C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q2 2023 Earnings Call Transcript

C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q2 2023 Earnings Call Transcript August 2, 2023

C.H. Robinson Worldwide, Inc. beats earnings expectations. Reported EPS is $2.67, expectations were $0.9.

Operator: Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Second 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. [Operator Instructions] As a reminder, this conference call is being recorded, Wednesday, August 2, 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 Dave Bozeman, our President and Chief Executive Officer; Mike Zechmeister, our Chief Financial Officer; and Arun Rajan, our Chief Operating Officer. Dave will provide some interdictory comments. Mike will provide a summary of our 2023 second quarter results and our outlook for 2023. Arun will provide an update on our efforts to improve our customer and carrier experience 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 two 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 Dave.

Dave Bozeman: Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Let me start by saying it is an absolute privilege to be leading C.H. Robinson; a market leader with enormous scale, a strong base of loyal customers, and a resilient business model that generates profits and free cash flow through the entirety of the freight cycle. I know from my time in the transportation market that other freight providers and new entrants look to Robinson as an example of a commercial engine with the breadth, scale, expertise and financial strength that they aspire to achieve. However, there’s always room for improvement and I recognize the tremendous opportunity in front of us to accelerate growth in a very fragmented market.

In my first month, I’ve been spending time meeting with and talking to customers, employees, and shareholders as I analyze the business. A customer centric focus is in my DNA, and I have successfully implemented customer focus strategies over my 30 year career at leading brands, such as Harley Davidson, Caterpillar, Amazon and Ford Motor Company. I look forward to applying that experience towards our goal of providing such a compelling offering that customers feel like C.H. Robinson is essential to the success of their supply chain. As a lean practitioner, I’m in a discovery and diagnosis phase, and I’ve been learning more and shaping my vision for the company each day. I’m digging in quickly with the leadership team. I’m looking at the portfolio of businesses with an open mind, and my intentions are to drive focus so that we position ourselves for growth in our core business.

As I aim to reinvigorate the winning culture, my focus will be on people, products, processes, technology, collaboration and excellence. My style is to, one, be accountable for driving improvement and be passionate about making people better. Two, look around corners and anticipate in order to minimize surprises. And three, wake up every day like you’re working for a startup by being gritty, scrappy, innovative and change oriented, with a focus on improving clock speed and acknowledging every day that you can be better. These practices have enabled success for the companies I’ve worked at and the people I’ve worked with. People are at the heart of Robinson and I’m confident that together we will win for our customers, carriers and shareholders.

I’m passionate about continuously improving how organizations operate. Lean principles work and are applicable at Robinson to further improve efficiency. Robinson is a strong company, but all companies have ways that can be removed to make a company quicker, more flexible and more agile in solving problems for their customers, improving workflows and providing better customer service and experiences. I have helped build out and scale transportation businesses, most notably at Amazon, where technology is the starting point. I am certain we can leverage technology as a force multiplier here at Robinson, and I’ve been discussing it with Arun and the team. As an example, when I look at C.H. Robinson, I’m excited about the potential benefits from Generative AI, in conjunction with the machine learning and artificial intelligence that the company has already been utilizing.

With more data and history to leverage than any other 3PL, we have opportunities to harness the power that these advanced technologies now offer to further capitalize on our information advantage, and we’ll continue to look for and pursue those opportunities. Arun will touch more on this in his prepared comments. In summary, I look forward to leading this great company to new heights and sharing our progress with all of you along our journey. With that, I’ll turn it over to Mike for a review of our second quarter results.

Mike Zechmeister : Thanks Dave and good afternoon everyone. Global freight markets in Q2 continue to be impacted by weak demand, high inventories and excess capacity, which resulted in a more competitive marketplace with suppressed transportation rates. North American freight volumes and load-to-truck ratios remain near the low levels of 2019. In the freight forwarding market, ocean vessel and air freight capacity continues to exceed demand, which has kept ocean and air freight rates low during the period of significant declines that extends back to the second half of 2022. Despite the weak demand, new vessel deliveries are expected to continue to add capacity to the ocean market. This suggests that the influence of excess capacity may persist for several periods, despite the steamship lines efforts to manage capacity through blank sailings, slow steaming and redeploying capacity to other lanes.

We are staying focused on what we can control, providing superior service to our customers and carriers and streamlining our processes by removing waste and manual touches. The result has been meaningful cost reduction and productivity gains across our business. With our record quarterly financial results in Q2 of last year as a comparable, and the macro forces that I outlined as the backdrop, our second quarter total revenues of $4.4 billion declined 35% compared to Q2 last year. Our second quarter adjusted gross profit or AGP was also down 35% year-over-year or $366 million, driven by a 45% decline in our global forwarding and a 36% decline in NAST. On a sequential basis, total company AGP was down 3%, driven by a 6% decline in NAST, that was partially offset by a 1% increase in global forwarding and a 6% increase in the total of our other segments.

