C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q2 2022 Earnings Conference Call July 27, 2022 5:00 PM ET
Chuck Ives – Director of Investor Relations
Bob Biesterfeld – President & Chief Executive Officer
Arun Rajan – Chief Product Officer
Mike Zechmeister – Chief Financial Officer
Conference Call Participants
Todd Fowler – KeyBanc Capital Markets
Jason Seidl – Cowen & Company
Brian Ossenbeck – J.P. Morgan
Ken Hoexter – Bank of America
Jordan Alliger – Goldman Sachs
Jizong Chan – Stifel
Jack Atkins – Stephens
Scott Group – Wolfe Research
Chris Wetherbee – Citi
Tom Wadewitz – UBS
Charles Yukevich – Evercore ISI
Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Second Quarter 2022 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, July 27, 2022.
I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.
Thank you, Donna, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer; Arun Rajan, our Chief Product Officer; and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2022 second quarter results and Arun will provide an update on the innovation and development occurring across our platform, and then we will open the call up for questions.
Our earnings presentation slides are supplemental to our earnings release and can be found on the Investors section of our website at investor.chrobinson.com. Our prepared comments are not intended to follow the slides. If we do refer to specific information on the slides, we will let you know which slide we’re referencing. I’d also like to remind you that our remarks today may contain forward-looking statements. Slide 2 in today’s presentation lists factors that could cause our actual results to differ from management’s expectations.
And with that, I’ll turn the call over to Bob.
Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Our second quarter was another quarter of record profits as our business model performed as we would expect it to in this part of the cycle. Our investments in our customer relationships through the early part of the cycle, while the cost of purchased transportation was rapidly increasing, are paying dividends as we retain and gain share with these customers through the terms of our agreements.
Our strong results were again driven by significant operating margin expansion in our North American Surface Transportation or NAST business as we further improve the profitability of our truckload and less than truckload businesses and grew truckload volume in a declining market. Our Global Forwarding team continued to deliver strong financial results while benefiting from the market share that they’ve gained over the past couple of years. Additionally, our Robinson Fresh, Managed Services and European Surface Transportation businesses all increased their adjusted gross profit on a year-over-year basis.
Now, let me turn to a high-level overview of our NAST and Global Forwarding results. Our NAST adjusted operating margin in Q2 was 44.3%, up 970 basis points year-over-year and 830 basis points sequentially due to improved profitability in both truckload and LTL. In our NAST truckload business, our volume grew 2% year-over-year compared to the cash freight index that reflected a 2% decline in shipments. Our adjusted gross profit, or AGP per shipment, increased 48% versus Q2 last year and 26% sequentially as the cost of purchase transportation declined during the quarter and the percent of truckload shipments with a negative margin returned to historical levels.
Our truckload volume growth included increases in dry van, flatbed and temp control services. And throughout the quarter, we pursued volume in the spot market and collaborated with our customers to use the spot market as part of their procurement strategy. This included a 21% increase in volume that was driven through our real-time proprietary dynamic pricing engine.
During the second quarter, we had an approximate mix of 60% contractual volume and 40% transactional volume compared to a 55-45 mix in the same period last year. Routing guide depth of tender in our managed services business, which is a proxy for the overall market, declined to 1.4% in the second quarter from 1.7% in the first quarter. Broadly speaking, route guides are performing well, as first tender acceptance rates are near prepandemic levels, and the first backup provider is accepting rejected tenders most of the time. Since the exceptional market tension in January caused by COVID-related absenteeism and winter storms, the truckload market has seen greater balance return to the spot market.
With the exception of Roadcheck Week, where many drivers seemingly temporarily leave the market, the national dry van load-to-truck ratio hovered around 4:1 throughout the second quarter. Between 3:1 and 4:1 for dry van is considered a reasonably balanced market versus the ratio closer to 5.75:1 that we saw in the extraordinarily tight year of 2021. The sequential declines in truckload linehaul cost and price per mile that we saw in February and March continued throughout the second quarter. This resulted in approximately 5% year-over-year decline in our average truckload linehaul costs paid to carriers, excluding fuel surcharges.
And although pricing declined sequentially in Q2, our average linehaul rate billed to our customers, excluding fuel surcharges, increased year-over-year by approximately 1.5%, which was supported by our contractual truckload portfolio that was negotiated in prior quarters. This resulted in a year-over-year increase in our NAST truckload AGP per mile of 46.5%.
Slide 7 of our earnings presentation shows the historical trend of our truckload AGP dollars per shipment. The past three years have been volatile ones in the freight market and our truckload AGP per shipment reached a new low and a new high within the past eight quarters. Putting this quarterly volatility aside, though, our average AGP per shipment on a trailing 2-year, 5-year and 10-year view continues to remain relatively constant, which demonstrates the resiliency of our business model and our ability to obtain adjusted gross profit through cycles. Through it all, we worked tirelessly to help our customers optimize their freight networks and their costs. Carriers improve their equipment utilization and to provide strong returns to our shareholders.
As we prepare for the second half of the year, we expect the truckload cost per mile will decline further, both sequentially and year-over-year due to demand deceleration in the three biggest verticals for freight. Weakness in the retail market is expected to persist, further slowing in the housing market as expected, and there are early signs of deceleration in the industrial or manufacturing space, although this vertical is holding up the best on a relative basis.
