Yahoo Finance C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q1 2024 Earnings Call Transcript
C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) Q1 2024 Earnings Call Transcript May 2, 2024
C.H. Robinson Worldwide, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good Afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2024 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 is being recorded, Wednesday, May 1, 2024. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations. Please go ahead.
Chuck Ives: 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. I'd like to remind you that our remarks today may contain forward-looking statements. Slide 2 in today's presentation lists factors that could cause our actual results to differ from management's expectations. 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'll let you know which slide we're referencing. Today's remarks also contain certain non-GAAP measures and reconciliations of those measures to GAAP measures are included in the presentation. 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. 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. And although we continue to battle through an elongated freight recession with an oversupply of capacity, I'm optimistic about our ability to continue improving our execution regardless of the market environment. As part of my initial diagnosis of the company, I identified an opportunity to refocus our mindset on root causing and definitively solving problems, including making decisions amid uncertainty and acting with greater clock speed. Following my diagnosis, I brought in additional talent to assist the senior leadership team and me on improving operational execution across the business and to deploy a new operating model that is rooted in Lean methodology.
In Q1, we began deploying the new model at the enterprise, divisional, and shared service levels, which is evolving our execution and accountability by bringing more structure to our continuous improvement cadence and culture. This new way of operating is starting to enable greater discipline, transparency, urgency, and consistency in our decision-making based on data and input metrics that can reliably lead to better outputs. It's also setting the tone of how we operate and hold ourselves accountable, helping us make systemic improvements, build operational muscle, and drive value at speed. We began to see the benefits of our new operating model in our Q1 execution. As a result of disciplined pricing and capacity procurement efforts, we executed better across our contractual and transactional portfolios in our NAST business in Q1 and in particular, in our truckload business.
This resulted in improved optimization of volume and adjusted gross profit per truckload, which improved sequentially despite an increase in our linehaul cost per mile for the full quarter versus Q4. Additionally, our truckload volume reflects growing market share and we outpaced the market indices for the third quarter in a row. In what continues to be a difficult environment, our resilient team of freight experts is responding to the challenge and embracing the new operating model and the innovative tools that we continue to arm them with. Our people have a powerful desire to win and I thank them for their tireless efforts. They continue to be a differentiator for us and for our customers and carriers. And I'm confident in the team's willingness and ability to drive a higher level of discipline in our operational execution.
We are moving in the right direction and at the same time, everyone understands that we have more work to do. Now I'll provide some details on our Q1 results in our NAST and Global Forwarding businesses. In our NAST truckload business, our Q1 volume declined approximately 0.5% year-over-year, which outpaced the market indices. Our truckload AGP per load improved as we move through the quarter, and although spot costs within the market came down after the winter storms in January, our new operating model and improved pricing discipline led to better AGP yield within both our committed and transactional business, while our procurement teams improved our cost of hire more than the market average. We had an approximate mix of 65% contractual volume and 35% transactional volume in our truckload business compared to the same mix in Q4 and a 70/30 mix in Q1 last year.
In our LTL business, Q1 shipments were up 3% on a year-over-year basis and 1% sequentially on a per business day basis. AGP per order declined 1% on a year-over-year basis, driven primarily by lower fuel prices. Our LTL AGP per order improved within the quarter and also benefited from our pricing discipline and the new operating model that I mentioned earlier. In our Global Forwarding business, we've been highly engaged with our customers to help them navigate the ongoing conflict in the Red Sea and to ensure flexibility and resilience in their supply chain. The transit interruptions in the Red Sea and resulting vessel reroutings have extended transit times, which has reduced global ocean capacity. While the Asia to Europe trade lane has been most affected, the impact has also extended to other lanes as carriers adjust routes based on shipping demand.
As a result, ocean rates increased sharply in Q1 on several trade lanes, including Asia to Europe and Asia to North America. While the Red Sea disruption continues without any clear timeline of when it will be resolved, ocean rates have come down from the February peak as capacity has been repositioned and new vessel capacity enters the market, while rates remain elevated compared to 2023. As a global logistics provider with the scale and expertise to strategize and implement contingency plans, we have grown our ocean market share by providing differentiated solutions and customer service and by leveraging investments in technology and talent, leading to the addition of new customers and diversification of the verticals and trade lanes that we serve.
In Q1, our Ocean Forwarding AGP increased by 2.5% year-over-year, driven by a 7% increase in shipments and partially offset by a 4% decrease in AGP per shipment. Sequentially, AGP per shipment increased 13.5%. As the Global and North American freight markets fluctuate due to seasonal, cyclical, and geopolitical factors, we remain focused on what we can control, including deploying our new operating model, providing best-in-class service to our customers and carriers, gaining profitable share in targeted market segments, reducing complexity in the organization and optimizing our structural costs, streamlining our processes by removing waste and manual touches and delivering tools that enable our customer and carrier facing employees to allocate their time to relationship building, value-added solutioning, and exception management.
