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

Hello, everyone. Thank you for joining us. Continuing to see our numbers climb. But as always, we have a ton of content today. So we are going to get started so that we could get every bit in that we can. Thank you for joining us again. My name is Samantha Hurst, and I'm here to support in the background of today's webinar focused on understanding and breaking down the U.S. Customs Enforcement executive order. So let's talk real briefly about some of our housekeeping items so we can get started. We do encourage you to join audio if you've not already. And if you happen to hear my voice twice, I'm very sorry for the annoyance, but you might want to make sure that you're not joined in two different places. So that could be the issue there. [Operator Instructions] Common question, how do I get the slides? We love that you guys appreciate this material so much and often want to go back and watch it or review it and make some notes for yourself. We will make sure that you get the content. We typically send a survey out via e-mail within about an hour or 2 of today's presentation wrapping up, and that will come from myself. If you do not get the survey, have no fear. You're welcome to send your input to me, your feedback, but we will get the material out to you within 48 hours at the latest. And then finally, want to subscribe to future webinars. You can absolutely do that. Just scan this QR code, and we will get you signed up to get future invites. So now I'm going to pass things off. Well, first, I think I need to introduce our speakers. These are not new faces here, but unless you've joined us for the very first time, welcome. So we have Madeleine Veigel, who's our Vice President of Customs for the Americas; Brenda Smith, whose lovely face just popped up on video. She's our Global Director of Government Outreach. Ted Henderson is our Senior Adviser for Customs and Stephanie Holloway is our Director of Customs Operations. Now Brenda is going to get us kicked off.

I am, and thank you, Samantha, and hello, everyone. Thanks so much for joining us today. It has been a busy August. We appreciate you taking time out to talk about this executive order that dropped in early summer. Before we get started, we wanted to issue our usual disclaimer. Translated means we are not attorneys. We do the best we can to translate the policy and the legal documents that are issued by the U.S. government and give you our best interpretation, but we are not attorneys nor do we play them on television. So with that, let's get started. As we dive into the environment that we are operating in from an enforcement perspective, there's a couple of key policy documents. And the reason that we wanted to spend a little time on this is because what we have observed about the Trump administration is it is rare for them to take action without telegraphing it in advance. Now sometimes the telegraphing comes very close to when an action actually happens. But typically, if you look at the documents, you look at the guidance, you will understand where the administration is going, at least in the general direction. So on inauguration day, one of the very first documents that President Trump issued was the America First Trade Policy. It was very broad. It was very sweeping and had a lot of new ideas in it and new actions. That pretty much set us up for the 18 months since then. In early June, however, after a lot of the tariff activity and the agreements on reciprocal trade activity had kind of hit a consistent rhythm, we saw a new document, the Executive Order on strengthening Customs Enforcement, which directs very specific action, most of which is to be taken by U.S. Customs and Border Protection. It essentially gives us a framework for how the government is thinking about enforcing current laws, making changes to either law or regulation, and doing an operational approach to enforcement. That was fairly quickly followed by the Department of Justice and the Department of Homeland Security issuing a pretty extensive guide, the trade fraud resource guide, which really outlined the enforcement priorities from both DOJ and DHS. And really set up a red flag for those participating in U.S.-bound supply chains to really pay attention and make sure that all your I's are dotted and your T's are crossed because there is a renewed focus by the U.S. government to identify and address trade fraud. And then finally, and one might have thought that this came -- would come out earlier, but it came out in August, just a week or 2 ago, something directly from the White House. Our assumption is that Peter Navarro, one of the President's key trade advisers, his team drafted a report called The Great Transshipment Scam. We are used to working with a very specific description of -- or definition of transshipment. Mr. Navarro has actually kind of expanded the approach. He raises a number of points about goods moving between countries, how origin is not or could be verified, and the expectations around supply chain visibility. A lot of these ideas we have seen before, but this really puts the meat on the bones for the justification of why the Trump administration is taking the actions around enforcement that it is. So this is sort of a policy background for how CBP will be moving forward. And with that, I'm going to turn it over to Stephanie that will give us a little bit more insight into how that policy translates into the day-to-day.

