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

Okay. We are right at the top of the hour. So you want to get started here. Thank you all for joining us today. Of course, you are joining our freight considerations for U.S. government contracts webinar with Expeditors. So my name is Samantha Hurst. I'm one of our managers for marketing bids here with Expeditors Americas team. And I will be supporting as hosts in the background, if you have any questions or issues, please feel free to e-mail me, and I will try to take care of those. Hopefully, we will not have any technical difficulties, and everybody will be able to get a full value of our content today. So we will start off with a little bit of housekeeping items just to make sure if you've not joined us before you understand how things will flow. So with all of our webinars, we typically will have about 45 minutes of content and then Q&A to follow. Hopefully, you see the Q&A box on your controls. And we do ask that you place any questions that you have there in that box. We will be working on those questions throughout because in addition to our speakers, we have several members from their teams who are on to support today and answer questions in the background, and we will also address any others that come through at the end of the presentation. One of the very first questions we always get is how do I receive the slides from today's program. So after the webinar, you will receive a short feedback survey via e-mail, and that will come out to you typically within about 2 hours of us wrapping up today. And once you complete the survey and give us a bit of feedback on the value of today's content, you will be redirected to a landing page. And on that landing page, you can find a link to the recording of today's session as well as the presentation slides. Another question we often get is how do I learn about future webinars. So Rob, if you'll skip back, sorry, just going to go over that QR code, you can scan that and you are able to sign up to get future invites for other events as well as global market updates. So just a quick disclaimer on that next slide. Of course, all of the content that is presented today is made available for informational purposes and Expeditors does not guarantee or warrant any of the contents of this presentation to be used for financial decisions, et cetera. We are here to educate and then, of course, you make the best decision you can for your own company decisions. Now the fun part, let's introduce our speakers so that you know who is going to be presenting our content today. So with us, we have Rob Dinwoodie, who is our Director of U.S. Government Services; and Ugo Sbriglio, who is our Program Manager for Global Compliance. Before I hand it over to them to get started with the content, I do want to give you a little bit of an idea about their backgrounds and expertise. So Rob has 20 years of experience in supply chain in the U.S. government sector. And Rob joined Expeditors in 2015 after 10 years of service as an officer in the United States Marine Corps. In the Marine Corps, he worked in supply, logistics, finance and even aviation. And since joining Expeditors, he's led supply chain projects across pretty much every sector that delivered results for some of our largest global customers. Now you'll hear Rob talk a lot today about his passion for process improvement and eliminating waste. So it should not surprise you that he is a lean sigma Black belt. He's also very proud, of course, of his veteran status. Now Ugo has meanwhile been with Expeditors for 7 years after he graduated with the Masters in International business in France. Ugo has gained experience handling strategic cargo for which he's developed a really keen interest. And this experience provided him with all the knowledge he needed to move to London and take on a role in compliance for us in 2015. There, he provided guidance and oversight to our European offices to make sure they were handling strategic goods in compliance with all the applicable local and international laws and regulations. So you'll see that expertise is definitely put to use today. In 2022, Ugo joined Expeditors global compliance team, where he now leads our strategic goods program. So Rob, I believe I'm turning it over to you now to get started with our content.

