C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q4 2022 Earnings Call Transcript

C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Fourth Quarter 2022 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 live question and answer session. As a reminder, this conference is being recorded, Wednesday, February 1, 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; Arun Rajan, our Chief Operating Officer; and Mike Zechmeister, our Chief Financial Officer. Scott and Mike will provide a summary of our 2022 fourth quarter results and our outlook for 2023. Arun will provide an update on our path to a scalable operating model to improve the customer and carrier experience. 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 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 Scott.

Scott Anderson: Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. I’d like to start today’s call by expressing my appreciation and the Board’s gratitude for the contributions that Bob Biesterfeld made to C.H. Robinson over his 24 years with the company, including his three years as CEO. Under Bob’s guidance, C.H. Robinson navigated the challenges presented by the pandemic and the ongoing supply chain disruptions. And he played an important role in positioning Robinson for long-term success. We wish Bob all the best. In order to accelerate C.H. Robinson’s strategic initiatives and take the company into its next chapter, the Board felt that a change in leadership was needed. Jodee Kozlak, the newly appointed Chair of the Board, is leading the Search Committee to find a new CEO.

With Jodee’s background and expertise, I can’t think of anyone more qualified to lead the Board and the search process. To give you a little of my background, I’ve spent over 10 years as a Director here at Robinson and the last three years as Chairman of the Board. I’ve spent the first 25 years of my career at Patterson Companies, most recently as CEO from 2010 to 2017 and also Chairman from 2013 to 2017. I look forward to working closely with Jodee and the Board as well as the whole Robinson team in the coming weeks and months. I’m excited to bring my experience and my knowledge of Robinson to the role of Interim CEO. I’m leveraging the relationships I have with the senior leadership team to ensure that we continue delivering superior global services and capabilities to our customers and carriers while continuing to execute with great focus on our sustainable growth strategy.

During my first few weeks as Interim CEO, I’ve been meeting with our customers and employees who are highly engaged and motivated to win. And I’m confident in our ability to navigate this transition and deliver for our customers. Throughout the transition, we’re increasing our focus on delivering a scalable operating model to lower our costs, improve the customer and carrier experience, and foster long-term profitable growth through cycles. The current point in the cycle is one of shippers managing through elevated inventories amidst slowing economic growth, causing unseasonably soft demand for transportation services. At the same time, prices for ground transportation and global freight forwarding are declining due to the changing balance of supply and demand.

While the correction in the freight forwarding market was certainly expected, the speed and magnitude of the correction in only two quarters was unexpected, with ocean rates on some trade lanes already back to pre-pandemic levels. As a result, our operating costs were misaligned. As was announced on our third quarter earnings call, we have taken actions to structurally reduce our overall cost structure. The actions are expected to generate net annualized cost savings of $150 million by Q4 2023 as compared to the annualized Q3 2022 run rate. If growth opportunities or economic conditions play out differently than we expect, we’ll adjust our plans accordingly. I believe we’re uniquely positioned in the marketplace to deliver for our shippers, carriers and shareholders through a combination of our digital solutions, our global suite of services and our network of global logistics experts.

Now let me turn it over to Mike for a review of our fourth quarter results.

Mike Zechmeister: Thanks, Scott, and good afternoon, everyone. Our Q4 financial results reflect the price declines and slowing demand in the freight forwarding and surface transportation markets that Scott referenced earlier. Our fourth quarter total company adjusted gross profit or AGP was down $88 million or 10.3% compared to Q4 of 2021 driven by a 39% decline in Global Forwarding and partially offset by a 5.7% growth in NAST. The market softness was also prominent on a sequential basis, with total company AGP down 13%, including a 24% decline in Global Forwarding and an 11% decline in NAST. On a monthly basis, compared to Q4 of 2021, our total company AGP per business day was down 10% in October, down 7% in November and down 14% in December.