Thank you, Brenda. Okay. Let's see. My computer seems to have a mind of itself. So as Brenda said, she just covered the high-level policies. How are we actually seeing this play out day-to-day? So this is where I love not for enforcement purposes, but what I always like to look at and what I'd like to bring to the table during these webinars is the practical sense as a broker, how are we seeing this role. So this slide shows, and we've talked about this before. On the left-hand side, this is activity or data that Expeditors has collected. So as a broker, you often get copies of the CF-28s and CF-29s. So that's a request for information at the CF-28, a very formal document that's sent, or CF-29, which is a notice of action or notice of proposed action from customs, also a very formal letter. So you can see here how it has jumped around and really made a significant jump in 2025. The other thing that you can see is that our general document request, you see for just kind of the e-mails informally sent from customs, that's almost completely disappeared. And you can see the amount of CF-29s to CF-28s has significantly increased. So most of the time before the pattern was you would get a CF-28, you would respond, customs would come back or not with a CF-29. Now we're often just seeing a CF-29 issued and not a CF-28. On the right-hand side, there are some interesting data points. So these are all published by customs. Customs actually have a number of dashboards. This particular data set is coming from a dashboard that's called CBP Trade Statistics. You can Google it or you can just use this link here. This is not secret information. You have access to it just like I do. But some of the signals per se that we're seeing on the ground is importer of audits or imported audits. So customs is actually doing less of them, but yielding much higher results per audit. So traditionally, through -- you can see, I think their data goes to 2021. They used to yield about $200,000, $250,000 per audit. Last year, that took a jump to about half a million, $500,000, and they are trending at almost $800,000 per audit now, doing less audits. So you can really see when they go to do an audit, there's -- I think they already have the smoke, right? They know it's not a random thing. They really have intel. The other thing that we're seeing a lot more that their data is saying is liquidated damages. So they're issuing much more of these. Liquidated damages are often issued if you have a late payment, a notice -- not following a notice to redeliver things like that. They are issuing many more of these. And then the way they group the amount they've collected is with penalties, so it's a little bit harder. But they have now exceeded not by double, but close. Last year, they collected $46 million in penalties and liquidated damages. And this year, even though they're not through their whole fiscal year, they're already at $70 million. So these are just some kind of random -- not random, intentional steps that we pulled to help paint some of the picture of what's happening on the ground. The other thing, and we've mentioned this in passing before, is really understanding what is being issued. We know they're issuing more CF-28s and 29s, but what are -- what's in them and how are they asking for data. So if you have not gotten a CF-28 or 29 from customs in the past year, this is going to be very surprising to you. They are very different than what we used to see. These examples that I have here, I have anonymized, but these are ones that we got in the last couple of weeks. I didn't go dumpster diving for really hard weird ones. This is just how they look now. If you get one, it's going to look like this, okay? I used to see 1 year ago that were like, send me your certificate of origin. That's it. Those things are gone. So this CF-28, the request for information, they're already testing a specific claim. So a lot of times, we see like the one on the left is saying, you claim 9802 U.S. goods, now prove it to me, right? Show me all the activities and documents that support that claim. Same thing on the right, the USMCA or any free trade agreement, it's really show me all the documentation and prove that to me. So these are a little more robust than what we may have seen before, they just ask for a lot more things. It's important also to know that you have 30 days to respond to this. So if you're looking at this, you should be thinking right now, how long would it take me to put this all together. This is a doozy of a CF-28. This one is really them asking for alignment between the product description and the value that was declared. So they're saying, I don't quite understand what the product is and now please justify the value. But it's not just write me a little paragraph. It's give me, I need photographs. I need written descriptions. I need all of these things. And then now go in depth on the value, tell me exactly how you got there. Are there any additional charges that your company paid? Now who are all the people in the transaction? So once again, I have genericized this a bit, but I have tried to really keep the actual intent here so that you can see how they are coming, okay? They are large and they are massive amounts. The other thing I'll touch on is this CF-29 sample. So