C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q1 2023 Earnings Call Transcript

C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q1 2023 Earnings Call Transcript April 26, 2023

C.H. Robinson Worldwide, Inc. misses on earnings expectations. Reported EPS is $0.98 EPS, expectations were $0.99.

Operator: Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will open the line for a live question-and-answer session. As a reminder, the conference call is being recorded, Wednesday, April 26, 2023. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Chuck Ives: Thank you, Donna, and good afternoon, everyone. On the call with me today is Scott Anderson, our interim Chief Executive Officer; Mike Zechmeister, our Chief Financial Officer; and Arun Rajan, our Chief Operating Officer. Scott and Mike will provide a summary of our 2023 first quarter results and our outlook for 2023. Arun will provide an update on our efforts to improve our efficiency and operating leverage, and then we will open the call up for questions. Our earnings presentation slides are supplemental to our earnings release and can be found in 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 Scott.

Scott Anderson: Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Our Q1 financial results reflect the softening market conditions that have transpired in the freight transportation market over the past 12 months. With shippers continuing to manage through elevated inventories amid slowing economic growth, the balance of supply and demand has shifted from a tight market a year ago to one that is now oversupplied. As spot rates approach the breakeven cost per mile to operate a truck, the market is likely at or near the bottom of the industry cycle, which typically results in capacity exiting the market. Contract rates are also declining as transportation providers adjust to the changing market. During this transition, we’ve continued to increase our focus on delivering an improved customer and carrier experience and a more efficient business model, and we’re taking steps to foster profitable growth through cycles.

In his prepared remarks, Arun will provide an update on the progress we’re making on increasing the digital execution within the life cycle of a load by streamlining certain processes that are core to our operating model. Mike will give you an update on our continuing restructuring effort. We are executing on the plan that was initiated in November and we’re lowering our 2023 personnel expense by $100 million at the midpoint of our guidance reflecting actions that have already been taken and additional opportunities to further reduce our costs. As I’ve transitioned from my role of Board Chair to the interim CEO, I’ve met with many of our employees who remain highly engaged and motivated to win as we strive to amplify their expertise with new tools.

I’ve also met with several of our customers, and I’m confident in the power of our commercial engine and our ability to deliver superior global services and capabilities and solve complex logistics challenges for our customers while continuing to execute on our sustainable growth strategy. I’ll wrap up my opening remarks by providing an update on the search for the new permanent CEO. Jodee Kozlak, the Chair of the Board and former Chief HR Officer at Target is leading the search committee. With the assistance of Russell Reynolds, this role has attracted a strong pool of candidates. The committee is choosing a proven leader with broad operational experience who will accelerate our strategic initiatives and execute on the opportunities ahead for the company.

The process is moving along as expected, and the Board anticipates naming the new CEO in the second quarter. I, along with the senior leadership team, am actively preparing for a smooth transition to a new leader. Now let me turn it over to Mike for a review of our first quarter results.

Mike Zechmeister: Thanks, Scott, and good afternoon, everyone. As Scott mentioned, our Q1 results were impacted by a soft freight market. Prices for surface transportation and global freight forwarding have been declining with the weakening demand and excess capacity. With these macro forces as a backdrop, our first quarter total revenues of $4.6 billion declined 32% compared to our record high of $6.8 billion in Q1 of last year. Our first quarter adjusted gross profit or AGP, was down $221 million or 24.3% compared to Q1 of last year, driven by a 45% decline in Global Forwarding and a 16% decline in NAST. On a sequential basis, total company AGP was down 11%, including a 15% decline in NAST and a 6% decline in Global Forwarding.

On a monthly basis compared to Q1 of last year, our total company AGP per business day was down 23% in both January and February and down 27% in March as the typical seasonal acceleration in March did not materialize this year. So far in April, we’ve experienced similar freight market conditions to those we saw in March. In our NAST truckload business, our Q1 volume declined 3.5% on a year-over-year basis. Within Q1, average daily volume in March was weaker than January and February, resulting in a 1% sequential decline in Q1 compared to Q4 of last year. Our AGP per truckload shipment decreased 19% versus Q1 last year, primarily due to a decrease in our transactional or spot market truckload AGP per shipment. During Q1, we had an approximate mix of 70% contractual volume and 30% transactional volume.

Routing guide depth of tender in our managed services business, which is a proxy for overall market, declined from 1.7 in the first quarter of last year to 1.2 for the first quarter of this year, which is the lowest level we’ve seen since the pandemic impacted second quarter of 2020. The sequential declines in truckload linehaul cost and price per mile that we experienced in Q2 through Q4 of last year continued in Q1. However, the declines in Q1 were the largest that we’ve seen in over 10 years on a percentage basis. In Q1, we saw a 28.5% year-over-year decline in our average truckload linehaul cost per mile paid to carriers, excluding fuel surcharges. Our average line haul rate or price billed to our customers, excluding fuel surcharges, decreased year-over-year by approximately 27.5%.