Our continued focus on productivity improvements is one part of our plan to address and optimize our enterprise-wide structural cost. After exceeding our productivity targets in 2023 with 17% improvement in NAST and 20% improvement in Global Forwarding, we have carried our productivity momentum into 2024. We are on track to hit our 2024 targets of an additional 15% improvement in NAST shipments per person per day, an additional 10% improvement in Global Forwarding shipments per person per month, both of which would result in compounded productivity improvements of 32% or better over '23 and '24 combined. Our commitment to deliver quality, value, and continuous improvement to our customers continues to be validated by high net promoter scores.
Over the past four quarters, these scores have been higher than any point over the past few years and higher than the last similar point in the cycle, which we believe has contributed to our market share gains and puts us in good position with customers ahead of the eventual rebound in the freight market. Our customers continue to value the quality, innovation, and reliability that we provide as they work to optimize their transportation needs. They want a partner who has financial strength and the ability to consistently invest through cycles in the customer experience. They also want a customer-centric partner who can meet their increasingly complex logistics needs by providing expertise and a breadth of innovative solutions, enabled by technology and people that they can rely on to serve as an extension of their team.
C.H. Robinson is that partner with a combination of people, technology, and scale to deliver an exceptional customer experience and with the breadth of capabilities to meet all their logistics needs, including value-added solutions for cross-border freight, drop trailer capacity, and retail consolidation. We deliver integrated global solutions with no equal as evidenced in how we are helping our customers navigate disruptions in the Red Sea and restrictions on transit via the Panama Canal, as well as supporting their growth in cross-border trade between the US and Mexico. As we continue to improve the customer experience and our cost to serve, I'm focused on ensuring that we'll be ready for the eventual freight market rebound with a disciplined operating model that decouples volume growth from headcount growth and drives operating leverage.
Our commitment to continuously improving the experience of our customers and carriers and eliminating inefficiencies from our processes will make us a company that is faster, more flexible, and more effective in solving problems for our customers, delivering better customer service, and creating operating leverage and profitable growth. I'll turn it over to Arun now to provide more details on our efforts to strengthen our customer and carrier experience, increase AGP yield, and improve operating leverage.
Arun Rajan: 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. These tools and operating routines, together with our scale, data, and customer and carrier relationships underpin our revenue management function through which we can be more surgical in how we implement a disciplined pricing and profitable growth strategy based on individual customer value propositions.
We also continue to make progress in Q1 on concurrent work streams that are improving the customer and carrier experience and delivering process optimization by eliminating productivity bottlenecks. One of those work streams is aimed at using generative AI to automatically respond to transactional truckload quote emails to drive faster speed to market, increase our addressable demand, and reduce manual touches. Responding to transactional truckload quote requests is time-consuming for account teams and we must respond quickly to be competitive. Through our automated process and utilizing our GenAI technology, more than 2,000 truckload customers are getting the benefit of faster response time with our automated email quotes, and we will continue to scale this technology to cover more customers and other modes.
GenAI puts the power of large language models into the hands of our frontline teams. With more data and history to leverage than any other 3PL, we have opportunities to harness the power that Generative AI now offers to further capitalize on our information advantage and we'll continue to look for and pursue those opportunities. In addition to an improved customer experience, our efforts are increasing the digital execution of critical touch points in the life cycle of an order from quote to cash, thereby reducing the number of manual tasks per shipment and the time per task. This translates to productivity improvements measured in terms of shipments per person per day, which creates operating leverage. As we deliver further process optimization and an improved customer experience, we plan to deliver the compounded cost structure benefits of additional 2024 productivity improvements of 15% in NAST and 10% in Global Forwarding with technology that supports our people and processes.
With that, I'll turn the call over to Mike for a review of our first quarter results.
Mike Zechmeister: 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. On a monthly basis compared to Q1 of last year, our total AGP per business day was down 16% in January, down 3% in February, and up 7% in March, reflecting market conditions and improved execution, driven by the rollout of our new operating model. The new operating model will help simplify decision-making for our teams by focusing on what matters most and helping to ensure clearer accountability around delivering results.
Turning to expenses. Q1 personnel expenses were $379.1 million, including $7.9 million of restructuring charges related to workforce reductions. Excluding restructuring charges this year and last year, our Q1 personnel expenses were $371.1 million, down $8.4 million, or 2.2% year-over-year, driven by our cost optimization efforts and partially offset by expected higher incentive compensation. Our average Q1 headcount was down 11.3% compared to Q1 last year and our ending headcount was down 10.2% to 14,734. We continue to expect our 2024 personnel expenses to be in the range of $1.4 billion to $1.5 billion, excluding restructuring charges with productivity initiatives and lower headcount offsetting increases driven by the restoration of target incentive compensation related to the expected improvement in our financial performance.
We continued to eliminate non-value-added tasks to enable our teams to handle more volume. We expect these initiatives will help drive a 15% increase in shipments per person per day in NAST and a 10% increase in Global Forwarding, which comes on top of improvements last year of 17% in NAST and 20% in Global Forwarding that Dave and Arun referenced earlier. Moving to SG&A. Q1 expenses were $151.5 million, including $5 million of restructuring charges, driven by the impairment of certain internally developed software as we focus the efforts of our product and technology teams on the strategic initiatives that best accelerate the capabilities of our teams. Excluding restructuring charges this year and last year, SG&A expenses were $146.5 million, up $5.1 million, or 3.6% year-over-year, primarily due to a non-recurring benefit in Q1 last year related to our credit loss reserve.