in this scenario that importer had received the CF-28, they had responded. And if you look in this first paragraph, it says you gave us a ton of documents, okay? But then customs goes on, if you have time to read this, and I encourage you to, they're saying these documents you gave us aren't telling the full story. You can't justify the amount that you produce based on the documents that you are giving me. We don't actually believe that this could have been accomplished. Therefore, the country of origin that you're claiming is not correct, and we're going to change it and you're going to pay a different duty amount. So this should be very alarming and really make you understand or make you think about it's not just accomplishing the task of getting the documents, it's making sure that they're telling the cohesive story. And I think many of us, of course, have been using AI and things to look at documents and understand them. And of course, I think you should assume that customs will be doing the same. And if you get these requests, also trying to figure out how do you actually make sure that they all come together and tell the story cohesively and back up what you've claimed on your entry, okay? The last thing I'll point to is kind of an on-the-ground data point is the Department of Justice trade fraud cases. So these are being highly publicized now. No. You know what I'm trying to say. They're putting the news alerts out on these. And if you look here, look at the overall patterns. Don't get bogged down on each commodity, but you're seeing them put them out on a very consistent basis. Of course, they're big numbers. Another theme that you're seeing is that they're using FCA. So that's the False Claims Act. I'll let you deep dive on that. That's not what this webinar is about. But it's really looking at these common themes, and we're going to be talking about these because they come up all over the place with enforcement right now, the AD/CVD, country of origin, transshipment. So these are the themes that are coming up, and we're seeing this. One other thing that I'll say is they have, of course, put together this task force -- fraud task force. And as a broker, we are seeing some of that activity as well, also being asked in subpoenas and things like that for data and documents. So just to bring that home a little bit more, the Department of Justice is very active. They are asking for things. They are putting cases forward so that the partnership between CBP and DOJ is stronger than we have ever seen it. So I feel like that was really rough and a downer, but I'll hand it back to you, Brenda, to tie it a little bit more into the executive order and what we're seeing and thinking about that.

Great. Thanks, Stephanie. So we've given you the policy background, and we've given you the on-the-ground enforcement activity. What we want to do now is really do that deeper dive into the executive order that came out in early June. The executive order is only 5 pages long. It sounds like it's pretty dense, but you all read legal stuff all the time. We would strongly encourage you to read the executive order from start to finish. But here's the framework as you read it, to be able to hang on different provisions. We believe that these are really the 5 big areas that are the takeaways from the executive order and capture what CBP and the administration is trying to accomplish with the actions taken as a result of that EO. So the first one is the importer eligibility. And when the EO first came out, there was a lot of discussion about importing shifting from a right to a privilege. There's a lot of language about importers in good standing and certification and vetting of importers. So that's going to be a pretty critical change for those of us in the trade community, and we expect to see CBP issuing either policy guidance or more probably regulatory guidance. We also expect to see a pretty significant advances in the requirements around supply chain information. Traceability has been a word that we have been hearing from CBP for the last 18 months. And as Stephanie pointed out, in the CF-28 and 29 process, the supporting documentation requirements and the expectation of visibility is getting very strong. And so that continues to carry out as a theme. We are also seeing that if you don't get it right, that your ability to get a penalty mitigated down is going to be much more limited than it currently is, especially for repeat offenders. Going along with that supply chain visibility, we're seeing CBP really committed to earlier risk identification. They are expecting of both importers and brokers earlier vetting of not only transactions, but of business entities and expect private sector players to be able to demonstrate that they've actually done this vetting. And then finally, we are seeing some interesting language around export records and the expectation that an importer will be able to provide any records associated with the export from the initial country of origin. So just keep in mind these 5 areas and as you review the executive order, this is your framework. And so as we really think about who's going to be impacted, in our world, we often talk about importers and brokers. But in fact, if you parse the language of the executive order, you'll