Awesome. Thank you so much, Samantha. I appreciate the introduction. I wanted to say thank you to everyone that has joined us today. We're really excited about this webinar. For those of you who aren't familiar with Expeditors, I'm going to do a brief introduction. We're a Fortune 500 freight and logistics company headquartered in Bellevue, Washington. We don't own the assets of air, ocean and trucking transportation but we do generate highly optimized and customized supply chain solutions all over the world. We have a network of 340 locations in 100-plus countries on 6 continents. As a service-based company, like I said, we don't own that. But what this means for you is that we can find the right service providers to meet your mission needs. In addition to moving freight for our commercial customers, we also work on U.S. government contracts ourselves. So we're also registered in the system for award management. So our customer base is across all industries, verticals and a good portion of the world's geography. So not only do we service customers in the defense industrial base and defense services space with airfreight, ocean freight and trucking customs brokerage and a host of other services like project cargo. We also know how to process duty for imports, 22 CFR 126.4 exemptions and handle ITAR and EAR compliance. In addition, we also work on some pretty big U.S. government freight contracts like Global Heavyweight Service 2 and Multimodal 3, which means we have the perspective of a freight forwarder and a U.S. government contractor. So the things we're talking about today in this webinar are from our lessons learned servicing U.S. government contractors and doing the exact same work on our contracts. I hope that this comes across, but we want to be a resource as a government contractor to other government contractors with our lessons learned. The goal of our webinar today is simple. I want to share common shipping issues we see in the government contracting community that create waste in the international shipping process. But also I want everyone to walk away with implementable solutions that can help your supply chain improve its cost and on-time performance today. Like I said, these are things that we have worked through for many years and we also do this for our customers, and we feel there's a lot of value in sharing this with you all today. We're hosting this webinar in the interest of the community and in the interest of transparency. As Samantha mentioned, I'm a supply chain practitioner, a Six Sigma Black Belt, and I was also United States Marine Corps Officer, running supply chain operations in the U.S. and overseas. I hate waste, I hate inefficiency, and I really hate seeing the same issues over and over again in people's supply chains. In my experience, though, I know the farther upstream we plan with the right information, the better results we can have downstream. Over the past couple of years, the Expeditors government services team realized we have an important and unique story to tell about how to make supply chains run more smoothly, and we want to share with the government contracting community. As a freight forwarder and supply chain services company, we have visibility to almost every aspect of the supply chain. The idea for this particular webinar came at an industry conference last year. We were talking with U.S. government contractors, U.S. government officials and other carriers. Like I mentioned, we're also a U.S. government contractor ourselves. And in these conversations, it became very clear that many people in the industry aren't aware of all the regulations, laws and potential friction points that occur when shipping freight under U.S. government contracts. And I got to thinking about it, and that makes perfect sense, and I want to explain. The ultimate goal of supply chain management is to create visibility across the network and to ensure efficient fast delivery of goods and services to end customers. If we look at a supply chain as being comprised of 5 primary tasks of plan, source, make, deliver, and return, which you can see in this chart here, the purposes, goals and considerations are almost all different. In theory, a supply chain is an efficient flow of goods materials and information. But in reality, the supply chain is often a fragmented group of people focused on their own day-to-day tasks with their own goals and often miss the end-to-end picture. You can't know everything, and you can't get it all done in a day. So what we see is that issues pop up repeatedly in customer supply chains are not the product of people doing a bad job. It's often they don't know. They don't know an issue exists or how to fix it. Turnover is high in logistics. I know that firsthand. Things are always changing. New customers are always being added. And most of your day is often spent fighting fires. I know that's how my days were in the Marine Corps. So we want to have this conversation today. So you can take these topics we're talking about back to others in your company, share them and move them up further in the supply chain. It's better to have problems or potential issues recognized early so that they aren't an issue when it's time to move, ship your freight, pitch your delivery KPIs and provide top-level customer service. To start our journey today, we're going to lay out the definition of a perfect shipment. From a process and proven perspective, this is our ideal or future or 2B state. A perfect shipment is 1 that moves from its origin destination with no additional cost of delays, on time, damage free while providing stakeholders their needed amount of information facilitating proper revenue recognition. I know all the transportation managers in the audience are going, "Yes, that's nice, right? I'd love to do that." And we wish it happen every time. This is hard to do on commercial contracts. But hitting this ideal state becomes much harder once you layer in all the potential requirements on the U.S. government contract, especially if you're shipping high-value military goods under export control regimes. A typical government contract shipment must navigate about 5 primary stages with a potential for 15 to 20 additional steps to meet our definition of a perfect shipment. First, it almost always must have 3 to 4 bids. So if you want to move a box from point A to point B under a government contract, you need quotes from multiple carriers in order to prove that you made a best value determination. And also, you got to keep those records. Second, you have tight timelines. The U.S. government is often the 1 dictating the pickup times, the required delivery dates and the allowable transit times for your shipment, often without regard for the reality of the situation on the ground or market conditions. Third, the shipments must be in compliance with a host of U.S. government and international regulations like ITAR, EAR, specific exemptions, different customs documents and channels in order to move smoothly. Fourth, there are often restrictions on the countries your freight can travel through or above cargo preference laws dictating which carriers can move on. And then it is often delivered to a U.S. military base located far away from a city with tough access protocols and contacts that are often hard to reach. And then finally, you have to get shipment visibility to your customer, often through different visibility portals, upload proof of deliveries, all within contractually set timelines to make sure you get paid timely. That's a lot. So all of this leads to potential for waste in your supply chain. I mentioned earlier that I'm a Six Sigma Black Belt and hate waste, but all of these different requirements that are layered on to U.S. government contracts, if not properly planned for, manifest themselves in these 8 types of waste, which ultimately drive up your cost, create frustrations, drain time from important tasks, make your day far more unpredictable and delay your shipments and disappoint your customers. Waiting, unused talent, storage, unnecessary motion, defects and rework and excess transportation all steal from your bottom line and your customer satisfaction. A final point before we get into the nitty gritty here. A supply chain is functioning smoothly if 3 flows are without disruptions. First, materials and products are flowing from suppliers to customers; two, information is always being shared between supply and demand points. And then three, money is flowing from customers to suppliers. The key takeaway here is that if all these elements are running smoothly, a supply chain will be running smoothly. However, this is often not the case. When we layer on the waste and in all the requirements that can go wrong, you have disruptions to these flows, not just one or the other, but all sometimes in the same shipment. All of us collectively can find more ways to improve how these 3 elements move. Between supply and demand, the basis of corporate competitive advantage is improved or destroyed if any of these 3 elements are disrupted. Today's topics were picked because they have the biggest impact to these flows often was some of the easiest planning considerations to remediate. So our webinar today is broken into 2 sections. First, we'll lay out some of the complex regulations like ITAR, EAR, cargo preference, cargo security and defense, transportation regulations. Then in part 2, we'll talk about how these regulations play out in the movement of goods and supply chain responsibilities, routing considerations and then finally discuss remedies. Of note, these topics are not waste in and of themselves. They are necessary requirements to complete policy or security objectives. The waste is created when they aren't factored into your supply chain planning, understood and communicated properly. So with that, I'll turn it over to Ugo to talk about some regulations.