In our NAST truckload business, our volume declined on a year-over-year basis for the first time in seven quarters with shipments down 4%. Within the fourth quarter, monthly volume declined sequentially from October through December as freight demand weakened. Our AGP per truckload shipment increased 6.5% versus Q4 last year due to an increase in our contractual truckload AGP per shipment. On a sequential basis, however, our truckload AGP per shipment came down 6.5% but remained above our 10-year average. During Q4, we had an approximate mix of 65% contractual volume and 35% transactional volume compared to a 55-45 mix in the same period a year ago. Routing guide depth of tender in our Managed Services business, which is a proxy for our overall market, declined from 1.3 in the third quarter to 1.2 in the fourth quarter, which is the lowest level we’ve seen since the pandemic impacted second quarter of 2020.

The sequential declines in our truckload linehaul cost price per mile that we experienced in Q1 through Q3 continued in Q4 as excess carrier capacity, combined with slowing demand, led to the softening market conditions. This resulted in an approximate 24% year-over-year decline in our average truckload linehaul cost paid to carriers, excluding fuel surcharges. Our average linehaul rate billed to our customers, excluding fuel surcharges, decreased year-over-year by approximately 21%. With the cost down 24% and price down 21%, we saw a 3% increase in our NAST truckload AGP per mile on a year-over-year basis. In our Global Forwarding business, higher customer inventory levels, combined with softening demand, contributed to significantly reduced import prices for ocean and airfreight.

In Q4, Global Forwarding generated AGP of $188.7 million, representing a year-over-year decrease of 39% versus the record high fourth quarter in 2021, which was up 72%. With these results, our ocean forwarding AGP declined $89 million or 43% year-over-year compared to an 86.5% growth in Q4 of 2021. The Q4 results were driven by a 36.5% decrease in AGP per shipment and a 9.5% decrease in shipments. AGP in our airfreight business declined by $33 million or 51.5% year-over-year compared to a 92% growth in Q4 of 2021. This was driven by a 40% decline in AGP per metric ton and a 19.5% decrease in metric tons shipped. Despite the soft market, the forwarding team continues to add new customers and diversify our industry verticals and trade lanes. In Q4, approximately 50% of our AGP from new business was generated from trade lanes other than the trans-Pacific lane.

Now turning to expenses. Q4 personnel expenses were $427.3 million, up 1.7% compared to Q4 last year, including $21.5 million of severance and related charges driven by the restructuring that we initiated in November. The restructuring-related costs were partially offset by a decrease in equity compensation as we reversed some previously accrued expense due to financial results that came in lower than previously expected. On a sequential basis, Q4 personnel expenses declined $10.2 million. Excluding the restructuring charges in Q4, personnel expenses declined $31.7 million sequentially due to lower incentive compensation and lower salaries and benefits associated with reduced headcount. Our Q4 average headcount declined 2% versus our Q3 average.

The workforce reduction initiated in November affected approximately 650 employees. While nearly 150 of those employees had left the company prior to December 31, over 600 had exited as of early January. As we continue to make progress on delivering a scalable operating model, we expect our headcount to decline throughout 2023 as productivity improves. For 2023, we expect our personnel expenses to be $1.55 billion to $1.65 billion, down approximately 7% at the midpoint compared to our 2022 total of $1.72 billion, primarily due to reduced headcount. Excluding the restructuring charges in Q4 of 2022, the midpoint of our 2023 guidance for personnel expenses is down approximately 6% year-over-year. Moving on to SG&A. Q4 expenses of $176.8 million were up $27.9 million compared to Q4 of 2021 driven primarily by $15.2 million of restructuring charges and a year-over-year increase in legal settlements, partially offset by a decrease in credit losses.

The restructuring charges in SG&A primarily included an impairment to internally developed software related to the reprioritization of our technology investments that Arun will speak to shortly. Our approach to investments and investment prioritization is more data-driven and more focused on delivering a scalable operating model than in the past, which is improving the value of the benefits we are delivering and allowing us to pivot more quickly if investments are not delivering as expected. For 2023, we expect our total SG&A expenses to be $575 million to $625 million compared to $603.4 million in 2022. The slight decrease at the midpoint includes an expected decrease in legal settlements in the absence of two onetime items that occurred in 2022.