On a monthly basis compared to Q2 of last year, our total company AGP per business day was down 30% in April, down 39% in May and down 37% in June. In our NAST truckload business, our Q2 volume declined by approximately 6.5% on a year-over-year basis. Within Q2, average daily volume in April was stronger than March, but weakened in May and held in June, which resulted in a 0.5% sequential decline in Q2. During Q2 we had an approximate mix of 70% contractual volume and 30% transactional volume in our truckload business. Routing guide depth of tender in our managed services business, which is a proxy for the overall market, declined from 1.4 in Q2 of last year to 1.1 in the second quarter of this year, which is the lowest level we’ve seen for a full quarter since the recession of 2009.

The sequential declines in our truckload line haul cost per mile since Q2 of last year began to level off and increase sequentially in May and June, causing the June cost per mile to be only $0.02 below the March cost per mile. On a year-over-year basis, we saw a decline of approximately 19% in our average truckload line haul cost per mile paid to carriers, excluding fuel surcharges. Due to the time lag for contract pricing to follow spot market costs, Q2 truckload line haul pricing continued to decline on a sequential basis, resulting in a 23% year-over-year decline in our average line haul rate for price billed to our customers, excluding fuel surcharges. These changes resulted in a 41.5% year-over-year decrease in our truckload AGP per mile and AGP per shipment, with declines in both contractual and transactional AGP per shipment.

This is the largest year-over-year decline in AGP per mile that we’ve experienced in the last 10 years and is in contrast to the 46.5% increase in Q2 last year. In our LTL business, shipments were flat on a year-over-year basis and up 5% sequentially. By leveraging our broad access to capacity and all modes of LTL and our high level of service, our LTL team continues to onboard a pipeline of new business that is offsetting the softness in the LTL market. AGP per order, however declined 19% compared to Q2 last year, driven primarily by the market conditions and lower fuel prices. As I mentioned, market conditions in our global forwarding business were also soft behind weak demand and plenty of capacity. Despite that, our ocean and air volume each grew sequentially, exhibiting the progress our global forwarding team has made through adding new customers, diversifying trade lanes and verticals, and leveraging investments in technology and talent over the past several years.

In Q2, global forwarding generated revenue of $780 million and AGP of approximately $179 million, which declined 45% year-over-year compared to the record high from Q2 last year. Within these results, our ocean forwarding AGP declined by 53% year-over-year compared to 51% growth in Q2 of 2022. The Q2 results were driven by a 49.5% decrease in AGP per shipment and a 7% decrease in shipments. Turning to expenses, we delivered on our expense reduction and productivity expectations for the quarter. Q2 personal expenses were $377.3 million, including $13.1 million of restructuring charges, down 15.2% compared to Q2 of last year. Excluding the restructuring charges, our Q2 personnel expenses were down 18.1% year-over-year, primarily due to the cost optimization efforts and lower variable compensation.

Our headcount was also down significantly in Q2, with ending headcount at 15,763, down 13.1% year-over-year. In Q2 we elevated our cost optimization efforts, which began in Q4 of last year, as we streamlined our workflows and removed waste to help ensure a more competitive and sustainable long term cost structure. As a result, our shipments per person per day in NAST has increased by 12% year-to-date through Q2, and we remain on track to deliver on our target of 15% year-over-year improvement by Q4 of this year. I’d also note that we were able to achieve the productivity gains in a soft volume market, which sets us up well for when the market demand returns. Going forward, we expect continued improvements in shipments per person per day and the associated cost benefits through the remainder of 2023, as we streamline processes and improve customer outcomes with technology that supports our people and processes.

As a result of the progress on our cost optimization efforts, we now expect 2023 personnel expenses to be toward the lower end of the $1.45 billion to $1.55 billion range that we previously provided. As a reminder, our expense guidance excludes restructuring expenses. Moving to SG&A, Q2 expenses were $155.6 million and included $1 million of restructuring charges. Excluding the Q2 restructuring charges and last year’s $25.3 million gain on the sale leaseback of our Kansas City Regional Center in Q2, SG&A expenses were up approximately 8.5% compared to Q2 of last year, primarily due to increases in claims and warehouse expenses. We continue to expect our 2023 SG&A expenses to be $575 million to $625 million, including $90 million to $100 million of depreciation and amortization expense.

As you may recall from our Q1 earnings call, we raised our cost savings commitment to $300 million of net annualized cost savings by Q4 of this year, compared to the annualized run rate of the Q3 expenses from last year. We continue to be on track to deliver those expense reductions, and the majority are expected to be longer-term structural changes to our cost base that will help us improve operating margins once demand returns. Q2 interest and other expense totaled $18.3 million, down $9.1 million versus Q2 last year. Q2 included $23.2 million dollars of interest expense, up $6.3 million versus Q2 of last year, due to higher variable interest rates against a reduced debt load. Q2 also included a $3.5 million gain on foreign currency revaluation and realized foreign currency gains and losses, compared to a $10.3 million loss in Q2 last year, with both driven by various foreign currency impacts on intercompany assets and liabilities.