Thanks, Rob. So as Rob mentioned, before discussing the shipping process and potential road blocks, let's talk about some of the regulations that controlled goods shipped under U.S. government contracts. First, let's take a step back and look at the principles behind export control regulations. Export control regulations are a set of regulations that control the transfer of certain goods, technologies and software. In most export control regimes, legislation list the items which are controlled and list the destinations to which and use for which exports are restricted in some way. Ultimately, export controls aim to restrict the export of sensitive technologies or strategic goods to prevent the proliferation of weapons of mass destruction and counter international threats. The list of controlled items often arise from some harmonized regimes, whether they are international regimes, such as treaties and conventions like the chemical weapons convention, multilateral export control regimes such as the Wassenaar Arrangement, which frames the export controls on conventional arms and dual-use goods or technologies, or the Australia Group, which prevents the spread of chemical and biological weapons. Last but not least, at a national level. Each country has its own set of laws and regulations with their list of controls. Let's now have a look at the U.S. jurisdiction and a few of its key concepts. In the case of international shipping, other jurisdictions may apply to. So to add some perspective on how U.S. export controls apply, I will put it in parallel to the EU jurisdiction. Who is subject to the EU jurisdiction? It's pretty straightforward, EU entities and their subsidiaries, EU nationals, companies and individuals located in the EU territories, and companies conducting business in the EU. In regards to the U.S. jurisdiction, it's a little bit more complicated. We're talking about the long arm of the U.S. because they apply extraterritorial controls on the export, re-export and transfer of controlled goods. Simply put, the U.S. jurisdiction applies to U.S. persons who facilitate a transaction. So let's define U.S. person and then explain the concept of facilitation. U.S. person first. There are entities organized under the law of the U.S., so companies headquartered in the U.S. and they're non-U.S. branches, employees of these entities regardless of their nationality, individuals and entities located in the U.S. or U.S. citizens and permanent residents wherever they are located in the world. When it comes to facilitation, it has a broad definition, but the OFAC, the Office of Foreign Asset Controls, give some guidance to define what it is. Approving a business transaction is considered as facilitation as well as the referral of business to a non-U.S. person, negotiating, drafting or reviewing commercial contracts, processing, clearing or selling a transaction, certain forms of IT support also can be seen as facilitation, and finally, changing policies and procedures to enable transactions that would otherwise be forbidden. So more generally, if a transaction can trace back to a U.S. involvement, then it can fall under the U.S. jurisdiction. This is the presence of a U.S. Nexus in a business transaction that expands the U.S. jurisdiction out of its territory. To make it concrete, for instance, if during a transaction between 2 non-U.S. companies, one of them has a server in the U.S. through which the transaction is processed, then it could be controlled by the U.S. in addition to the local regulations. So further booked for the purpose of this webinar, we will focus on 2 regulations that most of you are probably familiar with that are the ITAR and the EAR. I'll keep it short, I promise. On one side, the International Traffic in Arms Regulations enforced by the DDTC controls the export and import of defense-related articles and services listed on the United State Munitions List, also known as the U.S. ML. On the other side, the export administration regulation regulate the export, re-export and transfer of dual-use goods, so goods that can have both commercial and military or proliferation applications based on the country of export, the end use and the end user of the goods. It is enforced by the Bureau of Industry Security, which maintains a commerce control list. These regulations are updated as new technologies emerge and as U.S. foreign policy interest evolves. So what are the consequences of not complying with those regulations. The consequences of violations of the ITAR or the EAR are listed in the regulations themselves. Fines and penalties for ITAR violation under the chapter 127, specifically detainment for future and seizure of shipments under the Paragraph 127.6, debarment and loss of export privileges under Paragraph 127.7 and the civil penalties under 127.10. Similarly, EAR violations and sanctions can be found in the 15 CFR Paragraph 764.2 and 764.3. So let's have a look at some consequences of those valuations. Here, you can see some examples of fines given by the U.S. government. This is a good illustration of the U.S. extraterritorial jurisdiction. The U.S. regulations apply outside of the U.S. So fine can be given to companies outside of its territory. It's important to note that the amount you are seeing here are direct fine given by the U.S. government. It does not take into consideration any mitigation, and it may not represent the actual fine those companies have to pay, which can be lower than what you're seeing. However, it also does not include all the additional costs such as legal fees and other costs incurred because of the noncompliance. When companies are fined for an ITAR violation, for instance, Part of the settlement may require them to improve their compliance program, which means that they must invest in more compliant resources, create tighter processes and provide additional trainings to their employees. Financial implications are serious, but the consequences go way beyond just the financial aspects. And on that, I will turn it back over to Rob.

