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

All right. Hello, everyone. My name is Sal, Sales Operations at Expeditors, and I'd like to formally welcome you to today's webinar on unlocking growth in Canada through Smarter Distribution. Before we get into it, I just want to cover a few items. [Operator Instructions] Later today, you will be e-mailed a link to a survey. And upon completion of it, the presentation and supplemental information will be provided and available for download. Just on screen here, we do have a QR code. Feel free to scan that now or later on, and you can subscribe to receive webinar invites direct to your inbox. All right, so for today's presentation, we have Mehmet, who is the Distribution Manager in Toronto; we have Billy, who is the Distribution Manager in Calgary; Dario, the Distribution Manager in Vancouver; and then Steve Bunda, who is our Customs Business Development Manager across Canada. So now -- so in terms of the agenda, we're going to be looking at distribution trends and market outlook. We'll look at in-house and 3PL distribution models, the differences between them and then expanding and growing into Canada, what that looks like from a distribution standpoint. So I'll hand it over to Mehmet now to walk us through a market update.

Thank you very much, Sal. Thank you very much for your time, everyone. Good morning, good afternoon. So we wanted to provide some updates from the market where we stand as things are changing rapidly in our market. So we're going to look at the 4 core pillars of warehousing in Canada, including industrial space, labor, forklifts and racking. The first one is about the warehouse space and the industrial space in Canada. We do have a different availability rate across the country. It's averaging about 5.2% as we speak, according to the results of end of Q3. Certain parts of Canada, such as Vancouver and Toronto have been the most expensive warehousing space in the entire North America market since 2021. And fluctuation we had seen in the market over the past years has begun to stabilize. So Canadian industrial market fundamentals strengthened significantly in Q3 2026, and it's giving a signal from a shift from stabilization towards tightening conditions with all the -- what we are -- trends that we are seeing -- we're going to see in the upcoming slides. With that said, the national availability declined, representing the largest quarterly decrease in 5 years as well as demand accelerated sharply. So there are multiple reasons driving those factors. Again, the demand in space is by changing the models by importers bypassing U.S. and coming directly to Canada and holding inventory on hand, which never did in the past or increasing their inventory levels. The other reason is for -- from a construction perspective, we did have a lot of projects, were approved during COVID in 2020 and '21 as well as what happened, those new projects were delivered to the market, created additional space while the demand were significantly decreased during that time. However, now that was stabilizing for the past 1.5 years, 2 years. And right now, we are seeing the decrease in the availability and tightening during -- in the market conditions. We are seeing Toronto in the GTA market being below 5% and the Mississauga, where we are -- is actually below 4%. So that's a signal that we are seeing in the upcoming. However, considering all that, we are still seeing the rent per square foot still dropping a little bit compared to where it used to be prior to the previous quarters, but that's also expected to stabilize in the upcoming quarters, and then we will see where it goes from here. But that's where we stand from an industrial space perspective in Canada today. And when we look at the other pillars of the market, we're looking at, from a labor market perspective. So while we continue to experience some challenges -- sorry, Sal, if you can just skip to the next one, please. Thank you. So from a labor market perspective, we are seeing an unemployment overall national level at 6.4%. So with that said, while we continue to experience some challenges with labor turnover driven by the latest immigration policy changes that we've been hearing and seeing on the news, overall market conditions continue to be flat and steady over the last few years. With that said, the recruiting conditions are still -- the skills are still available in the market. The peak seasons are now -- because of the nature of the peak season, instead of having -- like just a little shorter or a more squeezed Black Friday as well as Cyber Week or a boxing day, this is more spreaded over multiple weeks and even over to a month now. So that also distributes those peak volumes amongst multiple weeks. And from comparing those peak volumes to 2021 and '22, there's a significant reduction in those volumes. And then that allows the labor market to be more stable and resources are more accessible from that perspective. With the wage pressure, that changes by the market. Ontario has been getting back-to-back increases. We just got one in Ontario as of October 1, where we have in Alberta, haven't seen any increase for some time. So the local market, the minimum wage changes vary by province. And when we talk about the forklift market, that's also got stabilized and have access to materials and different types of machines obviously differ by the time line. When you look at the standard machines, most common ones, obviously, those are more accessible and available in the market. When you look at more specific machines such as order pickers and maybe turret drives, that could be a little bit more exclusive as well as longer lead times to secure them and bring them on board something to consider when you're looking at opening your own operations and working in a 3PL environment. With that said, that also related to some of the battery options that they have like against standard batteries versus lithium-ion batteries that are becoming more common, and that's also taking a little longer time to -- compared to the different type of machines that are out there. And with that said, the last but not least, it's the racking portion of the market update. Racking used to be much longer lead times in the market and then it started to shrink and then shorter time lines. However, we also started to see some extension during sourcing these pallet types. It also depends on -- sorry, the racking types. It also depends on what type of racking equipment you're looking to implement within your environment. So these are the 4 pillars that we just wanted to give a very brief update from a market update perspective. So if you look at the trends, what we are seeing in the Canadian consumer market fulfillment, we're definitely seeing the historical place where it used to be a lot of the Canadian freight used to come to U.S. warehousing, imported in the U.S. Most of the companies would have either their large 3PL providers, either single or multi-facility model across the country or their in-house operations, and then they would fulfill all their e-com as well as LTL orders for the