see that there are many other parties to the supply chain that are likely to be impacted, not just the importers of record, but those known as the beneficial owner. Stephanie, I've got that same speech issue. But beneficial owners and their affiliates, manufacturers and exporters, brokers, freight forwarders, custodians of bonded merchandise and any other party involved in the transaction will be impacted by the executive order. It goes beyond customs declarations. It is about who is facilitating lawful or perhaps violative trade. There's a lot of things that we know and a lot of things we don't know as we look at the executive order. So if we could go on to the next slide. We know the direction that CBP and the administration is going. And we've just kind of talked about that, and we've given you the flags for where you can find that information. We know what the priorities are, who the importer is, who owns the company and whether traceability of entries can actually be demonstrated. We know the time lines, but just a small caveat to the 180-day calendar that is represented in the executive order. In our conversations with various government officials, they have pointed out to us that the executive order has language that's a little bit I hate to call it fuzzy, but I will. And it says things like CBP will start or will initiate, which means that CBP has to get regulatory and legislative processes rolling, but they don't have to complete them within that 180-day time frame. We are hearing much more likely to see this activity over the next 12 to 18 months. We also know the enforcement objectives, and we've kind of hit those pretty hard. We don't know -- we don't have a lot of insight into the rule-making processes. We don't know what -- whether they will use interim final rules or notices of proposed rulemaking. We don't know what those regulatory packages will look like. We don't know what the implementing procedures will be or the specifics around documentation and data, and we don't know how CBP as a whole organization will be implementing those new requirements. So there's a lot of things we don't know. But for now, we have a pretty good sense of where CBP is going. There's one more issue that we wanted to flag for you. In the past, we've often dealt with this idea of a foreign importer of record. And we know that CBP often sees a great deal of risk in companies that do not have a U.S. presence. In the executive order, that is certainly an area of focus. And what we're seeing is a shift towards a definition of a foreign importer of record to someone or an entity that is financially responsible for the duties or someone that does not have U.S. assets or bonding, someone who does not have beneficial ownership or business transparency. And whether at the end of the day, that importer can be held accountable for compliance, whether they provide the data in the documents, whether they pay their duties and whether a penalty can be issued and successfully collected. So this is a new concept. Well, it's not a new concept. We believe the definition is likely to be new. So a lot of change on the horizon, and Madeleine is going to walk us through what that means for importers.

Gosh. Okay. Thank you, Brenda. All right, everybody. I just want to reiterate actually the same point Brenda made earlier. And I think I may have mentioned it on earlier webinars, but please, if you haven't had a chance, please read that executive order. As Brenda said, it's only 5 pages, so it's not too long, but it's so important to review it and for you all to become familiar with what's in there currently. So -- and again, I think this is -- for me anyway, I think this is one of the biggest changes since 1993 and the Mod Act. I really -- this is a huge change. And what we see with this executive order and really some of the other things that Brenda talked about, some of the other policy directions that Brenda mentioned earlier, is that importing now really becomes more of a privilege versus a right. So that is a huge shift that we all have to now understand and anyway trying to get our arms around. So one of the things that this -- and as you go through the executive order, one of the things you'll see is that the administration wants to collect a lot more information about your company. So there is information in that executive order about understanding and wanting to -- or the administration wanting to collect information about your domestic assets, the year your organization or the year your company was organized, ownership of the company disclosure or ownership disclosures, business affiliation disclosures, domestic asset disclosures. So that's a lot more company-specific information. And you may be asking, well, what does that really mean? And that is the question we are all asking. We do not know. The problem with this is that there is no official guidance yet from CBP or the administration in terms of what that really means. But these are all kind of additional points that are stated in the executive order that the administration wants to collect. So we are also reviewing internally as a broker, how -- what additional questions do we need to ask you as a new importer, for example, or even to our existing customers, do we need to collect this additional information. And