Thanks, Ugo. So let's talk cargo security regulation for a second. The transportation sector is full cargo security regulations. These exist from the Transportation Security Administration, United States Code, Department of Defense, foreign countries, other state and local government agencies and internal company processes to hopefully ensure safe and secure passage of freight. On top of that, U.S. government contracts often require extra levels of protection to move their freight safely and securely. There are actually too many different regulations to mention here, but some specific examples on how they play on your supply chain on this. First, cargo preference laws that mandate the use of U.S. flag vessels during shipment transit or carriers in countries that cannot be transited through or used. Equipment mandates, which specify the specific types of equipment that can and cannot be used. Sensor-based tracking, which reports GPS position, template and shock during the entire move. We see this quite often is U.S. citizen and team drivers because freight is getting delivered to U.S. military bases, constant surveillance escorts requiring human eyes on the freight 24/7 as it moves from origin to destination. Chain of custody requirements that or on top of customers -- or sorry, service providers already stringent chain of custody requirements. These play out as literally extra documents that have to be handed to and from different providers as it moves to the supply chain. And then when freight isn't moving, it needs high levels of security like around warehousing and storage facilities. So why is all of this important for potential waste? Well, many of these are extra services that are not provided unless you specifically ask for them. If you aren't aware of these cargo security requirements on your specific contract and at a shipment level and you don't tell your carriers they're acquired, you'll get quotes back, they look very inexpensive, a great best value. But in reality, they aren't priced properly for the work you need to stay in compliance through contract. If the freight is lost, stolen or damaged, you could be liable for that. An example of a cargo and market security regulation are what are called cargo preference laws for ocean freight. You may have heard the terms government-impelled or P1, P2 service requirements before and these are roughly the same. These were enacted to protect U.S. shipping interest in the international market when the U.S. federal fund -- sorry, when the U.S. is funding this. They are used for both security and market-driven regulations, market-driven because it keeps U.S. flag vessel owners with a steady stream of business shielded from global market pressures. And from a national security perspective, you really don't want your most sensitive military goods floating around the ocean for weeks on end on a foreign adversary ship. There are 3 key Acts, which can apply based on who your U.S. government contractor is. First, the military Cargo Preference Act of 1904. This requires 100% of cargoes bought for the Army, Navy, Air Force or Marine Corps to be carried on U.S. flag vessels, basically all U.S. military freight. What many do not know is that this applies to all components of the shipping process, not just the end product, and these apply to foreign to foreign, U.S. to foreign and foreign to U.S. moves. Second, the Cargo Preference Act of 1954 requires that 50% of civilian agencies, gross tonnage to be carried in U.S. flag vessels. So some examples are civilian agencies or NASA, Department of State and the Department of Energy. And then third, the public Resolution 17 of 1934 requires 100% shipping on U.S. flag vessels for export import bank transactions. People often ask, how do I know if these apply? In Expeditors case on our contracts, they're specifically called out in FARS and DFARS. But if you're unsure and if you're doing business with the U.S. government, ask your government contracts team or your contracting officer at the government. And like I said, it's important to note that these apply to all levels of the supply chain, all phases of the shipping process, including foreign to foreign, U.S. to foreign and foreign to U.S. moves. I bring that up because we get a lot of requests for people thinking that because the shipment is outside the United States, these don't apply, and that is not true. Okay. So you're probably saying yourself, okay, so what? This is where the market for shipping on U.S. government contracts is different than the commercial one for the freight of all kinds. So let's talk about supply and demand for a second. When we look at the aggregate market for global commercial ocean ships over 1,000 gross tons, there are 56,591 vessels according to 2023 UN report, seems pretty big, and it is. But out of that really huge market, less than 1%, 0.31% actually are U.S. flag vessels. There are only 178 total U.S. flag cargo ships and a 2022 government accountability office report found only 81 U.S. flag vessels are engaged in international trade and only 61 carry containers. So what does that mean? This means fewer routings for P1, P2 service when compared to commercial freight. Quite often, we must find circuitous and nonlinear routings to meet customers very pickup locations, equipment needs, ports of leading and port of debarkation to ensure proper transit. Next, U.S. flag vessel is 2x to 3x more expensive than FAK freight when compared to commercial goods. Why is that? Well, there are different maritime laws and standards for crews on U.S. vessels that drive up operating costs. A 2009 Department of Transportation study found when you compare U.S. versus non-U.S. flag vessels, the average cost of operating a U.S. flag vessel in foreign commerce is 2.7x higher than the cost incurred by foreign flag equivalents. These costs are passed along throughout the entire supply chain. Next, U.S. flag vessels are smaller than the average commercial vessel coming into the market today. The average container ship entering service today is about 12,000 TEUs. But the average size of U.S. flag vessels are about 4,500 TEUs. So this all translates to less routings, less space, which ultimately increase your cost. And then finally, U.S. government-owned cargo often pays a premium. So if the U.S. government is moving its freight, it's going to get on that ship. So if a booking is crowded, higher-rated cargo sales and a lower rated cargo is rolled. So you might be thinking yourself, okay, well, I don't ship a lot of ocean and we're primarily moving stuff in the air. So what about this? Well, airfreight also has cargo preference laws called the FLY America Act while not as economically or logistically as challenging as ocean cargo preference. These laws do find their ways in the contracts and are audited. As you can expect, not every place the U.S. government goes is serviced by U.S. flag aircraft, but also carry freight. And if they do, there's likely competition for that belly space driving up the costs. Everyone is competing for that space. More demand equals higher cost. This becomes a problem if you have fixed price contracts. So how do you know if Fly America Act applies to your contract? First, it's going to be in your contract clauses. Government contracts often include a clause called the Fly America Act, specifically FAR 52.247-63 preference for U.S. flag carriers. It's inserted into contracts where international air and cargo travel is likely. Also, the GSA is very clear. All travel and cargo transportation funded by the federal government are required to U.S. flag carriers and then provide a list of those flag carriers. The impacts of this can hit: one, new travel requirements for your company and subcontractors, the movement of your freight, both inside the United States and outside the United States, reimbursement. And finally, exceptions in waivers do exist, but this adds an administrative burden. So I'm not here in the business of telling what you can and can't do. That's where your legal team would decide. But what we do know is that there are possible penalties for noncompliance with ocean cargo preference laws and the Fly American Act. In our contracts, we see these as we would any other law regulation and work to ensure compliance and seek exemptions as needed. Ocean exemptions are submitted to MARAD 45 days before sailing. And for air exemptions, you can find those on GSA and in the regs, but those typically have to be done after the fact. There are financial penalties and contractual remedies that can be levied. So we don't mess around with this, we just work to comply. And finally, if your customer is a U.S. military agency and if you ever wonder what shipping processes apply to international freight and customs all over the world, the defense transportation regulations are a valuable resource for you. In our day-to-day Expeditors this is the Bible. We won't cover this in depth, but it's a powerful resource we used to understand import, export and customs processes, military contacts in specific countries and documents that apply to U.S. military freight. So at Expeditors, when we start shipping into a new country, we use this as the baseline to map out our mode specific understanding of the export, import, customs processes and forms. We then validate the accuracy with our local offices, local government and military officials in that host nation. So free resource, lots of good information, and it's updated regularly. The QR code right here will take you directly to it. All right. Now that we have laid a foundation what we'll talk about now are responsibilities, where waste happens and how to mitigate risks. Ugo, back to you.