With the price decline coming off a higher base than cost, these changes resulted in a 20.5% year-over-year decrease in our NAST truckload AGP per mile. Market conditions in our Global Forwarding business were also soft behind weakened demand and plenty of capacity, combined with the extended shutdowns around the Lunar New Year holiday. This contributed to significantly reduced import volumes and prices across the trade lanes for ocean and air freight. In Q1, Global Forwarding generated AGP of $177.9 million representing a year-over-year decrease of 45% versus the record high for our first quarter last year, which was up 50%. Within these results, our ocean forwarding AGP declined by $111 million or 50% year-over-year compared to 63.5% growth in Q1 of last year.

The Q1 results were driven by a 41.5% decrease in AGP per shipment and a 14.5% decrease in shipments. Despite the soft market, our forwarding business continues to have success adding new customers and strengthening its geographic diversity behind many of the investments made technology and talent over the past several years. In addition to our strength in the Trans-Pacific trade lanes, our forwarding team generated over 50% of new business AGP from customers outside of the US in Q1. Turning to expenses. Q1 personnel expenses were $383.1 million down $30 million or 7.3% compared to Q1 of last year, primarily due to our cost optimization efforts and lower variable compensation. Our Q1 average head count declined 2% versus Q1 of last year and 4% compared to our Q4 average.

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As another point of reference, our Q1 ending head count declined approximately 6% compared to the end of Q4. Our cost optimization and restructuring efforts that began in Q4 of last year continued into Q1 as we found more opportunities to help ensure a more competitive and sustainable long-term cost structure. As we indicated on our Q4 earnings call, we continue to expect our head count to decline throughout 2023, as we streamline processes and leverage technology to allow our industry-leading talent to focus on more important work like growing the business. As a result of the progress on these cost optimization efforts, we are now lowering our personnel expense guidance for 2023 by an additional $100 million at the midpoint. We now expect our 2023 personnel expenses to be in the range of $1.45 billion to $1.55 billion, compared to our previous guidance of $1.55 billion to $1.65 billion.

This updated guidance excludes the Q1 restructuring expense and additional restructuring costs that we expect to incur during the year. Excluding the restructuring charges in 2022 and 2023, the midpoint of our updated 2023 guidance for personnel expenses is now down approximately 12% year-over-year. These expense reductions are primarily long-term structural cost reductions with a lesser amount attributable to softer market conditions that we referred to earlier. Moving on to SG&A. Q1 expenses of $141.5 million were down $5.9 million compared to Q1 of last year primarily due to a decrease in credit losses and a reduction of purchased services, including temporary labor. We continue to expect our 2023 SG&A expenses to be about $575 million to $625 million.

2023 SG&A expenses are expected to include approximately $90 million to $100 million of depreciation and amortization expense. As you recall from our Q4 earnings call, we committed to $150 million of net cost savings by Q4 of this year, compared to the annualized run rate of Q3 last year. Our updated total operating expense guidance for 2023 now represents approximately $300 million of net cost savings compared to the annualized run rate in Q3 last year. As mentioned earlier, the majority of the expense reductions are expected to be long-term structural changes to our cost base. Q1 interest and other expense totaled $28.3 million, up $14.1 million versus Q1 last year. Q1 of 2023 included $23.5 million of interest expense, up $9 million versus the prior year due to higher variable interest rates.

Q1 results also included a $9.6 million loss on foreign currency revaluation and realized foreign currency gains and losses, up $8.1 million compared to Q1 last year, driven by the translation impact of the various foreign currency-denominated intercompany exposures that we had in Q1. As a reminder, our FX impacts are predominantly non-cash gains and losses, which is why we’re not actively hedging them to reduce volatility. Our Q1 tax rate came in at 13.5% compared to 18.4% in Q1 of 2022. The lower tax rate was driven primarily by the incremental tax benefits that we typically see from stock-based compensation deliveries in Q1 as well as additional U.S. tax credits and incentives in proportion to the lower pre-tax income. We continue to expect our 2023 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal state or international tax policy.