Our truckload contracts continue to trend towards 12-month durations, and we are proactively repricing some contracts in order to remain competitive in a changing market and to grow our wallet share with customers. Although we’re the largest provider of truckload capacity in North America, we only account for approximately 3% of the for hire market, which leaves us with significant market share opportunities to fuel our growth.
In our NAST LTL business, we again generated record quarterly AGP of $166.9 million in second quarter or up 30% year-over-year through a 37% increase in AGP per order that was partially offset by a 5% decline in volume. As was the case in the last few quarters, the second quarter decrease in LTL volume was mainly driven by a normalization of business levels as our LTL volumes in the second quarter of 2021 were bolstered by a few large customers that benefited from the stay-at-home trend during COVID, which contributed to 23% LTL volume growth in the comparable quarter last year.
In our Global Forwarding business, the team continues to provide solutions and excellent customer service in a market that’s becoming more balanced. In this quarter, Global Forwarding generated another quarterly AGP record of $324.4 million, representing year-over-year AGP growth of 36%. Operating income also grew by $59 million or 55%.
Against increasingly tougher comparables, Q2 marks the ninth consecutive quarter of year-over-year growth in total revenues, AGP and operating income for our Global Forwarding business. Within these results, our ocean forwarding business generated Q2 AGP growth of $77 million or 51% year-over-year. This was driven by a 47.5% increase in adjusted gross profit per shipment and a 2.5% increase in shipments, which was on top of a 29% volume growth in the second quarter of last year.
Global ocean demand is becoming more in line with the industry’s overall capacity, and ocean rates while still elevated, have started to come down. China ports appear to be back to normal operations. And while port congestion on the U.S. West Coast improved in the second quarter, congestion is edging back up again. Congestion on the East Coast has risen due to a higher percentage of freight being routed to their ports as shippers attempted to mitigate risk from a potential labor dispute in the West Coast. With limited new vessel deliveries in 2022, we expect ocean rates will remain elevated compared to historical levels, but may taper a bit more in the second half of the year.
Finally, our international airfreight business delivered AGP growth of $4 million or 7.5% year-over-year, driven by a 14% increase in AGP per metric ton shipped, which was partially offset by a 6% decrease in metric tons shipped. Airfreight capacity has improved in certain trade lanes due to increased belly capacity and we’re seeing some conversion of air freight back to the ocean. Overall, the Forwarding team has a great foundation to continue providing excellent service to our customers and to collaborate with them to leverage our flexible solutions for their shipping needs. Our win rates in our forwarding business are strong, and we continue to implement our pipeline of new customer business.
For the enterprise, we continue to believe that through combining our digital products with our global network of logistics experts and our full suite of multimodal services, along with our information advantage from our scale and data, we are uniquely positioned in the marketplace to deliver for our shippers and our carriers, regardless of the market conditions. We believe that our strategies and competitive advantages will enable us to create more value for customers and, in turn, win more business and increase our market share while delivering higher profitability and shareholder returns.
With that, I’ll now turn the call over to Arun to walk you through the product innovation and development that’s occurring across our platform.
Thanks, Bob, and good afternoon, everyone. As I said before, the role of our products is to relentlessly address customer and carrier needs, and we continue to make good progress on both fronts.
During the quarter, we continue to deliver enhancements to our Navisphere product platform while expanding the penetration of our digital offerings with both our carriers and our customers. Our work is improving both the customer and carrier experience with Robinson as evidenced by the results outlined on Slide 12 in our earnings presentation. I won’t touch on each of these data points in my prepared comments, but I’ll highlight a few that are extremely relevant and show progress and the benefits of our digital investments.
In the second quarter, we executed nearly 600,000 fully automated bookings in our NAST truckload business, an increase of 107% compared to the same quarter last year. This represents $1.1 billion in revenue flowing through this digital channel. Because of the digital improvements that have been delivered, we’ve increased the number of carriers looking loads to our digital channels by 96% year-over-year.
On the customer side of our marketplace, through further integrating and scaling a real-time dynamic pricing engine, we priced 71% of our spot truckload volume through this digital tool, resulting in $597 million of truckload business. Extending this capability allows us to be more responsive to changes in the market, better meet the needs of our customers while also creating additional stickiness in our customer relationships.
More broadly, we’re focused on designing and delivering scalable digital solutions for growth, such as the progress I just described by transforming our processes, accelerating the pace of development and prioritizing data integrity. The four main pillars of this effort are scaling capacity and procurement, scaling demand generation, scaling quality customer outcomes and scaling our marketplace dynamics as outlined on Slide 11 of our earnings presentation. These four pillars are focused on improving both the customer and carrier experience by working backwards from their needs and increasing the digital execution of all touch points in the life cycle of the load, including order management, appointments, carrier offers and looking, in-transit tracking and financial and documentation processes.
As we do this, we will continue to fly the appropriate rigor to direct our test and investments towards products, features and insights that increase the rate at which we acquire, retain and grow share of customers and carriers, which in turn serve as the primary inputs to power our future growth in the two-sided marketplace that we serve.
I’ll now turn the call to Mike to review the specifics of our second quarter financial performance.
Thanks, Arun, and good afternoon, everyone. In Q2, we continued to leverage the strength of our non-asset-based business model to deliver another record quarter of financial results.