Thanks, Rob. So here is your supply chain with the shipper on the left, the consignee on the right and all the intermediaries in the middle. Simply put, all parties are responsible for planning the next move of the cargo until it reaches the consignee. And this is how it happens for a perfect shipment. The shipper packs and labels the shipment, issues the commercial documents applies for the license and ensure that all information on the license matches the information on the commercial documents and those of the cargo. They have done their due diligence and confirmed that the commodity and the parties in this transaction are authorized under the applicable regulations. It is only after those verifications took place, and those documents are issued that they booked a shipment with the freight forwarder and communicate the cargo preference as well as the security requirements. The freight forwarder will then receive the cargo, follow the cargo preference and security requirements and validate the shipment against the commercial documents and license. They also have to do their due diligence, screen all parties involved and review information for potential sanctions and other applicable regulations. And if there aren't any red flags, they can prepare the transportation documents, identify the preferred routine and booked the shipment with the carrier accordingly. They also prepared the custom document for export clearance. Meanwhile, the carriers review the shipment information provided by the freight forwarder and do their due diligence. If they need approval from a government or governments, they will apply for it. And once the authorizations or permits are in place, they will be able to transport the cargo to its destination. There, the cargo will be recovered by the freight forwarder who will arrange the delivery by selecting the appropriate service provider and contacting the consignee to book the delivery slots. Customs will issue the import custom document, which will allow the shipment to be delivered. The consignee will receive the cargo, check that it matches what they were expecting, and the transaction is over. This is what happen in an ideal world. Documents are valid, due diligence do not raise any red flags, and each party share all the relevant information to allow the next actor in the supply chain to do their due diligence and their duty smoothly without unexpected or unwanted surprises. But things don't always go as expected and with so many parties involved, having to deal with so much information and different regulations, international shipping is not always a smooth process. So let's see where things can go wrong. First of all, the licenses and commercial documents, whether it is the commodity description or the HS code on the commercial invoice that is not listed on the license, it will stop the shipment. Sometimes, all the parties are not listed or the wrong party is listed on the license. For instance, the shipment is tendered to Expeditors, but the license shows another freight forwarder. It is also not rare to see expired licenses tender with shipments and other waste in the process. But in any of those cases, the shipment will have to be stopped and the license amended. Having to amend the license takes time and would cause the shipment to be held until a new license is issued. The regulations now. The change of often, sometimes very quickly. We've seen over the last few years, a lot of changes and implementation of new regulations and sanction sometimes overnight. Sanctions on Russia, for instance. There have been several iterations of the Russian sanctions since the conflict started. So staying on top of your regulations and constant communication between the compliance and logistics department, can prevent facilitating a forbidden transaction. We discussed earlier the consequence of noncompliance with the ITAR and the EAR. So we know that the cost of noncompliance with these regulations would have a much bigger impact than just the shipments. Additionally, freight forwarders and carriers also do their due diligence. And while it can be perceived as slowing down the shipping process sometimes, this is an opportunity to catch something that could have been missed by another party. From a transportation perspective, general terms and conditions of carriage always includes compliance with all applicable laws. Some carriers are state-owned and have to comply with additional requirements on their own government. And while direct routines are always preferred when shipping controlled goods, there is less availability and the cost of using those routes is higher. And when direct routes are not available, cargo has to transit to different countries, which means that in some instances, a permit to transit or landing permit may be required. Even a permit to fly over a given country may be required for some sensitive items. Applying for those permits may take time. And while it will extend the transit time of the shipment, planning ahead will always prevent longer delays and extra costs further down the line. It is worth mentioning that carriers can change routing at wheel. So it is essential for your freight forwarder to communicate accurate information to the carriers and validate the shipment routine with them beforehand. Now whether it's a trucking company or warehouse, it's also important that the chosen service providers have the appropriate authorizations to handle controlled goods that they can adhere to the security requirement but also have the necessary experience. Additionally, to protect your shipment, the security requirement must be understood by all parties. A lack of communication on that front or failure to comply with the security requirements could lead to cargo being lost, stolen or tempered with. Finally, the shipment has arrived at destination. It is customs cleared and on route to the consignee in a secure truck. However, there is still the possibility that it gets delayed and that additional costs occur. Delivering cargo to U.S. military bases requires planning. It requires to arrange a delivery slot and get drivers clearance for the delivery. Miscommunication with the delivery site can impact the shipments delivery and create more waste. So how can we help you mitigate risks? It has been mentioned several times by now, that all parties in the supply chain, including the freight forwarders have to comply with applicable laws and regulations. So what do we do as a company? Well, we have a network of customs and compliance subject matter experts all around the world who understand the local, regional and global regulations. We also have a dedicated U.S. government services team for your U.S. government contracts. We provide extensive training to our operations before they can handle shipments under U.S. government contract and any other strategic goods for that matter. All sensitive shipments are subject to due diligence supported by our compliance and security teams. Expeditors also has a strict service provider selection process to ensure that your cargo is handled compliantly and securely. And lastly, we partnered with air and ocean carriers with proven experience in transporting controlled goods and shipments under U.S. government contracts. So by doing all that, we comply with our obligations and make Expeditors a safe passage for your sensitive cargo. Back to you, Rob.