As a reminder, our FX impacts are predominantly non-cash gains and losses. Our Q2 tax rate came in at 14.9%, compared to 21.3% in Q2 of ‘22. The lower tax rate was driven by lower pre-tax income and incremental benefits from tax credits and incentives. We now expect our 2023 full-year effective tax rate to be in the range of 16% to 18%, assuming no meaningful changes to federal, state or international tax policy. Adjusted or non-GAAP earnings per share, excluding the $14.1 million of restructuring charges, was $0.90. Excluding the $25.3 million gain from Q2 last year, non-GAAP earnings per share was down $0.64, compared to the $0.75 increase in Q2 last year. Turning to cash flow, Q2 cash flow generated by operations was approximately $225 million, compared to the $265 million in Q2 of 2022, demonstrating our ability to generate cash and make investments in the business through the freight cycle.

The year-over-year decline in our cash flow was driven by a $251 million decrease in net income, partially offset by $144 million sequential decrease in net operating working capital in Q2, resulting from the declining cost and price of ocean and truckload transportation. Over the last four quarters, as the cost and price of purchased transportation have come down, we have realized the benefit to working capital and operating cash flow of more than $1.4 billion. In Q2, our capital expenditures were $24.4 million, compared to $43.2 million in Q2 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 $106 million of cash to shareholders in Q2, through $73 million of cash dividends and $33 million of share repurchases.

The cash returned to shareholders exceeded net income, but was down 74% versus Q2 last year, driven by the $137 million of cash used to reduce debt. Now, on to the balance sheet highlights. We ended Q2 with approximately $1.1 billion of liquidity, comprised of $859 million of committed funding under our credit facilities, and a cash balance of $210 million. Our debt balance at the end of Q2 was $1.74 billion, which includes debt pay down of $532 million versus Q2 last year. Our net debt to EBITDA leverage at the end of Q2 was 1.81x, up from 1.39x at the end of Q1. Our capital allocation strategy is grounded in maintaining an investment grade credit rating, which allows us to optimize our weighted average cost of capital. With the year-over-year earnings reduction and the $0.5 billion of debt pay down, we’ll continue to manage our capital structure to maintain our investment grade credit rating.

As you would expect, the cash that we use to reduce debt, generally reduces the amount of cash available for share repurchases. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth. Our dividends and share repurchase program are important levers to enhance shareholder value as we’re delivering quality customer service more efficiently than anyone in the marketplace. As we have demonstrated through the ups and downs of our highly cyclical freight market, the strength of our 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 we work to optimize their transportation needs.

I’d like to close by adding that I am incredibly excited about the direction we are headed and our ability to build on the productivity and cost control progress that we’ve made. By leveraging lean principles to reduce waste, and the emerging benefits of our combination of machine learning and generative AI across our scaled model, we are positioned well to deliver greater efficiency and improved competitiveness in the marketplace, to generate greater value for Robinson shareholders. With that, I’ll turn the call over to Arun to provide more details on our efforts to strengthen our customer and carrier experience, and improve our efficiency and operating leverage.

Arun Rajan : Thanks, Mike, and good afternoon everyone. In the second quarter, our single-threaded cross-functional teams made great progress on improving customer outcomes with technology that supports our people and processes. Our enhanced carrier advantage program has significantly improved our automated tracking and advanced visibility capabilities, and those efforts are being recognized by our customers and multiple third parties. In our LTL business, our team is leading the way as an early adopter of electronic bill of lading, which has enhanced our digital connectivity with our LTL carriers and enabled us to eliminate unnecessary work and achieve gains in efficiency and accuracy. All the initiatives and work streams of our teams are targeted at improving productivity and accelerating growth with disciplined product and change management.

Over the last six months we’ve increased our focus on opportunities to streamline processes that are core to improving the customer and carrier experience and enabling us to decouple volume and headcount growth and drive increased productivity. Shipments per person per day is a key metric that we use to measure our productivity improvements, and as Mike mentioned earlier, we’ve achieved a 12% year-to-date improvement through Q2 as we progress towards our goal of 15% year-over-year improvement by Q4 of this year. In order to reach our 2023 goal, we have accelerated the digital execution of critical touch points in the lifecycle of a load, thereby reducing the number of manual tasks per shipment and the time per task. A few areas where we have seen this progress include increasing the automation of in-transit tracking, case management tasks and appointment-related tasks.

As Dave mentioned earlier, we’ve also been using machine learning, artificial intelligence, and our large data estate to improve outcomes for our customers and carriers. But machine learning alone has limitations due to a need for standardization. Generative AI and large language models have the ability to work with unstructured and incomplete data and unstructured task flows to create an automation unlock. One example where this can be used is in order management. Over the years, manual processes or workarounds have been put in place to serve our customers and carriers and customize and therefore unstructured ways, such as receiving orders and providing quotes through email. As you can imagine, these have highly variable levels of information completeness and a fragmented mix of formats.

Generative AI can be used to fill in the blanks where there’s incomplete and unstructured information in a highly automated and efficient process. Our early testing and results from generative AI are promising, and we’re excited about the potential for this technology to be an accelerant to automation and productivity improvements and to magnify our information advantage. With that, I’ll turn the call back over to Dave for his final comments.