Our second quarter total company adjusted gross profit or AGP, was up 38%, reaching a record high of $1 billion with growth in each of our segments and services. On a sequential basis, AGP was up 14% and also grew in each business segment. On a monthly basis, compared to 2021, our total company AGP per business day was up 43% in April, up 39% in May and up 31% in June. After seven consecutive quarters of increasing price and cost per mile in our North American truckload business, both declined sequentially in Q2, with costs declining faster than price due to a softer demand environment and capacity that has grown over the past 12 months. The linehaul cost and price per mile, which excludes fuel surcharges, declined sequentially in each month of Q2.
As the cost of purchase transportation declined, our contractual truckload AGP per shipment improved and our NAST team managed our load acceptance rates to optimize our truckload AGP and look to the spot market to find additional volume opportunities. Q2 marked the seventh consecutive quarter of flat to increasing truckload AGP per mile. Truckload AGP per shipment improved 26% sequentially and by 48% compared to Q2 of 2021. Now turning to expenses. Q2 personnel expenses were $444.8 million, up 22.6% compared to Q2 last year, primarily due to increased headcount as we support growth and transformation opportunities across our business. We also incurred higher incentive compensation due to an increase in our projected annual financial results.
For the full year, we now expect our personnel expenses to be at the high end of our previous guidance of approximately $1.6 billion to $1.7 billion due to the higher expected incentive compensation. As we discussed in our last earnings call, we expect headcount additions to be weighted more towards the front half of 2022. For the remainder of the year, we expect our headcount to be flat to down. If growth opportunities or economic conditions play out differently than we expect, we’ll adjust accordingly.
Moving on to SG&A. Q2 expenses of $117.2 million, were down $8.5 million compared to Q2 of 2021, excluding the $25.3 million gain from the sale and leaseback of our Kansas City Regional Center, Q2 SG&A was up 13.4%, driven by year-over-year increases in purchased services and travel expenses. For 2022, we continue to expect total SG&A expenses to be $550 million to $600 million, excluding the gain from the sale and leaseback of our Kansas City Regional Center.
We also continue to expect $100 million of depreciation and amortization in 2022. Q2 interest and other expense totaled $27.4 million, up approximately $13.9 million versus Q2 last year, primarily due to a $10.3 million loss on foreign currency revaluation due to the strengthening of the U.S. dollar primarily versus the Euro and Yuan. This FX loss was $8.4 million higher than the $1.9 million loss in Q2 of last year. Interest expense increased $4.3 million due to a higher average debt balance, but with lower net debt-to-EBITDA leverage.
Our Q2 tax rate came in at 21.3% compared to 21.6% in Q2 last year, which brings our year-to-date tax rate to 20.0%. We continue to expect our 2022 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to state federal or international tax policy. Q2 net income was $348.2 million, up 80% compared to Q2 last year, and we delivered record quarterly diluted earnings per share of $2.67, up 85% year-over-year. As a reminder, our Q2 net income included the $25.3 million gain from the sale and leaseback of our Kansas City Regional Center and a $10.3 million loss on foreign currency revaluation.
Turning to cash flow. Q2 cash flow generated by operations was approximately $265 million compared to $149 million in Q2 of 2021. The $116 million year-over-year improvement was primarily due to the $154 million increase in net income. Over the past 2.5 years, our net operating working capital increased by approximately $1.5 billion driven by the increasing cost of purchase transportation. This reduced our operating cash flow by the same amount over that time. If the cost and price of purchased transportation come down, we expect a commensurate benefit to working capital and operating cash flow. In Q2, our accounts receivable and contract assets were down 1.5% sequentially and our days sales outstanding, or DSO, was flat sequentially. Capital expenditures were $43.2 million in Q2 compared to $16.3 million in Q2 last year.
We are raising our 2022 capital expenditure guidance from $90 million to $100 million to $110 million to $120 million, primarily due to higher level of internally developed software, which is tied to higher future returns. We returned approximately $409 million of cash to shareholders in Q2 through a combination of $337 million of share repurchases and $72 million of dividends. That level of cash to shareholders equates to approximately 118% of our Q2 net income and was up 100% versus Q2 last year. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and in using our opportunistic share repurchase program to deploy excess cash.
Now on to the balance sheet highlights. We ended Q2 with approximately $1.1 billion of liquidity comprised of $826 million of committed funding under our credit facilities and a $239 million cash balance. Our debt balance at the end of the quarter was $2.27 billion, up $901 million versus Q2 last year, primarily driven by increased working capital and share repurchases. Our net debt-to-EBITDA leverage at the end of Q2 was 1.35x, down from 1.49x at the end of Q1 due primarily to increased EBITDA.
Let me take a moment to comment on our return on invested capital, or ROIC, which is an important metric for many investors. With our asset-light business model, we operate with a relatively low capital base which naturally enhances ROIC relative to other asset-based logistics providers. In fact, 88% of our operating asset base is comprised of accounts receivable and noncash intangible assets with AR representing 67%. As a result, all else equal, ROIC for Robinson is impacted more by changes in receivables driven by changes in the price of purchased transportation than from proportionate changes in our capital expenditures.
In Q2, we delivered our highest ROIC in a decade at 32.1%, up 890 basis points from Q2 last year despite the contribution of a historically higher receivables balance to our operating asset base. Going forward, if the price of purchase transportation continues to fall than receivables, which represent 2/3 of our operating asset base will follow and represent a tailwind to ROIC, all else equal.
By driving scalability into our model with focus on the four main pillars that Arun talked about, we expect to generate growth and efficiencies that support long-term growth in our total shareholder return. Thank you for listening.
Now, I’ll turn the call back over to Bob for his final comments.