Canadian market out of their U.S. facilities and then just cross them over the border to Canada. However, in the past 18 months, I would say, since the tariffs have started to implement it because of the certain commodities as well as the timing and the customs complexities, we start to see a significant increase of a lot of the importers bypassing U.S. and coming directly into Canada. And with that said, that was another demand coming from the major retailers and the consumer market that who looked at -- looking at the origin shipping out of U.S. versus Canadian and there was some challenges and some demand from there, and it also made a significant cost difference between 2 models. So that's what we are seeing as the hottest topic in our market today that drives our model today, and we'll see where it goes from here. But how does that drive in multiple different occasions, and we're just going to take a look at a little deeper on this model. So if you look at the other models, if you can just go to the next slide, please, Sal. So the top commodities, obviously, all these additional tariffs, especially at the very high percentage of related to steel and aluminum -- automotive and that's including all the aftermarket OEMs and all the high SKU profiles and just in time. And a lot of the 3PLs who are not used to handling automotives just in time 24/7 operations would be something new and something challenging or more creative ways to adjust or add some, I would say, flexibility to your operations and your models and your services that you provide. However, automotive is definitely seeing a significant impact, and we are seeing the key origins as Korea, Japan and China when it's related to this. And the second commodity that we're seeing is a lot of the industrial machineries, not only the finished goods, but as well as the spare parts and accessories related to these machineries. And the challenges with these machineries are, most of them are oversized, overweight that cannot just be stored in any regular bulk or racking positions. In addition to that, it may require some additional skills to handle them in and out, and there may be some monthly requirements of maintenance and inspections. So these are the things that we need to consider when we're looking at these commodities. And most of these machinery commodities do come with a very high SKU profile inventory model. That's where it requires to come up with a lot more locations and bin locations to be more creative and source additional racking in terms of the beams as well as the screens. So this is another commodity that we are seeing a significant increase in terms of demand importing -- being imported directly into Canada. As well as we are all aware that AI is on the rise. We are not really seeing the volumes that we are seeing in the U.S., but it slowly started to increase in our Canadian market, but there it comes with its own challenges in terms of high security, in terms of the warehousing facilities as well as the transportation. And then these are almost every single unit or pallet does require RFID tracking. When we talk about commodities, again, health care is also on the rise. So we are looking at -- we're seeing a lot of different systems. Those are robotics that are used for different type of surgeries and tasks and at the hospitals in our market. And those are also including some of the laser therapy. And all these robotic systems and machines also require constant fulfillment of instruments and spare parts to be used at every single treatment. So this is also on the rise, and it requires different type of inventory management, different type of white-glove services arrangements because most of these clinics or hospitals do not have standard doctors or delivery methods. So we will have to become more cautious of the requirements of these commodities and the associated scopes and business requirements. And the consumer goods continues to increase. It's a common portion of our market that a lot of consumer goods used to be imported directly into Canada, and it also continues to increase from a demand of import directly here. As we mentioned, China, Korea and Japan, and there are others such as Vietnam and a few others, but these are the top origins that we do see direct imports from those countries into Canada directly regardless if it's East or West. So some of the origins are like that. And when we talk about programs, this is something also that we all know that returns, RMAs and reverse logistics is part of our supply chain, and we have to have that in place. So what we're also seeing is -- trending is a lot of these returns being shipped back to U.S. and -- for either -- multiple purposes, recycling, disposals and refurbishment. We've been seeing over the last 12 months to keep them, store them, consolidate them within Canada and find solutions and vendors to handle all those final handling such as recycling, disposals or refurbishments within Canada instead of just transferring back to U.S. goes back to the same reasons of tariffs. And again, when we look at all these different commodities becoming more primary and more popular, we definitely need to consider the high-value good facilities driving the demand with high security, temperature and humidity monitoring and controlling. These are the new requirements of facilities that must be in place when the customers are looking for. In addition to that, when we look at the new build, we see most of the -- over 65% of the facilities that are being built are 200,000 square feet plus. That's driven by the cost, especially if you look into some of the automation, a lot of the demand and customers are looking for multi-client facilities to co-share the resources in terms of labor, equipment, racking and overall operating expenses. Also that we are seeing new highest limits of insurance with all the increased high-value products that we are storing in our warehouses. And something else that we are also seeing in terms of the demand, and -- the RFPs and requirements from our customers is in-house versus 3PL model. Because of the uncertainty in the market, it is very hard to scale how much space you will need in the next 5 to 10 years, especially when it comes to renewing your lease, or opening your own business or expanding your own facility anywhere in the country because of the uncertainty and the lack of flexibility in terms of space and racking, there are many customers and companies out there looking for switch to over 3PL. And we will talk about that in more detail in the upcoming slides for these -- comparing these 2 models. Another thing is that with Canada, the size of the country and from a geography perspective, they are very large. Considering the weather constraints and limitations throughout the year, also a lot of customers and companies are looking at single versus two-DC model locating between East and West. So these are the top trends that we just wanted to highlight based on what we are seeing over the past 12-plus months. And we will definitely dive into it from a more specific perspective of these topics. Back to you, Sal.