Dave Bozeman : Thanks, Arun. C.H. Robinson is a great company, with the largest market share, the most developed freight-brokers network, longstanding relationships with global blue chip customers, deep carrier relations, strong technology, and a larger data set than any other market participant. While the near-term freight environment presents some challenges, the strength of our people, scaled network, financial model and investments in improving efficiency, position us well for the eventual rebound. I see an opportunity for the company to reach its full potential and create more shareholder value by improving our value proposition, increasing our market share, accelerating growth, improving our efficiency and operating margins, and increasing overall profitability.

Robinson has great people with a passion for winning and the grit, grind and hustle needed to innovate and solve challenges for our customers and carriers. To enable greater agility and flexibility and to accelerate our clock speed, I’m empowering our people to uncover new ways to challenge the status quo, move faster and act boldly to better anticipate our customers’ needs, exceed their expectations, and make us indispensable. Shippers are looking for stable and innovative logistics partners. Robinson has shown the strength of its model through cycles. Our balance sheet continues to be strong, and we plan to invest in initiatives that we expect to amplify the expertise of our people and generate high returns on investment. I’m excited about our opportunities and our future.

This concludes our prepared remarks. I’ll turn it back to Donna now for the Q&A portion of the call.

Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question is coming from Jack Atkins of Stephens. Please go ahead.

Jack Atkins : Okay, great. Good evening, and Dave, congratulations on your new role at C.H. Robinson.

A – Dave Bozeman: Thanks, Jack.

Jack Atkins : So, I guess I’d love to start going back to something that you mentioned in both your prepared remarks and also in the press release. It’s making C.H. Robinson essential. I guess my first question is or just broadly like, what is – you know what about C.H. Robinson right now is that essential? Because I look at a company with unparalleled scale in the marketplace, a leading technology platform. What do you think you need to do differently as a company to really make yourself essential in what is ultimately a highly commoditized part of the transportation supply chain, which is brokerage?

A – Dave Bozeman: Yes, thanks Jack, and a pleasure to virtually meet you. I look forward to meeting you in person here over the coming weeks. When I think about that question, Jack, its a couple things. You’re right, and I agree with you, C.H. Robinson is essential, and it’s going to continue. As I look at it, it’s going to continue to have a situation where we can pick up customers organically, so everyone sees the value and the advantage of doing business with Robinson. And some of the ways of doing that is, I consider myself a lean practitioner as I said in my comments. Driving the company to think faster, act faster, reduce waste, these are things that are going to take a strong company and make it stronger, right, and we’re going to be laser focused on that.

Speed is imperative, but speed is powerful, Jack, as you know. And in this market with this scale, as this company continues to increase its clock speed, as it continues to use technology as an enabler with its people, I think that is going to just enhance us to allow us to drive profitable growth and continue to along with our strong balance sheet. It just makes me excited and validates why I chose to come here, so that’s what I’d say to that.

Jack Atkins : Okay, thank you.

Operator: Thank you. The next question is coming from Scott Group of Wolfe Research. Please go ahead.

Scott Group : Hey, thanks, and congrats Dave. I look forward to meeting you next week.

Dave Bozeman: You got it, Scott.

Scott Group : I guess a near-term question and a longer-term question. Just, you know help us think about the puts and takes on sequential net revenue and earnings trends from the second quarter, third quarter. Do you think we should be higher or lower? And then just Dave, maybe too early to ask, but just as I think about the margin opportunity longer term that you talked about, this used to be a 40% net operating margin business. This year, probably closer to 20%. What do you think is the right margin range to think about for CH over time? Can we get back to where we were?

A – Dave Bozeman: Yes, thanks a lot Scott. Hey, I look forward to meeting you as well. Mike, why don’t you jump in. It’s a good question, and I’ll let you jump in on that.

A – Mike Zechmeister: Yes Scott, first of all, on the first part of your question, just thinking about the outlook on as you said, net revenue margin or AGP, Q2 to Q3, and I’d point to a few things. So first of all, obviously we’re in a market that has been weak, and no matter how you look at it, we’ve come a long way since Q2 of last year when we were sitting on record highs across the board and particularly in our biggest service lines, truckload and ocean. And so as we sit here today, you’ve got the demand factor and you’ve got the capacity factor. On the demand side, that’s a macroeconomics trends thing. As we look at our shippers and the way they’ve been seeing the market and acting, they’ve been working on inventories here for, geez, it seems like almost a year now.

They’ve been trying to work them down and optimize them. And so have they got there? Are they there yet? You know can we expect demand to come back there? We’ll see where that heads. On the capacity side, we’ve been balancing on the bottom in terms of the cost per mile for carriers, in terms of where their break-even is at. And so qualitatively, I think capacity is probably coming out of the market. I think it’s tough for some of the carriers. They are probably more likely now to be parking the truck and finding employment elsewhere given the good economy. And so I think on the capacity side, we probably are close to the bottom. And so as you go forward, one of the things that we provide for you in terms of forecasting is on our website, chrobinson.com under Resources.

We’ve got a section called North American Freight Market Insights. And we provide a forecast of DAT line haul, cost per mile per van, for not only the remainder of 2023, but also we’ve added another year to it now and we’re giving you 2024. And if you look at that, I think it’s really important. And the reason we give you cost is because, as you know, in this market in truck load, price follows cost, and that gets right to the root of the issue for us here in Q2 and probably in Q3, which is because we have a significant portion of our business, that is contract, where the prices are established and set for most frequently one year. When the cost side of the equation has been coming down like it has, and it takes a while. There’s a lag there between when we’re renegotiating those contracts with shippers and so there’s a lag on pricing, and that’s been coming down.