Thanks, Mike. So as questions linger about global economic growth, inflationary pressures and consumer discretionary spending, our global suite of multimodal services, our growing digital platform, a responsive team of logistics experts, our broad exposure to different industry verticals and geographies and our resilient and flexible non-asset-based business model put us in a position to continue delivering strong financial results.
While we’re pleased with our performance this quarter and the fact that both NAST and Global Forwarding delivered operating margins above our publicly stated targets, we know that we have work to do to consistently deliver at these targeted levels. The work that the teams are executing that Arun referenced, related to scaling our model, eliminating internal legacy processes and improving quality while working backwards from the needs of our customers and carriers will drive continued improvement in operating profits long term. As this work is focused on growth, customer satisfaction and productivity improvements, which will in turn reduce our cost to serve our customers.
As we look to the second half of the year, we are watching economic conditions closely, and the management team and the Board continue to consider all strategies to grow operating profits and maximize long-term shareholder returns through all phases of the business cycle and various economic scenarios.
This concludes our prepared comments. And with that, I’ll turn it back to Donna for the Q&A portion of the call.
[Operator Instructions] The first question today is coming from Todd Fowler of KeyBanc.
Hey, thanks. Good afternoon and congratulations on the results. Bob, I guess maybe to start, if we take a look at Slide 7 where you’ve got the truckload AGP. And it’s certainly helpful to see, obviously, the profit per load versus the percentage. But can you talk to your thoughts around the sustainability. The profit per load is obviously at a very elevated level versus the last 10 years. Would you expect it to be able to remain at this level with some of the dynamics in the marketplace? Or how do you think about kind of the sustainability of the profit that you’re seeing right now?
Sure. Thanks, Todd. Thanks for kicking us off. Maybe I’ll paint the picture of how we’ve seen this play out in the past and then try to tie it into where we are today. After — I think Mike said seven consecutive quarters of year-over-year rising cost of purchased transportation in our truckload business, we finally saw that moderate and turn negative this quarter on a year-over-year basis. And while we can’t be certain about the economy looking forward over the past couple of cycles, what we saw was on that year-over-year basis, costs typically declined year-over-year for around seven quarters after that inversion quarter from going kind of positive to negative. And then I look at Q3 ’15 and Q1 of ’17, kind of as those two points on Slide 7, and then again, from Q4 ’18 through Q4 — Q2 of ’20.
So no way to be sure that that’s how it’s going to play out this time but probably worth noting of how it’s played out in the past. So AGP per load during the second quarter point was at the highest point it’s been in the past decade. And we’re certainly not considering this to be the new normal as we think about our long-term planning and believe that eventually it will revert to the mean. I think the question that we have is just how long will it take to do that. So we’re certainly not building our strategy, our long-term cost structures around maintaining the level of earnings per load that we experienced in the second quarter over the long-term.
Now with that as a backdrop, I think encouragingly, we continue to make progress on our digital initiatives and more and more of our transactions, as you heard Arun say, are now flowing through more fully automated and frictionless processes. And so while the market will undoubtedly shift from this point over time, we’ve got a clear view on what it’s going to take to deliver against that 40% operating margin target through the cycle, both in terms of the components of volume, AGP per transaction and just our overall cost structure.
So as we continue to digitize more of that work we see a clear path to lower our operating costs on a per transaction basis. As I said in my prepared comments, if you look through the volatility of each of these quarters going back to 2013, that average AGP per shipment is virtually unchanged on a 2-year look back, a 5-year look back or a 10-year look back.
Yes. No, I got that in the comments. So that makes sense, and it sounds like that from your view, we’re still relatively early in kind of the cycle with what we typically have seen. So I thought I appreciate the comments. I’ll turn it over.
The next question is coming from Jason Seidl of Cowen.
Thanks, operator, and Bob and team, congrats on a good quarter. I wanted to talk a little bit on the pricing side. I think you guys said that pricing ex fuel was up on the contractual side, about 1.5%. But you also made some comments that you were proactively repricing some business. Can you talk to the instances where you took the proactive stance to reprice that business and just how much that might have come down from prior pricing trends? And where do you think that should set up for in 3Q?
Sure. So just to clarify on the data point, the 1.5% was the overall book of business, not just the contracts. So I just want to make sure that everyone is clear on that. Largely, if I think about the contract kind of the contract side of our business and the repricing, we continue to see most of our business that we’ve repriced in the first half of this year, renew on 12-month terms. And just as we saw kind of in the upward trajectory of the market over the past six or seven quarters, there was constant repricing there. And we expect to see that now, not broad-based, but us proactively going back and having conversations with customers aggressively and intentionally using the spot market as a strategy to help customers access lower cost of purchased transportation outside the course of their contractual agreements, that drives volume for us, and savings and opportunities for the customers.
Within the contract book of business, our win rates for the quarter were strong. We define our win rates as kind of the percentage of freight that we bid on that ultimately we were awarded. And that increased by 110 basis points in the second quarter of ’22 compared to the second quarter of ’21 and was right in line or ahead of kind of our long-term average win rates.
And as I said, most of these are coming at 12-month terms. I would say the market, at least our customer relationships, I’d say people are mostly acting rationally as it relates to these contracts. We’re not seeing shippers largely come out and rip up bids or awards or go back and repricing activities. So we feel good about the state of the contract business as well as our ability to use the spot as an intentional strategy with our customers to continue to drive volume.
The next question is coming from Brian Ossenbeck of JPMorgan.