Those include the $15.2 million Q4 restructuring charge and the $25.3 million Q2 gain from the sale and leaseback of our Kansas City regional center. 2023 SG&A expenses are expected to include approximately $90 million to $100 million of depreciation and amortization expense compared to $93 million in 2022. Q4 interest and other expense totaled $42.5 million, up $24.1 million versus Q4 of last year. Q4 of 2022 included $24.8 million of interest expense, up $10.7 million versus the prior year, primarily due to higher short-term average interest rates. Q4 results also include a $16.9 million loss on foreign currency revaluation, up $10.4 million compared to Q4 of last year driven by the relative weakness of the U.S. dollar. As a reminder, the FX impacts are predominantly non-cash gains and losses on intercompany balances, which is why they are not hedged.

Q4 tax rate came in at 20.9%, bringing our full year tax rate to 19.4%. We expect our 2023 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal, state or international tax policy. Q4 net income was $96.2 million, and diluted earnings per share was $0.80. Adjusted or non-GAAP earnings per share, excluding the $36.7 million of restructuring charges, was $1.03, down 41% compared to Q4 of ’21, which was up 61% versus the prior year. Turning to cash flow. Q4 cash flow generated by operations was a record $773.4 million compared to $75.9 million in Q4 of 2021. As we have talked about in prior earnings calls, we were expecting an improvement in working capital when the cost and price of purchase transportation came down.

The $698 million year-over-year improvement was driven by a $650 million sequential decrease in net operating working capital in Q4 due to the declining cost and price of ocean, air and truckload in our model. Conversely, Q4 of last year included a $200 million sequential increase in net operating working capital as costs and prices were rising. If you look back at the period when cost and price of purchased transportation was rising from the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1.5 billion. Between Q3 and Q4, as the cost and price of purchased transportation has come down, we have realized over $1 billion of benefit to working capital and operating cash flow. That benefit has come on a lag basis based on our DSO and DPO.

Driven by the increased free cash flow generation in Q4, we returned $507 million of cash to shareholders through $438 million of share repurchases and $69 million of cash dividends. The Q4 cash returned to shareholders significantly exceeded net income and was up by 128% versus Q4 last year driven by the record cash flow. Consistent with our capital allocation strategy, to the extent that we have excess cash after managing through our commitments, investments and holding to an investment-grade credit rating, we are committed to returning that cash to shareholders through share repurchases. Capital expenditures were $27.8 million in Q4, bringing our full year capital spending to $128.5 million, up $58 million compared to 2021. The increase was primarily due to an increase in internally developed software.

Travel mania/Shutterstock.com

We expect our 2023 capital expenditures to be in the range of $90 million to $100 million. Now on to the balance sheet highlights. We ended Q4 with approximately $1.34 billion of liquidity comprised of $1.12 billion of committed funding under our credit facilities and a cash balance of $218 million. Our debt balance at the end of Q4 was $1.97 billion, up $55 million versus Q4 last year, primarily driven by our expanded capacity to borrow given the strong EBITDA performance. Our net debt-to-EBITDA leverage at the end of Q4 was 1.29 times, down from 1.42 times at the end of Q4 last year. As I mentioned, our capital allocation strategy is based on maintaining our investment-grade credit rating, which allows us to optimize our cost of capital. As we anticipate reduced earnings in 2023 given the strong results in the first half of 2022, we are planning for a lower level of debt to deliver our leverage targets.

To the extent that we reduce our debt levels, this may reduce the amount of cash used for share repurchases. In December, our Board authorized and declared a 10.9% increase in our regular quarterly dividend taking it to $0.61 beginning with the dividend that was paid in January. We have now distributed uninterrupted dividends without decline for more than 25 years. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our share repurchase program as important levers to enhancing shareholder value. With that, I’ll turn the call over to Arun to walk through our strategy to deliver a scalable operating model and strengthen our customer and carrier experience.