And so one of the key things from a margin standpoint for us in the quarter was the fact that price came down 23%, but cost came down 19%, and that’s price catching up with cost, that’s margin compression for us. So it’s not what we would expect going forward. You see that through the cycle. That’s the point in the cycle that we’re at right now, and so there’s a little bit of extra margin compression there that’ll work itself out over time as cost leads price. And so when you’re back on that website looking at our forecast, you’ll see that we’ve got costs going up for the remainder of this year. We’re kind of at the bottom in terms of our forecast now. And then as you get to the holidays, you see a little spike up, and then it comes down a little bit, and then we see it really getting back to normal as you get through 2024, and so a pretty dramatic increase in costs there, and of course, price will follow as we get into new contracts with our shippers.

Arun Rajan: 40% operating margin?

Mike Zechmeister: Yes. So on the 40% operating margin, that’s the target that we’ve got out there for NAST. It’s been out there for quite a while. There are different dynamics going on there that impact that. But I’ll tell you what, we feel really good about the progress that we’ve made on productivity. We reported the shipments per person per day on NAST. We put a target out there to improve that by 15% on the year. We’re six months into the year, and we’re at 12% already. And that’s on the back of some really quality work from the teams, looking at where we’re spending our dollars, where we’re spending our time, and taking that waste out of our system and translating that into productivity. So you saw that on those numbers.

Those efforts will continue. We’ve got plenty to do there on that front. We’re really excited about Dave’s leadership as a lean practitioner. I believe in those principles. I’ve worked in that environment in the past. It’s a really methodical way to find waste and eliminate waste in an analytical, data-driven kind of way, and so we’ll continue to be able to take costs out there. We talked about machine learning and generative AI, and I really believe that Robinson is in a unique position in that regard. And unique, because we have a scaled business with an enormous amount of data, and because of our history, it’s to some extent unstructured. And so from a machine learning standpoint, the key for us has been to standardize and automate. But one of the great compliments from generative AI is the ability to go in and find inconsistencies, missing data, and actually take it through to getting that data and reinserting it and plugging it back into our machine learning.

And so there’s really some great complementary things there that can help us with our productivity and allow our folks really to focus on quality and more strategic work with our customers. So I think that inside of that you get growth, inside of that you get efficiency, and the growth and efficiency continue to keep us on our 40% operating income margin for NEST. I don’t know if Arun, if you’ve…

Arun Rajan: Yes, covered it, yes.

Scott Group : Thank you, guys.

Operator: Thank you. The next question is coming from David Vernon of Bernstein. Please go ahead.

David Vernon : Hey, good afternoon guys. Thanks for taking the questions. So Dave, first question for you is really kind of your background in some of the other, maybe more disruptive parts of the brokerage industry that have shown an ability to take quite a bit of share in very short periods of time. You know, what’s different about them versus what Robinson’s been doing recently? And then how do you think about, you know the moat of C.H. Robinson. Having been kind of on the other side of the barricades, you know throwing barrels of burning oil at the company, how do you think about the moat of C.H. Robinson?

A – Dave Bozeman: Yes, good question, and pleasure to virtually meet you as well. You’re right, I have been on a couple of sides of this. And number one, I’d say with the players coming in, I feel good about that because of the work we did at Amazon when I was there, and building some of this new entrant work here. So I understand it. I understand the importance of technology and the power that it can play in the digital transformation here. The key here from a Robinson perspective is I think you have both, and I know the importance of that scale. And I know having scale plus technology will drive that competitive advantage. And as we continue to – you know, someone asked me, said hey Dave, what’s something that surprised you, right, as you came to Robinson?

I’ll tell you, one of the things that surprised me as you come in and people will say, hey, that’s a fax machine company, right there, a older one. Actually coming in, some of the technology and state of the art things that Arun has put in and continues to grow was surprising, because this is a company that is really on the leading edge with technology and then adding scale to it. It just says, and I know this from being on both sides, that this is a competitive advantage and really allows the company to set the tone in the marketplace. So that’s how I’m answering that from both sides of it. And you know when you talk about the moat, it’s about just making sure we stay focused driving waste out. I just spent a lot of time over the last several weeks doing what I call a gimbal, that’s a go see, and you actually go see the work, and it taught me a couple of things.

One, the strength of our employees that are out there. But two, it allowed me to see the waste and the potential error states in the work so that you can fix them and fix them fast. And as we take this waste out, you’ll clearly see the speed of improvement on an already scaled strong business. That’s why I feel so happy about where we are and eventually when this upturn comes, where we will be from a positioning perspective.

David Vernon : Thanks for that. And maybe just as a quick follow-up, we’re talking a lot about lean, we’re talking a lot about process improvement. Can you talk to the mandate you have from the Board? Are we really just kind of focused on improving what Robinson does, the how of what it does, or are we still also looking at the what of it in terms of maybe some structural change to the business? I think there was some discussion with one of the activist shareholders a while back about a strategic committee. Can you give us a sense for kind of what the marching orders are from the Board, from your perspective?