All right. Thank you. It's a great -- really a great segue from that into my comments here on key trends. And some of the key trends that we're seeing in the distribution space today are being driven by the recent trade tensions between Canada and the United States. The demand for warehouse space in Canada has increased following the September 8 implementation of the Canadian counter tariffs or surtaxes on U.S. goods. And really ahead of that date, importers increased shipment volumes to take advantage of the goods in transit surtax exemption. And this led to higher inventory levels in Canada and a greater demand for overflow warehouse space. And with the counter tariffs, as mentioned, reaching up to 50% on certain products, importers may also be considering holding inventory in Canada and moving fulfillment operations here. And to support these changes, importers can explore Canada's FTZ, free trade zone, type programs known here in Canada as CBSA's, Canada Border Services Agency, duty deferral programs. And these include customs bonded warehouses, which allow importers to defer duty and tax payments and release goods as needed, paying the applicable duties and taxes at that time. Importers should also evaluate alternative sourcing countries as the Canadian government is streamlining the process for preferential trade agreements. And a perfect example is the latest trade agreement with Canada and Indonesia, which is scheduled to come into force by the end of this year. And as Mehmet mentioned earlier, we are starting to see fulfillment moving north of the border here. We are also working with importers, U.S.-based nonresident importers, to move the Canadian inventory through a U.S. free trade zone. And by doing this under Customs -- U.S. CBP Customs Control, claiming the Canadian preferential tariff program. And as an example, savings of 18% on landed cost for clothing and footwear from countries entitled to a specific Canadian trade agreement. And these tariff changes are promoting importers to review where they store goods and how they serve their customers here in Canada. And as industry, as inventory levels rise, so does the need for warehouse space. Over to Billy, I believe, next, Sal?