Q1 net income was $114.9 million and diluted earnings per share was $0.96. Adjusted or non-GAAP earnings per share, excluding the $3.7 million of restructuring charges, was $0.98, down 52% compared to Q1 of 2022, which was up 60% versus the prior year. Turning to cash flow, Q1 cash flow generated by operations was $254.5 million, compared to $13.9 million of cash used in Q1 of 2022. The $268.5 million year-over-year improvement was driven by a $235 million sequential decrease in net operating working capital in Q1 and driven by the declining cost and price of ocean and truckload in our model. Conversely, Q1 of last year included a $289 million sequential increase in net operating working capital as costs and prices were rising. Over the past three quarters, as the cost and price of purchased transportation has come down, we have realized a benefit to working capital and operating cash flow of more than $1.2 billion.

That benefit highlights some of the inherent resilience in our model. In Q1, our capital expenditures were $27 million compared to $26.2 million in Q1 of last year, and we continue to expect our 2023 capital expenditures to be in the range of $90 million to $100 million. We returned $125 million of cash to shareholders in Q1, through $73.4 million of cash dividends and $51.2 million of share repurchases. The cash returned to shareholders exceeded net income but was down 50% versus Q1 last year driven by the $101 million of cash used to reduce our debt. Now on to the balance sheet highlights. As we have demonstrated through the ups and downs of the highly cyclical freight market, the strength of our balance sheet and business model makes us a reliable partner for our customers and allows us to invest through the cycle.

Our customers value the stability and reliability that we provide as they work to optimize their transportation needs. We ended Q1 with approximately $1.5 billion of liquidity comprised of $1.22 billion of committed funding under our credit facilities and a cash balance of $239 million. Our debt balance at the end of Q1 was $1.87 billion, down $293 million versus Q1 last year. Our net debt-to-EBITDA leverage at the end of Q1 was 1.39 times, up from 1.29 times at the end of Q4. Our capital allocation strategy includes maintaining an investment-grade credit rating to allow us to cost of capital. With the anticipated earnings reduction in 2023, we have reduced our debt to deliver our leverage targets. As you would expect, the cash that we used to reduce debt generally reduces the amount of cash available for share repurchases.

Over the long-term, we remain committed to growing our cash dividend in alignment with alignment with our long-term EBITDA growth. Our dividends and share repurchase program are important leverage to enhance shareholder value, as is delivering quality customer service more efficiently than anyone in the marketplace. With that, I’ll turn the call the call over to Arun to walk through our efforts to strengthen our customer and carrier experience and improve our efficiency and operating leverage.

Arun Rajan: Thanks, Mike. And good afternoon, everyone. As I mentioned on our last earnings call, we’ve increased our focus on opportunities to streamline processes that are core to scaling our operating model. Streamlining these processes will enable us to decouple of volume and headcount growth and drive increased productivity, while simultaneously improving the customer experience and service levels. Shipments per person per day is a key metric that we used to measure our productivity improvements. And we achieved a 4% sequential improvement in Q1 as we progress towards our goal of 15% year-over-year improvement by the end of Q4 of 2023. In order to reach our 2023 goal, we have accelerated the digital execution of critical touch points in the lifecycle of a load.

In Q1 the progress we made was primarily driven by increasing the automation of in-transit tracking, and appointment related tasks. Increased digitization and automation are key elements of delivering superior customer service as well as operating leverage. These efforts include operationalizing our information advantage at scale by giving customers insights on price and coverage and providing features to carriers that improve their utilization and cashflow. Streamlining processes, improving productivity creates operating leverage, operating leverage gives us the pricing flexibility to unlock and accelerate market share growth, while delivering on our long-term operating margin targets. With that, I’ll turn the call back over to Scott now for his final comments.

Scott Anderson: Thanks Arun, as inflationary pressures continue to weigh on global economic growth and freight markets present cyclical challenges, the competitive landscape has changed. With lower available demand the competition for volume is intense, and shippers are looking for stable and innovative logistics partners. We’ve shown the strength of our model through cycles; our balance sheet continues to be strong and we plan to continue investing in initiatives that we expect to provide innovative solutions and generate long-term profitable growth. At the same time, we’re continuing to evolve our organization to bring greater focus to our highest strategic priorities, including keeping the needs of our customers and carriers at the center of what we do, while lowering our overall cost structure.

We expect this initiative will continue to drive improvements in our customer and carrier experience and amplify the expertise of our people, all of which we expect to drive market share gains and growth and lead to improve returns for our shareholders. After my first 100 days in this role, I’m even more excited about C.H. Robinson’s opportunities in future. We have some of the best people in the logistics industry, and they’re dedicated to solving challenges for our customers. As a result of the exceptional service that our people provide to customers during the period of extended market disruption, our customer experience scores are very high, and we’re having more strategic customer discussions about our ability to provide an integrated service solution.