Dave Bozeman: Yes, I will tell you, from the Board, I am locked in with the Board. I have a clear connection with the Board, and that is driving profitable growth for our shareholders and for this company and it’s pretty clear on where we’re going to do that. I’m taking my time to diagnose, analyze. I will speak to the Board on when I get through my diagnosis phase, but the true north is it’s continuing to improve this company with profitable growth, and I’m locked in on that. And the principles that I have found successful in this company, I’m just going to bring those forward in Robinson, and I know those are successful to do that.

David Vernon : All right, thanks so much for the time and look forward to meeting you.

Dave Bozeman: You got it. I look forward as well.

Operator: Thank you. The next question is coming from Christopher Kuhn of The Benchmark Company. Please go ahead.

Christopher Kuhn: Yes. Hi. Good afternoon, and good to meet you virtually, Dave. I wanted to just go back to your comments when you first started your conversation about taking a look at the portfolio and your thoughts there and what you’re going to be looking for going forward.

Dave Bozeman: Yes, nice to meet you as well. From a portfolio perspective, same thing. Its early days, right, on this, and I’m driving in, but my point is clear, is I’m looking at the entire business and as I said with an open mind on the portfolio. Make no doubt about it right, there is a clear focus, a driving focus within the organization on some of these, the core business and we all know truckload and making sure we drive truckload, LTL, Ocean Air, really driving that kind of focus on portfolios. And then with all the other businesses, continuing to evaluate how we best unlock that additional value for our shareholders. So it’s an open mind approach. It’s early days, I’m diagnosing, I’m diagnosing hard, and certainly we’ll come back to that, but just wanted to give a little bit of color to that.

Christopher Kuhn: Okay. Okay great. Thanks.

Operator: Thank you. The next question is coming from Jason Seidl of TD Cowen. Please go ahead.

Jason Seidl : Yes. Thank you, Operator. And Dave, good to meet you and welcome aboard. It sounds like everything’s still on the table as you’re in your diagnosis mode, so I’m going to sort of laser in on a few things. You talked a lot about some exciting opportunities in generative AI, and when I look at the electronic opportunities in brokerage, I think sort of the one sticking point has always been sort of getting the drivers over to sort of embrace technology. What are some things that you think CH can do better to sort of grow that presence in the driver’s side?

Dave Bozeman: Yes. Pleasure to meet you, and great question, because there’s a lot of ways to go into this. I mean Arun, why don’t you start off and I’ll finish on a couple of things here?

Arun Rajan : Yes, and I think for those of you who’ve been listening in for a while, you know this, when I came onboard, we made a sustained investment in our carrier-facing app and website, and we’ve seen huge uptake in usage in terms of digital bookings. And from a carrier-facing technology perspective, there’s two things that carriers care about, right. They care about sort of access to volume and loads, which we have, and they care about a better experience. So things like load recommendations, they are getting paid fast if they choose to. So a better experience and we’ve invested a lot in those areas. And like I said, digital bookings are up significantly, and more recently you probably saw us release or go-live with our refreshed Carrier Advantage program, which is our loyalty program.

And with that program we had certain new requirements of our carriers in terms of providing track and trace, automated track and trace through the app and through ELD. And what I can say is, carriers ask us – when we ask them for things, they say, well, okay tell us what you need, and when we make that easy to use in the app, they do it, and likewise we listen to them about what they want, and we invest in the carrier experience. So I would say compared to some of our competition, I’d say we have all the features that our carriers have asked for, and we have the volume of loads that no one can bring to the table.

Dave Bozeman: Yes, I would just plus one on that. I agree with Arun there in previous experience and seeing the teams build these things, that it’s about ease of use. It’s really about allowing those carriers to get the things that they want, such as pay and access to loads. So I think he hit on all the key points that when you do that, you really – and that spreads, right, when you hear about the ease of use. So it’s a good question. I’m glad you said it, because it highlights kind of where we are in this space and where we’re going to continue to go. So thanks for asking that.

Jason Seidl : Sure and I appreciate the color. As a quick follow-up, when I look at forwarding on the EBIT margins, if I sort of throw away the inflated numbers on the pandemic side, it looks like you guys have been in the sort of 15% to 20% range. We’re sort of probably going to be at the lower end this year at that. What’s it going to take to sort of get us towards the higher end and out of the way from the lower end? Is it just going to be an improvement in the overall macro or are there other things that you think are going to be low-hanging fruit that can get you there?

Mike Zechmeister : Yes, thanks for the question, Jason. You’re right, you have to look through the markets that we’ve experienced here over the past couple of years. Obviously, the comp this quarter is against all-time record highs on record highs from Q2 last year. But our long-term operating income margin goal for global forwarding is 30%. We feel like that’s achievable. The playbook there is in a lot of respects similar to the playbook that we’ve got on the NAST side. In other words, the team has done a really nice job developing their capability from a technology standpoint. There’s plenty of excitement out there around Navisphere 2.0, and that was launched, and the customers are having a better experience there. We’re seeing monthly average users go up, track and trace better, data quality better, feature usage by customers better, so on the tech side, that’s great.