Arun Rajan: Thanks, Mike, and good afternoon, everyone. During the fourth quarter, we continued to focus our efforts on working backwards from customers and carriers needs to build a scalable operating model. A scalable operating model improves customer and carrier experience and improves service levels while simultaneously reducing our cost to serve. These efforts include operationalizing our information advantage at scale by giving customers insights around price and coverage and providing features to carriers that improve their utilization and cash flow. Increased digitization is a key element of the scalable operating model. There are a number of data points that demonstrate our progress in 2022, including 183% increase in loads booked digitally by carriers and increased digitization across the board as evidenced by 2.3 billion digital transactions with customers and carriers, which represented a 30% increase year-over-year.

In 2023, we will continue to deliver meaningful improvements to our customer, carrier and employee experience by accelerating the digital execution of all touch points in the life cycle of the road, including order management, appointments, in-transit tracking, cash advances and financial and documentation processes. We made progress on this front in Q4 as well with the automation of appointment-related tasks, increasing 34% year-over-year and in-transit tracking automation increasing by 450 basis points versus Q3. We are focused on opportunities to automate or make self-serve those processes that are core to our operating model, which we expect will enable us to decouple volume and headcount growth and drive increased productivity while simultaneously improving the customer experience and service levels.

Throughout 2023, we’ll provide updates on the progress we’re making on shipments per person per day, which is a key metric to measure our productivity improvements. During the recent restructuring efforts, we continued our ongoing evaluation and prioritization of our tech and software projects. Through the assessment of those projects, we determined that some were no longer relevant to the acceleration of our scalable operating model, and we incurred the restructuring charges that Mike described earlier. The remaining projects are better aligned to improve the customer and carrier experience and reduce our cost to serve. And therefore, we’re allocating more of our investments to those projects. We’ve also taken steps to align compensation and incentives to support our strategic priority of creating a scalable operating model, which is foundational to being the low-cost operator, which ultimately gives us the pricing flexibility to unlock and accelerate long-term market share growth while delivering our long-term operating margin targets.

With that, I’ll turn the call back over to Scott for his final comments.

Scott Anderson: Thanks, Arun. As inflationary pressures continue to weigh on global economic growth and freight markets present cyclical challenges, we need to continue evolving our organization to bring great focus to our highest long-term strategic priorities, including keeping the needs of our customers and carriers at the center of what we do while lowering our overall cost structure by driving scale. I believe in the strategy that the team is executing on to deliver a scalable operating model. 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 will drive share gains and growth. And as Arun said, we expect these efforts will also improve our productivity, which will reduce our operating costs and lead to improved returns for our shareholders.

I’d like to close by saying thank you to our employees for persevering during the period of extended market disruption and the market correction that is followed and for continuing to provide industry-leading service to our customers and carriers. This concludes our prepared remarks. 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: Today’s first question is coming from Jack Atkins of Stephens. Please go ahead.

Jack Atkins: Good afternoon. And thank you for taking my question. So Scott, if I could address this to you. The change in leadership at the CEO level would indicate that the Board believes that a change in strategic direction is necessary. But if I listen to the message on the conference call today, it’s very similar to the message three months ago from the company. So I guess my fundamental question here is, what is actually changing at C.H. Robinson today? And as you think about the qualities that you’re looking for in the permanent CEO, what are those? And where does the Board want to take this company over the long term? Thank you.

Scott Anderson: Yes. Thanks, Jack. Appreciate the question. A few things. First of all, the Board was unanimous in our decision. And it really was around an opportunity for this to be an inflection point of performance at the company, and new leadership being a component of that in terms of making that happen. As I said in my prepared remarks as well, we were also unanimous in our appreciation of Bob’s contribution to the company over his career. I think this is a tremendous opportunity here at Robinson and couldn’t be more excited after the five weeks I’ve spent with our people and in the field. Our core strategy of building out our operating model going forward, I think, is solid. Obviously, new eyes in terms of a new CEO will give some perspective to that as well.

But strategically, we are absolutely in a spot with global supply chains becoming more complex to be a go-to partner in the future. So this is not a shift in strategy for the company. This is really a shift in sort of accelerating performance and moving at a faster pace.

Jack Atkins: And then in terms of the qualities for the next CEO, can you maybe talk about that for a moment?