So I wanted to ask more about the automated bookings as substantially again on a sequential basis. How much further room to run do you have on that metric alone? And maybe you can talk more broadly about how that integration of more technology, more automation is impacting employee productivity? Is there any pushback on the receptivity of it? And then if you can just tie in some comments about digital competition, digital natives overall as some of them have been paring back headcount. Wondering if you’re seeing anything in the markets from that side as well.
Yes, you bet. I’ll use the technical term that Arun and I will ham and egg the answer to this one, and I’ll kick it off. I mean on the carrier bookings side, we had about $1.1 billion in freight that was booked through the digital channels. If you think about the question of how much of your freight is that, I think we were right around $4 billion in truckload freight in NAST for the quarter. Check me on that, Chuck, right? And so about 25% of the revenue running through that fully digital channel, and that will give you a perspective of the $600 million on the customer side as well.
From a productivity perspective, even with the additional headcount that we’ve added and to NAST over the past several quarters. If I use — I’ll use 2018 or 2019 because the head count was virtually flat is kind of the pre-pandemic comparison, our shipments per person per day in NAST are up about 16% in total. And obviously, the technology investments have a lot to do with that.
One point that I’d add to that, though, and I think an area where we could be — could have been more effective in communicating with our investors and the analyst is that over that time period, our headcount has started to include more and more employees that work in our consolidation and warehouse facilities post the acquisition of Prime.
So knowing that those warehouse employees are never going to really contribute to the productivity focus of our truckload marketplace. If you net out the increase in those warehouse employees, our headcount in NAST is actually down about 2% in terms of the employee base that really focuses on the customer and carrier marketplace compared to 2019. And so the productivity index there, the shipments per person per day were actually up about 21% in total over that time period.
As it relates to kind of the digital natives, we’re not seeing anything necessarily drastically different in terms of how the marketplace is acting right now. I think there’s less focus of growth at all costs, I guess, I would say, in this industry and many others. And so rational pricing environment and an environment where industry participants with scale are pricing the market rationally, we think is a good thing for Robinson.
I maybe open it to Arun to see if there’s anything you’d add.
Yes. I think the only thing I’d add is that there’s definitely more room to run. I look at digital bookings as sort of the first step, and that was sort of the first proof point of how we can move the needle. But if you look at digital execution of every step in the life cycle of the load, order management, appointments, carrier offers and booking, which we’ve made progress on, but in transit tracking financial and documentation processes. So then just looking at the entire life cycle of the load, while we made progress on the productivity front, as Bob pointed out, there’s still a lot more opportunity for us to drive up digital execution and all the steps.
Arun, could you phrase that maybe use a baseball analogy, what inning we’re in? How far you can get to 25%, anything else just to give us some additional context of where you are versus where you expect to be in several years’ time?
I’d say, I mean, if you look at 25% on the booking side, I think we have more room to run on — I won’t come up with a percentage. But I’d say there’s no reason that we shouldn’t aspire to double that percentage. And in terms of some of the other steps in the process, I’m not ready to make a hard commitment there. But there’s certainly opportunity. Let’s think of it as like there’s a digital versus manual ratio that we look at for each of the other steps. I’d say we’re in the early innings on those.
Yes. And I would say, too, just some of our conversations in terms of our prioritization of work. While digital bookings is probably the metric that people talk about the most as being kind of the leading edge of digital transformation. We actually believe the highest leverage points are not the actual booking and much more so some of the operational tasks that Arun spoke to because that’s really where a lot of our people’s time ends up being spent. And the more we can move those towards digital on the back end of a digital demand signal from a customer or before digital booking with a carrier. That’s where the real productivity lift and ultimately, our ability to drive down the cost of an incremental transaction really happens.
The next question is coming from Ken Hoexter of Bank of America.
I thought that was a great answer. Thanks on the digital side, and congrats on a great quarter. Just a bit intrigued Bob, on your market comments. Other carriers seem to suggest they’re not feeling in yet. Yet most obvious, you’re seeing it in the spot rates as they come down and the benefit you’re talking about on the cost. So maybe talk a little bit about what customers are saying in terms of the impact and your thoughts on where we are in that — in the market. And is this a factor of what the smaller carriers are feeling versus the larger in terms of that spread widening?
It’s an interesting question, Ken. A lot of talk about the small carriers and the rate and the speed or if they are exiting the market at pace. Ken, I was quite surprised to see that we actually added 12,000 additional carriers throughout the course of this quarter, right, which is, I think, a record number of new carrier sign-ups for us in any given quarter. I really had expected that, that number would go down. So perhaps the health of the small carrier is a bit better than is being advertised. The other way you might look at that is if those small carriers were working with another broker, those that other broker doesn’t have the network density today that they once had that they’re retreating to safety or retreating to Robinson. So overall, in the network, I mentioned it in the prepared comments or the industry, I mean, we’re definitely seeing on the consumer side things start to soften there. We’re seeing the consumer trade down.
On the construction side, we’re starting to see that manufacturing holding up relatively well compared to those other areas. Our aggregate demand in truckload has come down sequentially from Q1 to Q2 just in terms of the total number of tenders. But on the flip side of that, we’ve seen acceptance rates go up significantly, many fewer cancelled loads, many fewer negative loads. And so the health of the business on the contractual side has been really, really good. And as I say, using spot as an intentional strategy to automate that with customers, giving them access to the lower-cost spot market has helped us to maintain share.
The next question is our coming from Gordon Alliger of Goldman Sachs.