Operational uniformity is an important element for them there; the standardization in a very complex business to create efficiency; generative AI can help as well there. Scale is something that the team has been working on. They’ve done a really nice job here through the ups and downs of the market, gained market share and increased the scale in that business, which will be important to getting the returns where we need them to be going forward. Probably the biggest highlight over the past year has been their expense management. So they’ve taken headcount down by about 12% year-over-year, and at the same time, they’ve been able to handle the loads and handle the volume that they’ve been working on. So that’s been a really nice enhancement that should really serve them well once we get back to some more normalization there.

And then the last thing I’d say is the development of their business. They’ve done a nice job of bringing some talent in, in some new geographies. They are looking at new verticals, and they’ve had a fair amount of success in new trade lanes and opening up to some places that they haven’t had a developed business in the past. They are getting excellent results. They are number three in the Trans-Pacific to U.S., number two in India to U.S., and number one in U.S. Oceana. So a lot of great progress from the team there and I think all those factors are important in coming together to get back to a more normalized 30% operating income margin.

Jason Seidl : No, we’re looking forward to seeing more progress. I appreciate the thoughts, and Dave, looking forward to seeing you in Boston next month.

Dave Bozeman: Absolutely, Jason. I’m looking forward to it.

Operator: Thank you. The next question is coming from Matthew Spahn of TCW. Please go ahead.

Matthew Spahn : Thank you, operator. And congratulations, Dave, and welcome to C.H. Robinson. I have a question about engagement. When a company has highly engaged employees, quality and delivery improve. In drawing on your prior experiences leading lean transformations, can you share one or two learnings that you can apply to foster a culture of deeper employee engagement at C.H. Robinson?

Dave Bozeman: Yes, great question Matthew and pleasure to meet you. This is the cold face for me, right. I’m meeting everyone for the first time here in some cases. Good question. Let me break that down for me, and I’ll be pretty pointed here. The one engagement that I see is, number one, you really do need to be locally self-critical about where you are on the things you do well and the things you don’t. And having the ability to see employees actually see waste in their processes, and be able to understand that, understand what their process flow should be versus what it is, they actually get engaged on that improvement. Trying to improve when you’re blind is one thing, but improving when it’s clear to you makes for engagement.

And so that’s one thing as I’ve gone through various companies. It’s the enlightenment and the education around where you are and then the humbleness to show how you can be better. Once that’s laid out, employees latch onto that, and I’ve seen it over four different companies.

Matthew Spahn : Thank you. I really appreciate that. I mean, it’s – I appreciate that. I mean, the culture matters most right now. I mean, you’re being I feel like the champion of lean, you know like the powerful cultural enabler, so welcome and good luck.

Dave Bozeman: Thank you, sir.

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

Stephanie Moore : Hi. Good afternoon, and Dave, congrats on your first earnings call.

Dave Bozeman: Thanks Stephanie. I appreciate it.

Stephanie Moore : So I think a lot was called out in your prepared remarks. I think a number of exciting opportunities going forward, but what do you think is probably the single one most important area you’ll place your focus on over the next 12 months, and what is your early read on how to achieve it? Thanks.

Dave Bozeman: Yes, that’s a good question Stephanie. It’s one that can take us well past the call, so I won’t do that, but I will give you some color on it. The focus is around driving waste out with the end game of profitable growth and really getting the organization to latch on to faster speed of decisions, speed of innovation, and ultimately looking around corners to set itself up for what is going to be an eventual turnaround. And that will put us in a very strong position with our scale and our balance sheet. And so, just focusing on that, and then also technology. We talked a bit about it. Arun’s talked a bit about it. These large language models, again don’t underestimate just the scale of Robinson, and then attaching that level of technology on top of that, I think can be a strong competitive advantage for us.

So, me focusing on driving that adoption of that type of technology, driving waste out of the system, this all adds up to a profitable growth setup for this company and really puts it in a strong position. I feel really, really strong around where we are, and that’s why I decided to take this move.

Stephanie Moore : Great. I appreciate the color. Thanks.

Operator: Thank you. The next question is coming from Bruce Chan of Stifel. Please go ahead.

Bruce Chan : Thank you, operator, and good afternoon everyone. Dave, congrats, it’s good to have you with us. I know it’s still pretty early in your tenure here, but I know you’ve hit the ground running. So maybe I could just coagulate some of the responses and get your perspective on where you see the biggest incremental cost buckets over the intermediate term. You talked a lot about lean and waste, but where specifically do you see the biggest addressable opportunities there?

Dave Bozeman: Yes Bruce, I’m going to double team you here a bit, because I’m 4.5, 5 weeks here on my diagnosis there. So I am going to call a comma, not a period on this question, because I do want to continue to diagnose. But I will tell you this, and as I’m talking with a ruling team, it’s breaking down this kind of life of an order and really going through the origination of this order all the way through the end, and then understanding those error states and pinch points along the way. That’s going to generate kind of where the cost opportunities are along that line, along that cycle. And I’m in the middle of doing that. I have some points that I see, but it’s not complete. And I think Arun sees some of that as well. So I will come back to you on that, because it’s a fair question, but I’m in the middle of it. Arun, would you add any other color to it?