Yes. Thank you. So, although there can be a misconception that distribution and warehousing is just simply storing and delivering freight, in Canada specifically, it's more about overcoming geography. Although nearly 75% of the population resides in the metro cities across the country, solutions require servicing almost 10 million square kilometers. Where this can become a challenge as vacancy rates are approximately 5.2% nationally, as Mehmet mentioned, but in some provinces, they're facing even less than 4% vacancy when 100,000 square feet or more is required. In 2025, majority of the industrial absorption activity was specifically located in Toronto and Calgary. So next slide, please. Establishing a multi-node Canadian distribution network requires significant capital investment in facilities, equipment, technology and inventory positioning before the first customer order is even processed. A 3PL will offer infrastructure, labor force, equipment and systems in place already. Rather than spending the capital on facilities and warehouse operations, companies can invest these funds into growing revenue and market share. Another consideration is flexibility. Many organizations do not know exactly what their Canadian demand profile will look like in the next 3 to 5 years. The dedicated facility creates fixed costs regardless of whether the warehouse is used up to 50% or 100%. A 3PL allows organizations to align cost more closely and actual activity. Labor is another major factor. Recruiting, training, managing safety programs and retaining warehouse associates requires a significant management attention. By leveraging the 3PL, companies can gain access to an experienced workforce and proven operational processes. Warehouse employment has increased approximately 66% over the past decade, demonstrating the continued pressure on labor recruitment and retention. And finally, speed matters. If business conditions change and the company wants to -- wants inventory closer to customers in Western Canada, Ontario or Quebec, a 3PL can offer -- or can often implement a solution in weeks rather than months or years to establish a new, in-house operation. The question for most companies is no longer whether they need warehousing in Canada, where transportation and warehousing sector contributes to almost $90 billion in GDP and persistent logistics labor shortage. The real question is how to achieve national coverage while preserving capital and maintaining service levels. For many organizations, leveraging a 3PL is the fastest and most flexible path to that objective. I pass it on to Dario.