So shifting to the forwarding side of the equation. Can you maybe give a little more color on your thoughts on the outlook from here? Obviously, trends have been super strong, and we’ve seen some moderation. But I guess maybe more importantly, can you talk to the share gains that you mentioned? What’s actually driving that above the market? And what customer base are you penetrating to get these share gains and who might you be taking share from?
It’s a lot there, Jordan. No, that’s all right. I probably won’t get these in the right order. So I might ask you to repeat a couple of those. So let’s talk first about kind of the customer base and where the growth is coming from. If I give you a really simple customer segmentation, A, B, C, D, with A being really big customers and B being smaller customers. Going into the pandemic, our customer mix tended to skew towards the seasons, right, more mid-cap to smaller customers. As we went into the pandemic and throughout and into today, the vast — we’ve won in all segments, and we’ve grown in all segments, but we’ve grown outsized in really that what I’ll call customer type A or the really large global customers is where we’re winning the most and the most impactful to our overall volume.
In terms of the forward look on the Forwarding business, we do expect that we will continue to see some softening in the marketplace within forwarding and domestically as well. But given the share gains that we’ve made, given the work that the Forwarding team has done in order to really structurally, I think, put that business in a different place in terms of profitability. We feel like we’ve got a forward look that’s going to allow us to continue to deliver at or above the kind of stated 30% operating margin targets for that business.
We are today the number one NVOCC from all of Asia to the U.S., along with the number one from China to the U.S. So if we are going into some moderating economic environments, we’re doing it with a strong tailwind and still a strong pipeline of customers to implement. So maybe tell me if I hit on your question and what did I miss?
Yes. The only other thing was like who might you be taking share from? Is it like a smaller freight forwarding base out there? Is it larger players? Any way to assess that?
It’s really difficult to assess. I think you can look at our share gains relative to some of our peers and draw your own conclusions on that Jordan, but I don’t have a kind of a play-by-play that I would feel comfortable sharing in a public forum that would have any level of accuracy to it.
The next question is coming from Bruce Chan of Stifel.
Congrats on the great print here. Bob, you’ve had some really helpful comments on the overall demand equation, and I just maybe wanted to pick up on some of that. I know it’s still kind of early to talk about peak season here, but as you start discussions for capacity planning on the Global Forwarding side, what are you hearing from them, especially if you think about some of those issues that you mentioned with labor disputes and increasing congestion at ports.
Yes. So the way that we’re thinking about the peak season right now, and I’ll — given our exposure to the ocean market, I’ll start there. Looking at the transpacific trade lane, we’re obviously — to where the most of our density is. We’ve seen rates steadily decline here over the course of the past couple of months. I think that’s mainly been caused by the issue of high inventories and either cancelled the reduced POs that have been driven by the impact of just this continued inflation on the consumer. Concurrently, other shippers have been pulling forward orders and stocking up for the holiday season early due to the years of the congestion with labor negotiation on the West Coast ports and kind of this looming congestion on the East Coast. And so we really look at the convergence of those two factors likely leading to a more muted peak season.
Looking at the air freight in the same corridor, our air volumes have started to come down a bit over the past couple of months. And again, against that backdrop of a more muted peak season, seeing as many — much of our air freight volume is driven by ocean conversions. We’d expect a bit of slowing there as well through the balance of the year. I think the outsized maybe alternate perspective there is that perhaps it’s just a later peak as we worked through inventory here domestically, and then we may find ourselves in a spot where we say, “Hey, we don’t have what we need for the holiday, we could see a later peak as well, but that’s speculation at this point.”
Okay, that’s really helpful. And then, just maybe a quick follow-up. We’ve heard some noise about maybe some concerns about production over in Europe with some of the Russian gas supply. Have you seen any of that on your European trans business or on your forwarding side?
Not that I could speak to, Bruce, with any level of expertise. It hasn’t elevated itself to any of our really broad-based management team discussions related to trends in the business.
The next question is coming from Jack Atkins of Stephens.
Congrats on the great quarter. So Bob, I guess maybe just kind of going back to the thoughts on the sustainability of the 40% net operating margin in NAST through cycle. Historically, we’ve seen your profitability in NAST follow AGP per load pretty closely. I guess as you sort of look forward, and you think about over the next several quarters and a normalization of that AGP per load, do you feel like that the product work that Arun has been undertaking over the last couple of quarters.
And the efficiency gains and productivity gains that you guys are beginning to see in the business are going to be able to spool up enough to really sort of offset a normalization of AGP to the degree that it materializes either later this year or into 2023?
Yes. It’s the right question to ask, Jack, and I’ll take that on and then open it up to the rest of the team here, too. So I want to lead in with one comment, when you say that the work that a room is leading and leading is the appropriate thing, but I also want to characterize this work is not just being technology work or product work, but really us thinking about the entire system of how C.H. Robinson works and system, not in the reference of technology systems, but just the entire system from quote to cash. And how do we best engineer every touch point along the way, both through technology and thinking differently about how we execute the business. And so that is critical work at the core of unlocking value at C.H. Robinson, and we’re making progress there.
But let’s go back to kind of how indirectly, I think your question, Jack, is, hey, if AGP comes down, can you grow volume enough to drive the business. And so here’s how I’m thinking about that a bit is we’ve now grown truckload volume for five consecutive quarters. And that’s the first time we’ve done that since 2016 into 2017. Volume in our truckload business in July is — continues to be positive year-over-year. And actually, on a per business day basis, it’s at the highest level of the year in both truckload and LTL. Our total truckload volume has increased on a per business day basis sequentially each month of this year, including July. The employee additions that we’ve made into the team over the past several quarters are starting to get their legs under them a bit, a little bit more capable to actually help us drive growth, and there are signs that the freight market is decelerating.