Scott Anderson: Yes. As I mentioned, Jodee Kozlak, our Board Chair now is the Head of the Search Committee. Just for background, Jodee was the former Chief HR Officer at Target. So she’s familiar in processes like this. We’re using a leading executive search firm that’s helping the Board. We’re going to take our time. We’re going to be thorough and inclusive. And we’re going to be broad in terms of the type of qualities we’re looking at for the next CEO. Like I said before, this is a tremendous opportunity for somebody. We’re looking for an experienced operator with sharp strategic thinking and someone who really can take Robinson to the next level. I think the next 10 years for Robinson are going to be the most exciting for the company going forward. So the opportunity here is fantastic for the next leader.

Jack Atkins: Okay. Thank you for the time.

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

Bruce Chan: Thanks, operator. And good afternoon everyone. Maybe just a follow-up on the strategic question and maybe in a little bit more of a pointed way. But when you think about your customer base, how many of them use you for end-to-end service? How many are both NAST and Global Forwarding customers? And then when you think about Bob’s kind of statement before that Global Forwarding was an intrinsic part of Robinson, do you feel the same way about that division going forward? Thank you.

Scott Anderson: Yes. First, why don’t I turn it over to Mike for some specifics on that, and then I’ll get my perspective.

Mike Zechmeister: Yes. As we look at the combination of NAST and Global Forwarding, we’ve seen some great opportunities from a cross-selling standpoint between the two. And as we pointed out, if you look at the last 12 months, we’ve had over half of our revenue in AGP comes from customers who use both, Surface Transportation and Global Forwarding, services. We’ve looked deeper into this. We could probably do a better job at taking advantage of the relationships on both sides, but we have had some pretty compelling results. And I’ll share with you one of the studies that we did where we looked at the last five years and we looked at customers who use both NAST and Global Forwarding versus customers who use one or the other. And the five-year compound annual growth rate for customers who use both was 400 basis points better than those who use one or the other.

So we’ve been able to leverage customer relationships, bring business from NAST customers to Global Forwarding customers and vice versa. We believe as we think about customers and what they need and what they want that we can bring a full complement of services that they really need where they can get stuff from center Asia, center China to center U.S. with us and do it in a way that is value-added to their supply chain. So we believe in the ability to leverage both of those businesses, and that’s our plans going forward.

Scott Anderson: Yes. And I’ll add on to that. I was on the board in 2012 when we did the Phoenix acquisition, which really was sort of the baseline of our modern Global Forwarding business. And we have built a substantial business in Global Forwarding and I think have just begun to see those cross-selling benefits. I’m a believer that, as I said before, global supply chains are getting more complex, and partners that can solve problems and I’ve seen that already in customer meetings I’ve sat in over the last five weeks can create tremendous value for multiple players, including Robinson. That being said, as a Board, we always stress test the portfolio and challenge ourselves as to the best ways to drive value for customers and shareholders.

So I would say — particularly, I would say, after the last two years, we have a great franchise in our Robinson Global Forwarding business, and we have a tremendous opportunity in a world where supply chains are just so much important post pandemic.

Bruce Chan: And just a quick follow-up there. You all talked a lot about this new, I guess, global platform and some of the tech changes that you’re making. Arun, I didn’t hear a whole lot about the Global Forwarding side of that. Maybe just some quick comments about what’s in store on the technology side for Forwarding. And ultimately, do you feel that Navisphere is the right platform there?

Arun Rajan: Yes. In terms of scalable operating model, we think of that cross divisionally across NAST and Global Forwarding. The opportunity, as it relates to creating a scalable operating model, exists in Global Forwarding just as much as NAST. In terms of an increased focus in that context, Global Forwarding is already down the path, but we believe there are acceleration opportunities that the product and tech organizations will be focused on starting in the back half of this year. As it relates to Navisphere, I think of Navisphere as a system of record. There is a lot of — much of the work that we’re doing that’s probably around Navisphere in terms of how we harvest the data out of it, run our algorithms and present it back to customers and carriers in whatever form they choose to consume it.