So how can you mitigate risks? Well, there are some simple steps that you can take that have big impact. So when we're talking about ITAR, some of the biggest things to do are ensure license accuracy. So check ITAR licenses for accuracy and relevancy on a regular basis, ensure that HTS codes are accurate and loaded into your commercial document generator with the proper declarations when and if they apply. Ensure that all parties to the transaction are properly listed. Review your partners regularly, your freight forwarders, brokers, business entities, et cetera. All these are critical to make sure that license is valid. Ensure your commercial invoices are accurate and match your ITAR license. Second, ensure your contract security standards are understood and communicated internally and with your logistics providers. The impacts to cost and delivery schedules depend on this, communicate early. Third, find the right partners. Best value is not always just the lowest cost. Your freight forwarders, brokers and carriers should have a strong compliance program. Work to understand their internal compliance processes, so those can be built into your planning process and cycle so they aren't surprise us. For cargo preference, notify the freight forwarder or carrier, you need U.S. flag vessel routing. For procurement and contracting personnel, please tell your logistics managers and transportation planners if U.S. flag is needed. Many do not know. For Ocean, start several weeks before you need to ship plan for another 45 to 60 days for transit. This allows you to source the market for the right shipment for your needs but also allows you the right amount of time to go find an exemption from MARAD, if needed. For air, start planning several days or a week before you required pickup date. Again, this allows you time to collect all the quotes you need and verify routing compliance carrier compliance, et cetera. And finally, do not use your FAK rates from your commercial business as a benchmark for U.S. flag rates and U.S. government contracts. These are 2 completely separate markets. And I guess the call to action here as we wrap it up, is this: share information internally and across departments that work on U.S. government contracts. We all know supply chains are highly fragmented, so work to break down barriers. On top of this, you have FCI and CUI controls. So my government contract people out there know what those are, but you have to be careful of who you're sharing the information with. This is where you work closely with your legal and contract teams. They're not usually a part of supply chain work, but extremely important and integral to make sure the contracts are executed according to what you signed up for. Second, build strategic partnerships with external partners and subcontractors, make sure everyone's aligned on your needs for U.S. government contracts. Third, protect your supply chain, know the regs and know your requirements, find partners that can adhere to them. And some best practices, be aware of the actual logistics impacts of FARS, ITAR, EAR, security regulations, et cetera. Here, Expeditors, we dive deep into our contracts and make sure they're disseminated broadly to the right people to make sure we're all in compliance, communicate those needs with your subcontractors. Second, increase your department's knowledge and export controls. There are a lot of resources out there. Some simple classes can go a long way to help increase your company's compliance. Have an open communication channel between your logistics department, compliance departments and your carriers. Make sure your cargo is ready per regulations and your contracts before you tender it to a freight forwarder or carrier. And then finally, if your freight forwarder or carrier is asking lots of questions, that's a good thing. Every single party we showed has a role in supply chain security and maintaining compliance. We're all trying to do the right things. And so with that, we'll open it up to any questions that are out there.