And you probably saw in our client advisory that we published on July 21, but based on the indicators we look at, we now expect truckload costs to decline on a full year basis around 15% for the full year. Now given that type of environment, what we also believe is that we will continue to see increased acceptance rates in our contractual business. We would expect to see less volatility in the cost of purchase transportation over the next several quarters in that environment, which allows us to lean in a bit more in terms of accepting volume, taking on a bit more risk. Because the risk on the downside just simply isn’t as great in that type of environment.
And so, I do feel very confident in the fact that our team should be and will deliver volume growth through the back half of this year. And I think that if we execute the plan accordingly, we could start to see that volume growth ahead of headcount growth even by the end of this year.
The next question is coming from Scott Group of Wolfe Research.
If I go back and look at some prior cycles, your costs and pricing historically have bottomed at sort of low double-digit declines. It sounds like you think it will be worse this time around. And just curious for your thoughts on why? And then if I look at your price versus cost in second quarter, it was 650 basis point spread. Do you think that that spread starts to compress from here? And I guess if that does happen, just any thoughts, implications on margins, PGP all of that.
Scott, take me back to the first part of your question where you talked about the decline, I wasn’t quite tracking that.
Sure. So, I just — I mean, if you go back and look, you’ve been giving us this — your price and your cost numbers for a while and they typically bottom at low double digit and kind of — yes?
We’re looking at Slide 6 in the deck. Okay. Got it. Got it. Yes. So — I certainly didn’t mean to insinuate that I think it’s going to be worse this time. So if that came through, I don’t have enough forward visibility to say that I think it’s going to be worse this time. I mean what I would obviously agree with is we’re at an AGP per shipment that is at an all-time high, and we’re not modeling our cost structure for how we stack our business or make our investments off of that was the point that I attempted to make in my comments. The last couple of cycles, it’s been six or seven quarters peak to trough in terms of the amount of time that it’s taken to get there and typically an equal amount of trough to peak. And so I’m kind of using that as the framework for what might likely play out over the course of the next couple of years.
Typically, from peak to average is a few quarters to kind of get back into that median AGP per file. Now again, I don’t have a crystal ball, but I just — I think oftentimes the past is a good predictor of the future. And so that’s what I would use to kind of frame up how we’re thinking about this cycle.
And Scott, I’d add relative to the 650 basis points that you’re referring to, which is price up 1.5% cost down in this business, as you know, the price follows cost. And so that spread will really be determined by how steep that cost drop-off is. So if it tapers off, you could expect, I think, that spread to be lower if it’s steeper, that spread gets wider. And so that’s really back to how long will it take for this thing to bottom out.
Okay, that makes sense. And I didn’t want to put words in your mouth, sorry. I was just — I thought you made on the prior question, a comment that you think full year costs are down 15%. And so they started up 20%. So that implies a pretty sharp drop in the back half?
Yes, yes, yes. Yes, that’s accurate, Scott. And more specifically, I would say, within that advisory, we go on to say that we believe that the first quarter is the only quarter that’s going to see any sort of industry-wide price increase in order to get to a year-over-year down 15%, you have to see some decreases in the back half of the year. We’re kind of calling week 43 the floor because you kind of run in the support of the cost to operate a trucking — truck at that point. We would expect to see it kick up there for the seasonal last several weeks of the year leading into the holidays.
The next question is coming from Chris Wetherbee of Citi.
I wanted to comment the 40% operating margins in NAST, a little bit from the cost side. So you talked a bit about the volume growth on the truckload side, which obviously has been really strong over the last few quarters, as you noted. I guess I want to get a sense in a tougher market, sort of the cost initiatives that you’re working on, and I know heads are first half weighted. So, we’ll probably see some benefit as we move into the back half of the year. What are the other things that you think can help support that 40%? And the last quarter, you gave us sort of a peak into the second quarter in terms of how things were operating from an operating margin perspective in April, not curious if you have the ability to do that in the month of July, just to give us a sense of how things are going.
Yes. We won’t talk about the kind of the sequential operating margins by month within the quarter. But again, maybe Arun and I can kind of take this on together. I mean if we think about headcount in NAST, definitely believe that the second quarter will be the peak. We’ve got a number of interns that will cycle through the second quarter and the beginning of the third quarter that will draw down headcount. We’ve based on kind of where we see the economy going and what we’ve added, we are slowing hiring towards the back half of the year. And so in NAST, if we ended the year with a headcount number that was lower than where we are today, it would certainly not be a surprise to anybody in this room, certainly. As it relates to the highest leverage points of how we drive efficiency and reduce our cost per transaction, it really leads back to the work that Arun referenced that he and the team are leading. And we’ve identified a very specific opportunity to eliminate costs associated with these, I won’t call them nonvalue-added activities because that’s not an accurate depiction. But non-revenue-generating activities would likely be the right way to say it.
The different parts of the load cycle, the appointments, load activations, the load acceptances. We have an idea of the amount of operation and personnel expense associated with executing that. And through investments in the whole system and the digitization of those, we see a very realistic way to reduce the operating expenses within NAPS. And Arun, if there’s anything you’d add.
