. While we do predict demand to increase as we approach the Chinese New Year holiday, it does remain manageable right now, and we're seeing limited cancellations to flights, which is keeping cargo moving as planned. South Asia has experienced a calm start to 2024 as well. But we have received an uptick in charter request from this market, which alludes to increasing demand on the horizon. There are 2 main factors that we have in the back of our minds regarding that demand, 1 of which is the ocean market, which we'll talk about shortly, and the other is upcoming Chinese New Year. Next slide, please. So Chinese New Year this year falls on February 10. It's going to be a year of the dragon. And while we have so far seen a start -- a slower start to this year, traditionally, there is going to be an increase in the weeks leading up to the holiday. We expect to see demand pick up, space tighten and rates spend traditionally follow. If you are planning a large shipment that master prior to the holiday, please work with your local Expeditors office to ensure that we are aware of the space constraints for your cargo and that we have it ready and available to move within the timeframe that you need. I do also want to make sure that we're aware of the holiday schedules around this time of year. So a lot of vendors and manufacturers will take extended breaks during this time. We want to make sure that you've communicated with your shippers to ensure that they're meeting your time lines. And that we're aware of the Expeditors Asia office is also sometimes having holiday break during this time as you can see in red, there will be cut-off periods, where we have to make sure we have that cargo in hand so that it can depart, while everyone is still at work before the holidays. So please keep in touch with your Expeditors office for these items. And now we're going to move on to the factor that's caused the most hesitation, I think, for everybody. Angela and I are going to go over 3 big topics in the ocean market that have been causing stress across the board. Please do remember as we go through these, we do have a chat box open for your questions. If you have questions, please utilize that box. We're here to answer those questions for you. So moving on to our first topic. So the first topic we're going to cover is the EU Emissions Trading System, or ETS which is an EU climate policy to reduce greenhouse gas emissions through a 3-year phased approach. It did start this January 1 [ bags ] of vessels arriving or departing EU ports. They would be subject to emissions reporting with the carriers and those carriers and have to buy allowances for their greenhouse gas emissions. This process has resulted in a price being put on those emissions in the form of a carbon tariff, which is being added into several carrier contracts. This is still very new. Obviously, we're only halfway through the month, and it just rolled out on the first. So not all of those cargo -- those tariffs are published by carriers just yet. These EU ETS fees are considered a pass-through fee. So if you are moving shipments through or to EU ports you would start to see an EU ETS fee for these carbon trading fees starting soon as it just beginning in January 1. This is different from the IMO 2023, which we did talk about last year. So the IMO was a measurement of efficiency of a vessel and grading them on that efficiency level, this ETS is actually a charge for the carbon cost of those vessels being used. So a little bit different. Moving on to [ bon back] #2 with our ocean freight here is the Panama Canal. So the Panama Canal has been experiencing lower water levels since July of 2023. During that time, the vessels transiting per day was reduced down to 32 per day due to the water level and the locks. Since that water level has not improved, there has been further reductions to the daily vessel traffic, as you can see on the table on your screen. The canal does function through an appointment process, allowing ocean carriers and those vessels to prebook a slot to use the canal, 30 to 45 days in advance. So most container ships do have these booked well in advance and are transitioning the port, the canal -- excuse me -- just fine. But over time, there is obviously concern that if the water levels are not brought up a little bit, but it would continue to cause reductions to the number of vessels allowed to transit per day. And that could alter some schedules or cause some backlog is the fewer vessels are allowed to transit per day, the fewer appointment lots they may have and may cause little weights here and there. Additionally, we have started to see some Panama Canal surcharges that have gone into effect for carriers utilizing this route. It has not been across the board just yet, but just something to be aware of. Additionally, with these lower water levels and carriers are being much more careful with loading weights. So if you typically shipped very heavy containers through the Panama canal, you may start to see weight restrictions on those containers due to the draft levels of the vessels and then not wanting to load too heavy, so that they still have room in the water to actually move. So if you do you have very time-sensitive cargo or very heavy cargo and you're concerned about this route or these changes to those water levels. Please do reach out to your Expeditors office. We're happy to talk through what types of options or different plans we can put in place to help that cargo move [indiscernible] as possible. And then I will move on to our final topic and hand it over to Angela to talk about the Red Sea.