Good. Thank you, Rob. Thank you, Ugo. So as he mentioned, this is a time to drop your questions into the Q&A box. I did see 1 just a minute ago. It always takes a minute for everyone to think about what questions they want to throw out there, but someone did ask again about where you get the slides. So just as a reminder, when we wrap up today, within about the next few hours, you'll get a request for you to fill out a short survey regarding your feedback. And once you complete that survey, you will be redirected to a landing page where you can download the presentation slides and then also get access to today's recording. So as we get questions dropped into the box, I also will remind you that these QR codes we are showing will give you access to the Expeditors government services web page and also a way to connect with our U.S. government services team on LinkedIn.

Do we have any questions? Because we did have 1 question that was submitted beforehand, which I wanted to tackle.

Yes. So Rob, we actually do have a couple of questions that have dropped in. So do you want me to read those or do you want to tackle the one that we received earlier.

Let's tackle with the one earlier first and then we'll...

Go ahead.

So someone submitted a question beforehand. And this is that when a U.S. military customer outside of the U.S. returns a U.S. manufactured instrument for repair, what forms should they submit to clear the temporary import for U.S. customs release. Fantastic question. Fortunately, the answer is it depends. So it depends on the country, the military base is located in. It depends on who owns the freight. But what we can say is a good place to see guidance is the defense transportation regulations. So I looked specifically into this question, and you can go to U.S. Transportation Command to ustranscom.mil and find a DTR. And within there, the DTR covers country-specific, base-specific and mode specific process for moving freight out of foreign countries into foreign countries and then back into the U.S. and then contacts are listed for local support. So I would say the first place to turn is the DTR. If we had a little more information, we could probably be a little more clear about that. But that is a great way to use the DTR as a resource for you in your supply chain.

Awesome. That is a great resource. And the individual has submitted that question. If you continue to have more questions on that and want additional support reach out to us again, and we'll connect you with Rob and his team. So Rob, another question that we received in the Q&A box is if FAK class is not appropriate, what are some common transportation class used in the DFAR, FAR goods movement?

Well, it depends. And it really comes down to the carrier on that lane based on market conditions, will give you the quote at that point in time. We all know that market conditions fluctuate wildly. Looking back at when COVID was happening, market rates were fluctuating daily and going up almost overnight. So it really is about going out to your carriers and sourcing quotes from as many as you can at that specific point in time based on your needs. You're going to get back different routes, you're going to get back different ships, you're going to get back different ports of origin debarkation. So it really depends on the point in time of when you're asking.