Yes. I would just say, I think Bob nailed it with like it’s really scalability of the operating model that we’re going after, and that means changing processes eliminating processes that maybe don’t make sense, automating things that ought to be automated or making self-serve things that are better made self-serve. But that impacts the whole system, like Bob said, the business system and the operating model. And we have clear line of sight in terms of initiatives that drive unlocks in terms of manual work that could be directed elsewhere or manual head count that can be directed elsewhere.
The next question is coming from Tom Wadewitz of UBS.
Bob, you’ve seen quite a few freight cycles. You got great information for understanding how the cycles work. And your commentary today seems fairly cautious just in terms of activity and kind of coming weakening in freight. Do you think that — I guess when I look at second quarter, it seems like there hasn’t really been that much of a decline in activity. If you look at imports, they’ve actually continued to be pretty strong in first half. So do you think that what we’re looking at is a fairly significant step down and you’re kind of anticipating that in the next month or two that there’s just kind of a delay between the impact of weaker consumer activity and any actual step-down in freight. Or are you just seeing kind of more of a moderation?
And then, I guess, I don’t know if this is related or not, but on contract and spot, do you think that kind of contract rates hang in there a bit better and that there’s just a lot more pressure in spot? Or you think contract has to have a Truckload has to have a big step down as well. So I guess two questions within that.
You bet. so I’ll take the second question first. I mean we’re seeing resiliency in our contract business. And that’s — I don’t mean to articulate that there’s been no changes. There’s been no conversations with customers, right? I mean we’re having conversations with customers, and we continue to see that contract portfolio lean more and more towards more traditional bid cycles, 12-month bid cycles. And I would broadly described that there hasn’t been a tremendous amount of downward pressure on the contract markets. I would expect as we go into the third quarter and the fourth quarter and go in to see bid renewals.
Those bid renewals are going to look different from a pricing standpoint than those that we did in the fourth quarter of last year or the first quarter of this year. My caution — look, I feel great about this quarter. We grew our truckload volume in a down market. Ocean volumes were positive. LTL volumes were down, but we can explain much of that just through a couple of specific customers and customer losses or changes in their activity from the stay-at-home trends. So I feel really strong about the business fundamentals. I’m concerned about the state of the consumer based on what we’re seeing from some of the retail reports over the course of the past several days here. I’m seeing us working with retail customers moving inventory around intracompany more so than I have at any time in the past. And so I think the inventory thing is real, and we’re starting to see that and feel that in the business.
I try to be cautiously optimistic in any scenario, but I think we have a very clear path to continue to drive growth. in the back half of this year across our services. I mean we’ve — there’s I don’t know if there’s probably 200 million truckloads that aren’t hauled by C.H. Robinson right now. So the market itself, whether it goes into recession or contraction or expansion, that shouldn’t be the limiter of growth for Robinson. So that — hopefully, that helps, Tom.
Yes. And it’s really focused on the market, not so much. Your business has performed remarkably well in the quarter, right? It was a great quarter, and you can do better than the market, but it’s more a question on the market. So it sounds like you think maybe more moderation as opposed to a big step down in activity in the market.
I think that’s right. I mean if I just look at the DAT load-to-truck ratio and that’s one that we use in our client advisories, we look at it internally. I mean we’re coming off of ridiculous high levels of load-to-truck ratios in January, it was 12 or whatever. Last year, it was 5.75:1. It’s basically right now at the 5-year average, 3.6, 3.7 to one. And so this feels a lot different, obviously, for all of us industry participants than it did 12 months ago. But it’s kind of average. I don’t think we’re in the freight recession or freight Armageddon. I just think we might have forgotten what average feels like for a while here, and the business is executing. Routing guides are holding up, first tender acceptance rates are up. So I don’t think that, again, from where I sit, I think we’ve got a healthy market still, but we should exercise caution on a forward look.
The next question is coming from Jon Chappell of Evercore ISI.
Bob, Jordan kind of alluded to this as it related to the forwarding community, but in the traditional broker business with the NAST, what’s the competitive landscape shaking out like? I mean, on the one hand, you have some pretty full pockets from a phenomenal last few quarters. But on the other hand, the labor market is still tight, inflation is really high. There’s a lot of uncertainty in the market right now. Does this push a lot of the smaller brokers out? And does that provide opportunity and/or risk to see it rising going forward?
It’s interesting that there’s some 20,000 different property brokers in this industry, right? And from small mom and pops that operate every other house to those to the size and scale of ours. One of the biggest challenges, I think, for — I think one of the reasons why there’s so many small brokers and so many very few of scale is one of the biggest challenges is just simply working capital. And as truckload pricing has been so high over the course of the past couple of years, it takes a lot of working capital in order to fund and scale a business like that. So I think many of those businesses have been constrained based on that.
If we start to see the market come down, you may likely see some exits of some of those smaller brokers. But given their size relative to ours, there’s not a real — I don’t know, I want to say, an imminent threat to our model that comes from that population. I think many of the upstart companies that have come on in the last five years that have gotten to some scale that have been largely funded by VC and private equity, likely their owners are taking a different approach right now to profitability versus growth at all costs. And so again, I think that adds some rationalization to the overall environment that we’re seeing that we’re competing in and winning in every single day.
Ladies and gentlemen, this brings us to the end of the question-and-answer session. I will turn the floor back over to Mr. Ives for closing comments.
That concludes today’s earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a good evening.
Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time, and enjoy the rest of your day.