Good morning, everyone. I'm Angela Morris, the Ocean Export Manager for Expeditors Pittsburgh. An extremely hot topic on everyone's minds right now that are in the logistics and supply chain industries is the Red Sea crisis. The attacks by Iranian backed militants have disrupted international trade through the Suez Canal, the shortest shipping route between Europe and Asia, which does account for about 1/6 of global traffic. The number of attacks has increased significantly, since November of last year. The green arrows on the slide shown now represent the number of vessels currently on the water. As carriers decide, if they go through the Red Sea or around the Cape of Good Hope, vessel bunching is inevitable, stopping cargo from moving for a certain period of time. Rerouting cargo via the Cape of Good Hope adds about -- excuse me, 10 to 15 days on to the overall transit time depending on the final destination. Because vessel strings move in loops, delays to the entire schedules can increase by 14 to greater than 30 days. Delays are prominent. A possibility of several vessels arriving at the Northern Europe, North American and Asian ports at the same time due to vessel changes will more than likely overwhelm terminals, railroads, chassis availability and truck capacity. Late-arriving vessels can accelerate the depletion of equipment pools as empty containers are pulled and loaded without replacement containers arriving timely to replenish those chassis bulls. Delays in vessels transitioning back to Asia will affect weekly space and equipment capacity. Additional transit times do lead to increased fuel costs. Additional security and other related fees have already been implemented. The carriers costs are increasing for the additional work involved, so those costs are being passed along to expeditors. Supply and demand will not be in balance due to gaps in service caused by vessel rotation disruptions. The situation in the Red Sea remains dynamic. Global supply chains are being affected, transit times are increasing. We're running into space limitations. Vessels are becoming full and equipment is becoming out of balance. And unfortunately, that means rates will increase as well. The Red Sea and Suez canal traffic is a significant artery and the flow of global goods. So disruptions there can have broader market impacts. For example, to fill service gaps and heavily impacted trade routes, we have seen some carriers pull vessels from other markets and insert them into the strained routes. Unfortunately, pulling capacity in turn alters the balance of supply and demand in those trade lines. Next slide, please. I would now like to address some of the frequently asked questions that we've been hearing from our customers. Hopefully, this helps to answer some of your questions in advance. And as Julia mentioned earlier, if you do have additional questions, please feel free to list them in the chat. So which carriers are affected. All commercial carriers and vessels going through the Red Sea are affected. What trades does this impact? This mainly impacts the Asia and India, to and from Europe, Mediterranean and North American trades. About 15% of the world's shipping traffic transits via the Suez Canal and is impacted by the current disruptions. How does this affect transit times? As I mentioned earlier, rerouting cargo via the Cape of Good Hope will add an additional 10 to 15 days of transit depending on the final destination. How long might this situation last? The situation is fluid and changing daily. It will continue -- we'll continue seeing delays until a safe passage is allowed through the region. Carriers are conducting case-by-case assessments to determine whether adjustments need to be made including diversions via the Cape of Good Hope and other contingencies. Our office will continue to update the affected customers on an individual shipment-by-shipment basis as soon as we have those details available. I have cargo destined to Red Seaport what will happen. Cargo planning may be impacted with delays, especially for bookings originally destined to Red Sea ports. Please work with your local Expeditors office for alternative solutions to your shipments. For cargo already loaded unaffected vessels, transit times are being updated and adjusted daily even hourly at this point. Our teams are working around the clock with our service providers and partners to find the most suitable solution for your shipments. I booked cargo on a service originally scheduled to transit through the Suez Canal, what will happen? If your shipment was scheduled to transit via the Suez Canal, the carrier may decide to route via the Cape of Good Hope causing delays to your shipments that we spoke about earlier. Carriers may allow shipment modifications which typically occur at the last port of departure before transiting through the canal. Again, transit times are constantly being updated at this point. I have cargo on a service that could be impacted, but I'm not sure if my shipment is affected. Our teams are adjusting transits and proactively alerting our customers with possible impacted shipments ensuring that you have the most up-to-date information. Will pricing be affected? Due to increased security measures, additional distances traveled and strains on supply and demand new surcharges are being announced daily across many different trades. FAKM spot rates are currently increasing. And lastly, what should I take into consideration for business continuity planning? Just a few tips for you, please engage with your local Expeditors contact to evaluate and discuss alternative routes, services and shipping modes depending on your destination. At this point, please plan for longer-than-usual transit times and increased overall transits. Look at ground infrastructure for new ports of arrival, including cross-dock and transload operations. Please share your volume forecasts with your local Expeditors contact as early as possible. And also budgeting for air freight is another piece of advice at this point, if need be, of course. We recognize that disruptions, uncertainty and increase in costs can be frustrating. Unfortunately, the political and security situations remain fluid and beyond our control. Please reach out to your local contact with your current challenges, so we can assist with offering alternative solutions. Thank you for your time today.