Good point. And related to that, we had a question just dropped in what is the biggest driver behind the increased cost for U.S. flag vessels. Is this primarily because they might be smaller vessels? Or are those additional fees? Can you talk about that a little bit?

Great question. So it's -- for ocean, it's the combination of all those factors. Higher -- there's fewer U.S. flag vessels like we talked about. Those vessels are more expensive to operate because the U.S. has higher maritime laws and standards than other countries. That directly translates to higher costs. Also, there are few reports for them to go to. And then you take supply and demand in there as well. Everyone is competing for space. So on a supply and demand environment, those prices are driven up higher.

Great. Hopefully, that answers the question. There we sort of answered this one through some of our support personnel in the background, but someone did ask about us doing a webinar focused on TAA compliance exactly what it is and how it could affect government contracts. So I don't know, Rob, if that's something you hit at a super high level and then maybe look at trying to dig into that more later.

Did you say TAA compliance?

I did, yes.

I'm not familiar with that specifically.

Okay. Maybe that's something we can go back to this person and ask for some more clarity on their question then. Perfect.

And if we have questions, if you want to submit your name, we can then go back and look those up to. We want to make sure we do answer your questions.

So another question is asking about repair parts. Previously purchased by the U.S. Army to Army vessels around the globe. These vessels are not remaining in these countries. So this person is asking if their understanding duty should not be charged that the vessel is not remaining there. Can you talk a little bit about our understanding of that, and that may be more of a customs question.

That would be a customs question, but our understanding is if the freight isn't -- first of all, if the freight isn't entering into that economy, it shouldn't be charged any tariffs or duty fees. The second thing is if it's U.S. government-owned freight in almost all countries, and you can look at the DTR which ones apply, that freight should be processed duty free. There are extra documents that have to go along with that freight, but that is something that is usually afforded U.S. government-owned goods. Now if you carry now if you the supplier own those goods. Typically, we see those don't apply unless you go for a duty drawback after the fact. But if they are owned by the U.S. government and you're just moving them, they should move duty-free.

So here, we have another one just popped in. It's asking if all Expeditors branches that are nearest to the international U.S. Army bases are familiar with DoD or U.S. Army-based clearance and delivery protocols.

So the question is, are Expeditors officers trained to know what protocols are for military bases.

Exactly. Yes.

Yes, we do. So when we are going to U.S. military bases, there's actually -- we have access to a portal called the transportation facilities guide that allows us to see what the access protocols are. However, most of those are actually available online as well. So when we are going to military bases, we do know what's required. In almost every case, the people delivering your freight must be in the U.S., they must be U.S. citizens. They cannot have a criminal record. The vehicles will get searched and people will undergo a background check on the spot as well. So all of those things are what we try to take care of before the freight moves because if not, they will get turned away at the gate.

I got things to know. Okay? So if known -- if known end user is a foreign party on to time. And if export control BIS ITAR is needed to be observed. [indiscernible] read this does 22 and 15 CFR have carved out exemptions exceptions that the exporter can use. Hopefully, I'm speaking that clearly enough, Rob, that you can follow up.

I'm going to turn now it over to my buddy, Ugo.

Sounds like a great idea.

So there can be exemptions an exception -- that -- I mean, I think we would need to have a bit more context on that. It's hard to say there will always be exemptions or exceptions, but there can be some yes. And if you have a specific question, please feel free to reach out, and I can take that online.

Got our contact information in the deck, you can reach out and we can tackle these questions a little more in depth.

Very good. And yes, earlier the questions about the TAA, sorry, just to clarify, reminder who were talking about they're asking about the Trade Agreement Act. So that is one enabling statute limitations or implements for multilateral and bilateral international trade agreements. So our support in the background just provided that. So that's something we can certainly look into a little bit more give you guys some additional details about. Okay. And I think that, that hit all of our questions now, unless anyone has any last questions or comments that we'd like to throw out there. Rob or Ugo, anything else from you as we wrap up?

I wanted to say thank you all for your time. I appreciate you being here. I know things are crazy right now in international trade and U.S. government contracts. So thanks for carving out 1 hour to be with us. If you have any questions, please reach out. We're here to help. I know some of these questions that you answered are really in depth and we're happy to take those on at a deeper level, if you reach out. So thank you.

Good. Absolutely. Well, thank you both for leading today with such great content. Thank you all who joined us today. Again, we have regular webinars. You can always go to expeditors.com/event. It's Is another great spot to find additional events that are coming up. And we look forward to seeing you at the next event. Thank you.

Thanks, everyone. Appreciate it.

Thank you.