C.H. Robinson Worldwide, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2024 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 1, 2024.
Thank you, Donna, and good afternoon, everyone. On the call with me today is Dave Bozeman, our President and Chief Executive Officer; Arun Rajan, our Chief Operating Officer; and Mike Zechmeister, our Chief Financial Officer.
Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Our first quarter results and adjusted EPS of $0.86 reflects a change in our execution and discipline as we began implementing a new lean-based operating model.
Thanks, Dave, and good afternoon, everyone. As Dave mentioned, we increased the rigor and discipline in our pricing and procurement efforts in Q1, resulting in improved AGP yield across the contractual and transactional portfolios in our NAST business. With continued investment in our pricing science, contract management and digital brokerage technology and deployment of our new operating model, we are responding faster than ever to dynamic market conditions with the tools and capabilities we've developed.
Thanks, Arun, and good afternoon, everyone. The continued soft freight market conditions outlined by Dave resulted in first quarter total revenues of $4.4 billion and adjusted gross profit, or AGP, of $658 million, which was down 4% year-over-year, driven by a 7% decline in NAST and partially offset by a 1% increase in Global Forwarding.
Thanks, Mike. I want to commend our people for their performance in what continues to be a challenging market. I believe our team of logistics experts are the best in the business, and they continue to embrace the innovative technology that is acting as a force multiplier and making the industry's best people even better. I'm excited about the work that we're doing to reinvigorate Robinson's winning culture and instilled disciplined with our new operating model.
[Operator Instructions] Today's first question is coming from Scott Group of Wolfe Research.
So you mentioned this new operating model a lot. I just don't know that we got any color on what it actually is, so maybe just some details of what's actually changing here. And then just as I think about this net revenue inflection in March, is this just truckload spot rates that moderated throughout the quarter? How sustainable is this? Does this -- do we get positive net revenue in Q2? And I guess, what about this new model, what happens when we see the eventual spike in spot rates as gross profit per load gets squeezed again? So I know there's a lot, but...
Yes. Scott, this is Dave. Thanks. A big question there. Let's unpack that a bit. First one on the operating model, I just want to start by saying, hey, I'm pretty serious about this model, and I've got the experience with this model. I've done it in other places, and I know it works.
Yes. So Scott, you asked about the inflection that we saw in March, and you're referring back to the comments I made about our enterprise AGP per day, and we went from down 3% in Feb to up 7% year-over-year in March.
Scott, just a little bit more on that in terms of how we actually achieved some of these results and input to the operating model, is our revenue management practice that we discussed in the last call. And while we're not immune to market inflections, but the point is we've invested in pricing science, costing science and technology that allows us to respond quickly to whatever event causes an inflection, whether that be short term or long term. And January, you saw a short-term inflection due to weather, but we had signals that we could respond to quickly and adjust based on revenue management principles.
And just to finish up here, Scott, it's -- I mean, it comes down to this company. The behaviors are changing. I mean if you look at the fidelity of our conversations, the speed of it, the ability to fail fast and really get after what we see could be broken, that's really starting to change. I'm trying to put on the table, what the front too. Like what's the difference here?
The next question is coming from Jeff Kauffman of Vertical Research Partners.
Congratulations to see numbers like this. Mike, a question on the working capital because I want to come back to this. Thank you for explaining that the ocean rates were driving the use of working capital. But I guess given what's going on in the world, is this going to continue to be a drain? And could we be looking at negative free cash flow for the first half or 2/3 of the year?
Yes. Thanks for the comments, Jeff, and the question. And as you've seen how the cost of purchase transportation impacts our working capital through the cycle, you've seen that when costs and therefore, prices start to go up, because our DSO is greater than our DPO, we tend to absorb cash as we ride that inflection up. And so that may very well be in our future.
Okay. And if we weren't having this unusual increase in some of these ocean rates and things going on around the world, just seasonally, should we be seeing better free cash flow as the year moves forward?
Yes.
The next question is coming from Christopher Kuhn of Benchmark Company.
Dave, can you maybe just talk about any changes to the compensation structure as part of this new model and if some of those changes impact maybe some of your better [ agents ]? And how are people reacting to some of the changes that you've implemented?
Yes. Thanks a lot, Christopher. On -- it's a good question. I like it because part of our operating model, we've talked about discipline and also connecting the company throughout. And part of that would be our compensation structure, and we feel good about that in 2 forms here.
Okay. And just maybe any thoughts on -- you've been there now for over a year, the portfolio review, some of the noncore businesses. I don't know if you have any thoughts on that and where those would be in the future.
Yes. As I said before, 4 Ps, people, product, process portfolio, that's going to -- that's not just static. That's dynamic. I'm going to continue to look at the company under those 4 Ps, but I've also said we're going to drive focus, right, and focus within our company in North America truckload, LTL, ocean and air. That's really just getting the company back to having that focus and driving that very well and implementing and performing very well within those kind of core focus stacks.
The next question is coming from Stephanie Moore of Jefferies.