if we do, how do we even validate it and what do we do with it? So there's lots of questions. We don't have answers yet, but this is just to give you a flavor of some of the additional pieces of information that are mentioned in the executive order. In addition, they talk about the fact that in order to continue importing, you as an importer must be in good standing. Well, what does good standing mean? So far, the only thing we know for the executive order is that you have to be a compliant company and that you've paid all of your customs liabilities or any liabilities to the government. That is all we know so far. So we're very much hoping that we're going to get more information here very soon on better definitions and guidance in both of those areas. CTPAT, of course, is also mentioned, especially for foreign importers of record that if they're not CTPAT, they have to work with a broker who is CTPAT. But what does this mean for all of you? So with -- since we're lacking a lot of detail and more official guidance, I think some of the things you can begin to look at are, do you have any outstanding compliance issues? And I'm thinking especially of companies who have maybe -- if you have purchased a lot of companies over the past several years. And do any of those companies that you've purchased have any compliance issues that are outstanding or customs liabilities. These are things that you can begin to look at and review while we await for more guidance on what many -- what much of the rest of this still means. So anyway, these are some things, again, to begin looking at compliance issues and outstanding compliance issues and customs liabilities. Okay. So the other thing, and Brenda mentioned this, too, as we go to the next slide, is export documentation. So this is really interesting, but the administration would like to collect the export declaration that was filed within the -- at the country of export. So when you ship your goods to the United States, the country of export -- there was an export declaration filed. And the U.S. administration is saying they would like a copy of that and perhaps -- and we don't know if that's the only thing they want to see or if they want an entire document packet that includes maybe a packing list, a commercial invoice, maybe certificates that you have to file at the -- within the country of export. So first of all, so we don't know what all that comprises. Second of all, we don't know the timing. So in other words, do you need to file that at the time the goods export the country of export? Or do you need to file it at the time that we file the customs entry or sometime after the customs entry? And where in the heck do you file this information? Is this going to be filed via the document imaging system or DIS as we know it? Or will this be a whole separate application through which we file the export documentation? We don't know any of this. This is still very -- not clear. And this is one of the objectives in the executive order that CBP is supposed to start something on as of September 1, which is next week. And we don't have any further information. So we'll see if any guidance or anything is issued next week. But in the meantime, what would be good, one thing you can do is begin looking at, do you even have access to that export declaration. Do you know how you could even get access to it? So that would be one thing to begin looking at as an importer is, hey, can I even get my hands on that export declaration or any of the export documentation. So again, a lot more information, hopefully, will be shared by CBP on how this requirement is going to be implemented. All right. So then the other area, and I should say that we've bucketed this into 4 areas. But the other one, and Brenda touched on this, is also the penalties. Actually, I think we have maybe -- Stephanie, I think we're one slide ahead or before. I think there's one other. Just before penalties. Yes. Okay. Perfect. All right. So this was something Brenda touched on too earlier. And this is CBP looking at information further up in the supply chain. So there's a couple of things here that are in the works. First, there's the -- of course, the additional information that CBP and the administration is seeking about the company or your company. Then there is also vetting that they're going to be doing. And they're going to be doing vetting of various parties. It's not just you as the importer, also the customs broker and several parties in the supply chain. But in addition, what they highlight is prioritizing, specifically, you'll see that in the executive order, they're prioritizing forced labor, misclassification, undervaluation and illegal transshipment. And aside from those 4 priorities, they also say that they would like to obtain detailed information about the imported goods supply chain and production methods. So examples of that are manufacturer's product identifier, model or style, key specifications. So they're getting at some very intricate detail. And we see -- so there's a couple of things here. First, also what Stephanie noted earlier with the CF-29s. You saw how deep CBP is getting. And we know that CBP is using AI. They've invested in AI, and they're using it more prevalent or more -- they're using it a lot more. And so