So while the near term freight environment presents some challenges, our differentiated value proposition and strength of our people, processes and technology provide many opportunities. This concludes our prepared comments. And with that, I’ll turn it back to Donna for the Q&A portion of the call.

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Q&A Session

Operator: Thank you. The floor is now open for questions. Today’s first question is coming from Jack Atkins of Stephens. Please go ahead.

Jack Atkins: Okay, great. Good evening and thank you for taking my question. So I guess, Arun, maybe this one is for you, but Scott or Mike, if you want to chime in, please do. But I guess I’d be curious to get your take on how you’re looking at the market for the balance of the year. It sounds like April is trending kind of in the same ballpark as March, if I understood your comment correctly. But if I think back to the last time you guys updated this, the thought was maybe the market would be troughing sometime in the second quarter and then beginning to see some improvement in the back of the year. Any sort of update to that view? Any update to what your customers are telling you about sort of their business plans? I think that would be really helpful. I’ll stop there and hand it back. Thank you.

Scott Anderson: Yes. Thanks, Jack. This is Scott. Why don’t we have Mike kick that off, and then I’ll give a little color on customer sentiment.

Jack Atkins: Okay.

Mike Zechmeister: Yes. Thanks for the question, Jack. And obviously, the market here that we’re experiencing is a pretty soft market. We’re seeing pretty good competitiveness, particularly on the truckload side on the bids that we’re involved with. We’ve been able to maintain our win percentage actually up this year in Q1 over last year. It was up in Q4 over last year. So I think we’re competing effectively. But what we’re seeing inside those bids, are reduced total demand. So the customers are just not seeing the volumes that they’ve had in the past, and that’s reflective of this soft freight market environment. There’s still — a lot of customers are still working through inventories. They’re not running the plants as aggressively as they have in the past.

So we’re seeing a pretty soft market overall. When we look at our NAST business in Q1, I think there are a few themes that I’d point to there, I think we feel like we grew share despite being down 3.5% on truckload. And that’s really with respect to the brokers, the 3PLs out there. I think we did a pretty good job. We also got improved productivity, and we talked about that 4% improved productivity against that 15%, shipments per person, per day target for the year. And we did that in a soft market. It’s generally a little bit easier to get productivity enhancements when the volume is really roaring, but we’re able to do that in a soft market. And the last thing, we talked about was our customer service, and we really felt like we had best-in-class customer service there.

So, the theme is our overall soft market. You talked about how we described April relative to the quarter. When we look at enterprise AGP per shipment or enterprise AGP per day, we certainly had a better January in February than we did in March. But again, if you kind of translate that over to the truckload business, we were — our volume is down 3.5 in the quarter. And April kind of has played out similar to where we were in March. So probably market share gaining within the brokerage universe, but certainly down versus our original expectations driven primarily by the soft market that we’re experiencing. And inside, I’ll talk a little bit, I guess, too, about the contract environment. One of the, I think, changes that we’ve seen in the contract business versus Q4 was, if you go back and look at Q4, customers were about half bids at 12 months and about half bids that were less than 12 months.

As we got into Q1, those RFPs were really more leaning into 12 months. And so we’ve gone all the way up to about three quarters of 12 months in those. And you could say that, that might be the customers seeing bottom here trying to lock in rates that are lower, but that’s another kind of data point indication of where we’re seeing the market. So, with that, I don’t know, Scott, if you have any more you want to say.

Scott Anderson: Yes, Jack, maybe just a little customer feedback. I’ve been lucky to be in probably about 20 meetings in the last 1.5 months with our top customers. I would say sentiment is pretty consistent with what you’re hearing with retailers and sort of higher levels of inventory. But it’s really dependent by vertical. There are areas of strength. Automotive, health care, are some. I would say a common theme of these meetings, too, is just sort of the longer-term partnership aspect of working with Robinson and us helping them solve their logistics challenges going forward with our full portfolio. So, the one thing we’re doing in a softer market is we’re really leaning into customer engagement and face-to-face meetings.

Jack Atkins: Okay, guys. Thank you so much for the color.

Scott Anderson: Thanks Jack.

Operator: Thank you. The next question is coming from Stephanie Moore of Jefferies. Please go ahead.

Stephanie Moore: Hey. Good afternoon. Thank you. Scott, I wanted to maybe get a little bit more color around the ongoing CEO search. I do think that in general, the market would like to see some certainty here. Now that it’s been, call it, several months of this evaluation process, if you could just provide any update of what expertise you, the Board are looking for in the new CEO in the evaluation of candidates, maybe some that might have specific brokerage experience or just transportation experience as well as the view of someone who might have experience outside of transportation entirely, just maybe how the Board is thinking about these factors? Thanks.