Dave, I appreciate -- I think you do a great job of kind of outlining kind of your future and your vision for the company. And I think we clearly understand where you're trying to go and have certainly made some progress here at year-end into the first quarter. But could you maybe give us a little bit of insight in terms of what has been implemented across the organization to allow you to either move faster or follow the inputs? I mean things like going from being more centralized to more centralized, I don't know if it's installing new systems that now give you some daily KPIs, comp structure changes, any kind of more tangible examples that's been driving some of these results?
Yes. Thanks for the question. There's been a number of things in these -- the first 10 months. I mean as we talked and we talked in person and on the calls, the first thing is to really diagnose. I mean you can't start any type of fix or treatment if you don't really understand or, as I said before, I needed to go to Gemba, right? That's goal to the work and really understand the company.
Got it. And then just a follow-up to a question that was asked earlier. In terms of the AGP per day inflection that we saw kind of going from January to positive in March, I'm kind of -- we kind of all hear the same trends or we've been hearing the trends for the last week or so about it still being a pretty weak freight environment. Rates from what we track haven't changed too much. So can you really talk a little bit about what you were able to do to execute on kind of such an inflection in results?
Yes, Stephanie, I'll take that one. And so you hear from Dave. You've heard about our operating model. There's execution inside that. We could pile on in terms of some of the examples. Dave talked about incentive changes coming into this year, the balanced volume and margin expectations on the business.
Yes. I'll just add that in terms of optimizing yield, this goes back to revenue management. And I'd say I'd describe it as Dave has the operating model installed, and I'd describe it as active management of optimizing volume and AGP. That happens every day, and it's a marriage of our science and our people. And I'd say we just manage it much more actively than we ever have, both on the cost side as well as a pricing side. That's what yields the AGP.
The next question is coming from Elliot Alper of TD Cowen.
This is Elliot Alper on for Jason Seidl. I wanted to ask about ocean capacity. We've heard some other ocean players that shippers have already adapted to a lot of the concerns whether it be the Red Sea or Panama Canal that appears to have been easing a bit. I guess we've seen spot rates come down notably from mid-February levels. I guess how should we think about pricing sequentially and maybe the puts and takes on growing the ocean business in the second quarter?
Yes, Elliot, this is Mike. I'll take that question. So I think our view is consistent with what was implied in your question. And as the Red Sea disruptions happened as the Canal issues kind of came and have now -- haven't completely been solved but are more solved, that repositioning of capacity really puts a pinch on the market and what drove prices up.
Yes, Elliot, and just to pin a couple of things on that as well. I mean we've said this in the past. We're -- our -- on average, our contract business for Global Forwarding is 30% to 40% in contract. So the remaining 60%, 70% of spot, obviously, we have an opportunity to do business in.
The next question is coming from Tom Wadewitz of UBS.
Yes. Wanted to see if you could give some thoughts on -- I know you talked about the progression. Within April, are you seeing kind of a similar dynamic to what you said in margin, that improvement? And is that kind of more of a volume improvement? Or is that a gross margin percent improvement if you think about NAST?
Yes, I'll take your productivity side and then maybe pass it off to take another shot at the trends going forward in the market. But on the productivity front, the shipments per person per day front, we really have to be flexible to adapt our productivity delivery based on what kind of market we're in.
Yes. And I think -- Tom, this is Dave. The -- adding on to that, I -- where the team is doing a really nice job is -- at the end of the day, you have to look at work differently and take it away, the manual work that in a sense is capacity, right, I mean when you -- at our scale, when we have our people doing nominal task, that eats up capacity of a person.
Does anybody else want to add any comments on kind of April and what it looks like and what might be driving it, kind of volume or gross margin?
Yes. I think we've covered that.
For April -- or sorry, I might have just missed that earlier.
Yes. We made comment earlier about Q1 and the progression that we made Q1 and our confidence in some of the progress we've made and the various elements inside the operating model. And as we move into Q2, just the way that a typical Q2 unfolds is that we get the produce business. We get the beverage business, and that strength is usually in the back half of Q2 for our business model.
Okay. So the year-over-year is still looking good.
The next question is coming from Jonathan Chappell of Evercore ISI.
Just a quick one on the competitive landscape. You're winning share. You've done better than other markets for 3 straight quarters, but at the same time, you're being disciplined on price.
Yes. I would -- thanks for the question. I think it's both. This disciplined execution on our side, we've talked about that a lot. But clearly, there's pressure in the brokerage industry. And I think you've seen some of the exits. You saw Convoy last year. And I think we continue to get reports of smaller brokers who are unable to sustain this market. So I think it's both.
That makes sense. Do you have a sense, just as a quick follow-up, that the broker business at large is closer to balance, maybe closer to, let's call it, 2019 levels than the truckload market from an asset-heavy perspective is?
No. Jonathan, this is Dave. I would say it's not at the levels of 2019. We don't see that. Just as we see the influx on capacity and carrier capacity, we -- while that's coming down, we don't -- that's not at levels that we think it should be at this period in the cycle. But as far as brokers specifically, no, I would say that we're not at those levels of 2019.
At this time, I'd like to turn the floor back over to Mr. Ives for closing comments.
Thanks, everyone, for joining us today. That concludes today's earnings call, and we look forward to talking to you again. Have a great evening.
Ladies and gentlemen, thank you for your participation. 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.