the expectation is that they are looking at more entities in terms of AI, not just here, importers, brokers, they're looking at other entities upstream, and they're looking at more information and more detail upstream. So we have talked about this before in other webinars, the importance of doing supply chain mapping. So as we -- as you read through this executive order, you'll see this and the importance of really looking at maybe your most critical important products? And are you able to map them, map that supply chain all the way back to the origin. And again, as we have discussed before, do you know where the components of the actual manufacturing product or manufactured product come from? Where are they sourced from? Who is that entity? Where is that entity located? So really beginning to look at supply chain mapping, I would say that would be one big takeaway or one thing you certainly want to look at. And then second, because they are prioritizing, again, forced labor misclassification, undervaluation and illegal transshipment, the compliance of those core elements are going to be critical. And we've talked about that also on other previous webinars. The fact that, hey, can you provide the backup documentation in terms of how you arrived at the classification of your goods? How did you arrive at determining the country of origin? How did you arrive at the valuation or the valuation of your product? Having that backup documentation is so critical. So that's another piece that you can really look at, especially maybe for some of your key or most critical products because you can't boil the ocean one day. But starting with the most critical products, really looking at do you have that backup documentation? And do you know all the entities associated with the product that you're importing. So anyway. And then kind of the fourth big area are penalties. And this is something that we all have to look at very closely. This is worrisome, everybody because, first of all, the mitigation guidelines that exist today from CBP, those go back, I believe, to the early 2000s, some of the penalty mitigation guidelines. And we have heard CBP is completely revamping those mitigation guidelines. So now they're looking at revised standards that establish a floor of at least 50% of the assessed penalty. And that is a large amount, everybody because we know that those penalty amounts can be quite large. And so if the minimum or the floor is 50% of that amount, that could still be a very, very large amount. And think about today, when we look at liquidated damages and penalties, especially like with the liquidated damage example of a late file penalty, where you pay -- ended up paying the duties too late to customs. You can mitigate those now down to $100 or if it's a periodic monthly statement, it could be $1,000. But anyway, those mitigation guidelines exist today. But with this complete revamp, what is that going to look like? And it's not just customs penalties, everybody. You have to think about it's also ISF penalties, AMS, Advanced (sic) [ Automated ] Manifest System penalties, in-bond penalties. So it's across the board. And as we all know, very highly compliant traders, highly compliant brokers, highly compliant importers, highly compliant transportation providers, we can all make mistakes and make simple mistakes, and that can result in a liquidated damage notice or maybe even a penalty. So this is worrisome and also the fact that the revised standards are going to eliminate mitigation for repeat offenders. So this is also worrisome. So the thing is, I think a few things to keep in mind. We cannot maybe just put this aside and say, well, I hope I'm not going to get a penalty because, of course, hope is not a strategy or maybe saying, hey, let's put a bunch of money aside in case I do get a penalty. I think what you should do is look or begin to look for what kind of trends do you see right now in any -- if you're getting any CF-28s or 29s, what are the trends that you're seeing? Is there a classification issue or claiming of a free trade agreement, whatever it might be, look for trends, look for trends in any penalties you may have seen, liquidated damages, audits and then see what is the issue surrounding those trends? And then what can I do about it? What kind of control can I put in place? Is it a systematic control? Is it a process control? Is it a training control? And I know this is a lot easier said than done, much easier said than done. But these are things you can at least begin looking at while we await further guidance on all of this. I should also say that many of the associations, including ourselves, are providing CBP feedback. So if you're part of an association, please make sure your voice is heard and you provide input on these areas because we definitely need more guidance in order to figure out how this is all going to play out. But it is worrisome. And Ted, I'm going to -- this is not very uplifting any of this, but I'm going to pass it on to you. You can maybe be able to help us with preparing for all of this scrutiny that's coming our way.

Yes. I think it will only get better during my section. So...

I know, of course.

You can take an ice cream out and have a heck of a big pout.

Yes, you can take ice cream out of this, Ted...