We continue to expect SG&A expenses for the full year to be in the range of $575 million to $625 million, excluding restructuring charges with cost reduction efforts offsetting expected inflation. SG&A includes depreciation and amortization expense where we continue to expect $90 million to $100 million in 2024. Shifting to expenses below operating income, our Q1 interest and other expense totaled $16.8 million, which was down $11.5 million year-over-year. This included $22.1 million of interest expense, which was down $1.5 million versus Q1 last year, driven by the $307 million year-over-year reduction in our average debt balance. Another factor that drove Q1 results in other was a $3.9 million gain on foreign currency revaluation and realized foreign currency gains and losses, which compared to the $9.6 million loss in Q1 of last year.
As a reminder, our FX impacts are predominantly non-cash gains and losses related to intercompany assets and liabilities. Our effective tax rate in Q1 was 15.8% compared to 13.5% in Q1 last year. As a reminder, our tax rate is typically lower in the first quarter of the year due to the incremental tax benefits from stock-based compensation deliveries in Q1. We continue to expect our 2024 full year effective tax rate to be in the range of 17% to 19%. Our Q1 adjusted or non-GAAP earnings per share of $0.86 excluded $12.9 million of restructuring charges and the $3.1 million tax provision benefit related to those restructuring charges. Turning to cash flow. Q1 cash flow used by operations was $33 million compared to $255 million generated in Q1 of last year.
The year-over-year decline in cash flow was primarily driven by changes in net operating working capital. In Q1 of last year, we had a cash inflow of $235 million from a sequential decrease in net operating working capital driven by the declining cost and price of purchased transportation in the market at that time. In Q1 of this year, we had a cash outflow of $135 million from a sequential increase in net operating working capital, driven primarily by higher ocean rates in Global Forwarding. In Q1, our capital expenditures were $22.5 million, down 16.6% on more focused technology spending. We continue to expect 2024 capital expenditures to be $85 million to $95 million. We also returned $91 million of cash to shareholders in Q1, primarily through dividends.
Now on to the balance sheet. We ended Q1 with approximately $842 million of liquidity comprised of $720 million of committed funding under our credit facilities and a cash balance of $122 million. Our debt balance at the end of Q1 was $1.7 billion, which was down $172 million from Q1 last year, but up $120 million from the end of Q4 due to the increase in net operating working capital that I mentioned earlier. Our net debt to EBITDA leverage at the end of Q1 was 2.73 times, up from 2.34 times at the end of Q4, primarily driven by the sequential increase in our net debt balance. Our capital allocation strategy remains grounded in maintaining an investment-grade credit rating, which allows us to optimize our weighted average cost of capital. Overall, I'm encouraged by our improved execution, the deployment of the new operating model, opportunities for continued market share gains, and the plans in place to deliver the compounded benefits of continued productivity improvements in 2024.
Improved growth and cost savings are expected to continue from the robust pipeline of process simplification, technology enablers, and waste elimination initiatives. Continuing to leverage AI to take the capability of our people to an even higher level positions Robinson well to further reduce waste and drive structural cost changes that improve our operating leverage and help deliver on the long-term operating income margin expectations that are imperative to the success of the business. With that, I'll turn the call back over to Dave for his final comments.
Dave Bozeman: 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 instill discipline with our new operating model. If what you're hearing about our execution sounds different, it's because it is. As we continue to deploy our new operating model, we're now monitoring key input metrics and responding faster to error states and changing market conditions with countermeasures that improve our execution.
As we continue to chart our path forward, we're on a mission to be fit, fast, and focused in order to win now and to be ready for the eventual freight market rebound. We'll get fit by embedding Lean practices, removing waste, and expanding our digital capabilities. This will enable us to strengthen our productivity and optimize our organizational structure in order to be the most efficient operator, in addition to the highest value provider, and achieve our profitable growth objectives. As our customers' logistics needs continue to become increasingly complex, we'll leverage our robust capabilities to power vertical-centric and value-added solutions. We'll move fast with greater clock speed and urgency to seize opportunities and solve problems for our customers and carriers.
We will arm our team of experts with the right capabilities to bring us into the future, enabled by our innovative and cutting-edge technology. And we'll be focused on profitable growth in our four core modes, North American truckload, and LTL, and Global Ocean and Air as the engines to ignite growth by continuing to reclaim share and expand our addressable market through value-added services and solutions that drive new volume to the core modes. As we take action on all of these fronts, our journey to unlock the power of our portfolio is moving forward. I continue to 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, further reducing our structural cost, and improving our efficiency, operating margins, and profitability.
I'm confident that together, we will win for our customers, carriers, employees, and shareholders. This concludes our prepared remarks. I'll turn it back to Donna now for the Q&A portion of the call.
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