Hello, everyone. The core idea that I want to share with you is really simple. Growing in this country is no longer about building heavy and expensive infrastructure. It's about deploying smarter data-driven distribution. As Billy mentioned and also Mehmet, if we look at the size of this market, Canada's overall space and logistics market is really big. It's valued today about USD 117 billion, and it's constantly expanding. Year-over-year, we are seeing a growth of this market about 4.5% and is projected to hit between $140 billion and $150 billion by 2030. This rapid expansion signals a high volume resilient expanding commercial network with plenty of room for new players. First, we need to understand how Canada works. Billy mentioned and also Mehmet that this country is really big. It's a massive country with extreme winter weather. But yet all the demographic reality dictates that the population is highly concentrated just in the southern border. Almost 86% of the entire Canadian population is just sitting between the border with the United States. Billy mentioned that we have massive distances. Traditional supply chain struggles really bad with fixed cost. The companies winning the Canadian market today are those that use technology as a daily tool. Successful expansion relies on dynamic, tech-driven networks that optimize routes in real time, allowing businesses to turn immense geographical distances into a sharp competitive advantage. Currently, the strategic shift that we are seeing in this country is that the true growth has moved away from asset ownership towards agility. Sustainable scaling in Canada is achieved by prioritizing data intelligence, speed to market and network flexibility; and it's no longer a race to see who owns the most warehouses, it's a race of who moves with the greatest precision. Next slide, please. Now that we understand the scale, thank you, Mehmet and Billy to give the summary of that. We need to understand the macro-market scale of the logistics network is very complex. But there's a second factor that we need to take into consideration -- to consider. This is basically who is the target of our business. To successfully position any brand in Canada, we mean we must crack unique psychology of the Canadian consumer. First, we need to discover any ideas that they impose any value. Here in Canada, the Canadian shopper is pragmatic and analytical. They are heavily research-driven, always comparing prices online and relying almost all the time on loyalty programs to maximize their budget. Aggressive or manipulative sales tactics simply do not work here. Trust and transparency are mandatory for any business that we want to trust consumer trust. Now recent data showed that, that significant 60% -- 67% of Canadians are actively planning to cut back on discretionary spending. Households are shifting their priorities towards financial responsibility. And if your business expands into Canada today, your value proposition must align with this fundamental need of everyday savings. Smart shoppers have turned towards share or multifamily bulk purchasing. This explains why volume formats like the Costco model resonates so deeply in this country. Shifting your [indiscernible] towards volume and value formats directly satisfy the consumer needs for unit pricing savings. What markets -- what makes this commercial piece brilliant is that it's perfectly synergized with the large retail distribution in Canada because the major retailers like Costco, Walmart, Loblaw always are looking for efficiency. By offering bulk packages, you maximize your truckload density that ultimately gets a per unit shipping cost being cheaper. And at the end, that's what the consumer wants here, always pays -- paying the best price possible. If you can go to the next slide, please, Sal. When we align our product strategy with the Canadian consumer, the next big question is, how do we physically deliver bulk formats across a massive country without destroying margins. The traditional expansion playbook in any other part of the world usually tells you go and build or lease a private local warehouse. Here in Canada, this approach is a massive financial risk. The industrial real estate market is exceptionally expensive. As Mehmet mentioned before, we have seen a huge increase in this market in the past few years with the same outcome, it will make everything more expensive. So having your own warehouse here is maybe -- sometimes it's just not the best option because you have to factor in heavy upfront capital, high rental rates, severe winter maintenance costs and inflexible multi-year lease commitments. Because of these barriers, this is a powerful and macroeconomic shift happening right now. The Canadian third-party logistics, as Billy mentioned, the 3PLs, is a submarket that's grown into a $20.7 billion submarket today, and this seems to be in a constant expansion. Modern business are abandoning the idea of private warehousing. Instead, they are migrating toward asset-light and shared distribution models, allowing them to pay only for the exact space and logistics service they use. We call it here pay for what you use. In this fact, we can say this is no longer a trend, it's the global standard. Current data shows that 86% of international and overseas companies that enter the Canadian market, they are doing that by outsourcing a portion or the entire network to a 3PL rather than buying warehouses or trucks. Next slide, please, Sal. In summary, first, we must prioritize adaptability of our assets. As we have seen, true growth and positioning in Canada, it is no longer about owning heavy physical infrastructure. The modern benchmark for success is about being flexible, smart and avoiding financial risks. Second, we must achieve value-driven alignment. Successfully positioning a business chain is impossible without respecting the reality of the buyer. It requires aligning your commercial offering such as volume formats with a market that actively prioritize efficiency, pragmatic spending and clear economic value. And finally, we must embrace the shared ecosystem. Leading international organizations do not try to build everything from scratch, take advantage of the local partners to grow together. One thing that I really like about this special market is that consumer is really empathic with their business and who they buy from. One key that every company must have is, we don't have market empathy with the consumer, probably it's not going to be a success business. Every company that we have seen here that make a really [indiscernible] is because they align with the consumers and the buyers and they grow together. Finally, I would like to say that this market empathy doesn't happen in other countries. I really believe that in this country, the consumer is really something that we -- if we honor the consumer, if we honor our buyers, it will be a successful business for everyone. I think it's getting back to you, Sal.

Thank you. Thank you very much for that. Thank you, everyone. So I'll just open it up to Q&A. Just a quick reminder that the Q&A box that should be on the bottom of your screen. If you have any questions, submit it now. We do have some in here now, so I'll just read them off and if any of the distribution managers just want to come up. So the first question is, how should companies think differently about Canada compared with the U.S. when building a distribution strategy?

Great question, and then I guess I'll take that one here. I'll just turn my video on for this question. It's a great question. I think there are multiple factors that need to be considered looking at your origin and your commodity as well as your customer market. So are you dealing with B2B, your major retailers and e-com market? There are definitely some things that we need to look at, at a project perspective to ensure that all the right network planning is in place before you make any -- either you continue to stay in U.S. and serve Canadian market or if you would like to expand into Canadian market, definitely different dynamics here. So that does require some research and planning, but we're happy to support in more details, and we can definitely collaborate on that offline.

Amazing.

Something I can say about the same. That -- something that we have seen here in the last years is what we call the Amazon Prime effect. Now consumers are not looking for 1-week delivery, 2 weeks delivery. They want the product now and they want the product on the cheaper price possible. As you have seen, Canada has a long border. And usually, all of the population is between those 7,000-plus kilometers. So sometimes sending something from the East Coast all the way back to the West Coast can take time. So more important than the price of the product itself is how we make that smart move happen at the lower cost. When we can have that result, we can get into any area of the Canadian territory in the short time possible. So I will say, taking advantages of the local network, local players and usually get this -- to your consumer as soon as possible is one key of success.

Amazing.