Arun Rajan : Yes, I think the color I would add is similar things that we’ve been saying over the past, call it 12 to 18 months. When asked about sort of our path to operating leverage and our focus on digital, our focus has been looking at the end-to-end order lifecycle, from quoting to order tender, to order entry, to booking, then to appointments, track and trace, invoicing, the whole lifecycle, right? And the focus of our digital efforts has been looking at those points in the lifecycle that are disproportionately manually intensive, and going after either automation or making self-serve to our customers or carriers, or in some cases, the processes don’t even make sense, they are legacy processes and we eliminate them, so that’s been the focus.

And so, now you come in and kind of layer. So in a way, it’s about taking out waste. I think it’s just that we’ve come at it more from a technology perspective. I think Dave’s going to come in here, and I think he’s going to inject lean principles. And as we get the tailwind of Gen-AI, I believe the things we’ve been talking about for the past 12 or 18 months just will accelerate.

Bruce Chan : Okay, that’s super helpful. And Dave, fair point about the brevity of your tenure. So maybe just to follow-up a little bit on that and direct the question more again at you Arun. We’ve had some nice reductions here in personnel cost. Is the tech and the platform at a place now where we can grow in the next cycle without adding additional resources or do we have a little bit more work to do?

Mike Zechmeister: Yes, so that’s a great question. We obviously have more work to do, but we’ve talked about 15% productivity improvements this year. The work that we’ve done to enable that productivity is structural. We can actually measure fewer touches in our system as a result of that work, because we’ve got newer automated track and trace information from our carriers, right, which means we don’t have to call carriers for status. Similarly, we’ve reduced the number of automation – sorry, reduced the number of appointment tasks by automating the greater proportion of them. So we actually see touches go down, touches per load go down in a way that we know it’s structural as we go into the cycle, a positive cycle here.

Bruce Chan : Great. Very helpful. Thank you all.

Dave Bozeman: Yes. Thank you.

Operator: Thank you. We’re showing time for one final questioner today. Our final question will be coming from Chris Wetherbee of Citi. Please go ahead.

Chris Wetherbee : Hey, thanks. Good afternoon, and thanks for squeezing me in. Congrats, Dave. I guess one of the things I guess I’ve been sitting listening to the call, and there’s been discussion sort of big picture and the Generative AI opportunity, those kinds of things. Maybe a two-parter here. Short-term, what do we think headcount looks like through the rest of the year? Are there further opportunities as we move through the rest of the year on the cost? It sounds like you guys are making maybe better progress towards those full-year goals, so that would be interesting. And then the second one kind of comes, we’ve talked about the segment level operating margin targets, relatively similar to what they’ve been historically.

And big picture opportunities that maybe would generate greater productivity, potentially cost savings down the road. So just kind of square those two, the NAST and the global forwarding margin targets relative to the opportunity you guys are talking about with some of these productivity tools. Should there be upside or is it the same? I just want to make sure I understand that.

Mike Zechmeister : Yes, let me take that. So first of all, you’re right. We’ve had great progress on our headcount, down 13% year-over-year. And because of the efforts and initiatives that we have ongoing in place that will continue, and really, I think we’ve got a great pipeline of things to work on. We’ll continue to draw that headcount down as we go forward and get to some of these things. Although, I would say the back half of ‘23 won’t be nearly as dramatic reductions as we saw in the first half. Now, when you talk about those operating targets and the macro things, we’re trying to help you understand that we feel like we’ve got some accelerants here in terms of our ability to improve our performance, our efficiency, and get us to growth.

And the headlines on those are lean principles, the diagnosing of our issues, finding waste, eliminating the waste, whether that’s with technology, with process, with adoption, with giving self-serve to customers or carriers, these kinds of things, and so that’s one accelerant. The other accelerant as we talked about, is really the combination of the machine learning work that we’ve been doing, but then enabled by Generative AI, where it can go in and it can find the exceptions and the work that really our people have been handling here historically. Where you build a model that handles things, if everything’s been input properly, and then in many cases our staff was going after the exceptions, and so now, with Generative AI, we’ve got the ability to do that in a more automated way and really enable our folks in ways that we haven’t before.

So those are the key headlines.

Chris Wetherbee : Okay. But they don’t necessarily change the curve of those targets. They are just sort of additive to the improvement off of the sort of where we are in the macro is the right way to think about it.

Mike Zechmeister : Yes, the progress we’ve made so far. Yes.

Chris Wetherbee : Okay. Thanks again. And congrats, Dave.

Dave Bozeman: Thank you, sir. Appreciate it.

Operator: Thank you. At this time, I’d like to turn the floor back over to Mr. Ives for closing comments.

Chuck Ives : That concludes today’s earnings call. Thank you everyone for joining us today and we look forward to talking to you again. Have a great evening.

Operator: Ladies and gentlemen, thank you for your participation and interest in C.H. Robinson. This concludes today’s event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.