C. H. Robinson Worldwide, Inc. Q2 FY2022 Earnings Call

Good afternoon ladies and gentlemen and welcome to the C.H. Robinson Second Quarter 2022 Conference Call. As a reminder, this conference is being recorded, Wednesday, July 27, 2022. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Thank you, Donna, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer; Arun Rajan, our Chief Product Officer; and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2022 second quarter results and Arun will provide an update on the innovation and development occurring across our platform, 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 2 in today's presentation lists factors that could cause our actual results to differ from management's expectations. And with that, I'll turn the call over to Bob.

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. Our second quarter was another quarter of record profits as our business model performed as we would expect it to in this part of the cycle. Our investments in our customer relationships through the early part of the cycle, while the cost of purchased transportation was rapidly increasing, are paying dividends as we retain and gain share with these customers through the terms of our agreements. Our strong results were again driven by significant operating margin expansion in our North American Surface Transportation or NAST business as we further improve the profitability of our truckload and less than truckload businesses and grew truckload volume in a declining market. Our Global Forwarding team continued to deliver strong financial results while benefiting from the market share that they've gained over the past couple of years. Additionally, our Robinson Fresh, Managed Services, and European Surface Transportation businesses all increased their adjusted gross profit on a year-over-year basis. Now, let me turn to a high-level overview of our NAST and Global Forwarding results. Our NAST adjusted operating margin in Q2 was 44.3%, up 970 basis points year-over-year and 830 basis points sequentially due to improved profitability in both truckload and LTL. In our NAST truckload business, our volume grew 2% year-over-year compared to the cash freight index that reflected a 2% decline in shipments. Our adjusted gross profit, or AGP per shipment increased 48% versus Q2 last year and 26% sequentially as the cost of purchased transportation declined during the quarter, and the percent of truckload shipments with a negative margin returned to historical levels. Our truckload volume growth included increases in dry van, flatbed, and temp control services. Throughout the quarter, we pursued volume in the spot market and collaborated with our customers to use the spot market as part of their procurement strategy. This included a 21% increase in volume that was driven through our real-time proprietary dynamic pricing engine. During the second quarter, we had an approximate mix of 60% contractual volume and 40% transactional volume compared to a 55-45 mix in the same period last year. Routing guide depth of tender in our managed services business, which is a proxy for the overall market, declined to 1.4% in the second quarter from 1.7% in the first quarter. Broadly speaking, route guides are performing well, as first tender acceptance rates are near pre-pandemic levels, and the first backup provider is accepting rejected tenders most of the time. Since the exceptional market tension in January caused by COVID-related absenteeism and winter storms, the truckload market has seen greater balance return to the spot market. With the exception of Roadcheck Week, where many drivers seemingly temporarily leave the market, the national dry van load-to-truck ratio hovered around 4:1 throughout the second quarter. Between 3:1 and 4:1 for dry van is considered a reasonably balanced market versus the ratio closer to 5.75:1 that we saw in the extraordinarily tight year of 2021. The sequential declines in truckload linehaul cost and price per mile that we saw in February and March continued throughout the second quarter. This resulted in approximately 5% year-over-year decline in our average truckload linehaul costs paid to carriers, excluding fuel surcharges. Although pricing declined sequentially in Q2, our average linehaul rate billed to our customers, excluding fuel surcharges, increased year-over-year by approximately 1.5%, which was supported by our contractual truckload portfolio that was negotiated in prior quarters. This resulted in a year-over-year increase in our NAST truckload AGP per mile of 46.5%. Slide 7 of our earnings presentation shows the historical trend of our truckload AGP dollars per shipment. The past three years have been volatile ones in the freight market and our truckload AGP per shipment reached a new low and a new high within the past eight quarters. Putting this quarterly volatility aside, though, our average AGP per shipment on a trailing 2-year, 5-year, and 10-year view continues to remain relatively constant, which demonstrates the resiliency of our business model and our ability to obtain adjusted gross profit through cycles. Through it all, we worked tirelessly to help our customers optimize their freight networks and their costs. Carriers improve their equipment utilization and provide strong returns to our shareholders. As we prepare for the second half of the year, we expect the truckload cost per mile will decline further, both sequentially and year-over-year due to demand deceleration in the three biggest verticals for freight. Weakness in the retail market is expected to persist, further slowing in the housing market as expected, and there are early signs of deceleration in the industrial or manufacturing space, although this vertical is holding up the best on a relative basis. Our truckload contracts continue to trend towards 12-month durations, and we are proactively repricing some contracts in order to remain competitive in a changing market and to grow our wallet share with customers. Although we're the largest provider of truckload capacity in North America, we only account for approximately 3% of the for-hire market, which leaves us with significant market share opportunities to fuel our growth. In our NAST LTL business, we again generated record quarterly AGP of $166.9 million in the second quarter or up 30% year-over-year through a 37% increase in AGP per order that was partially offset by a 5% decline in volume. As was the case in the last few quarters, the second quarter decrease in LTL volume was mainly driven by a normalization of business levels as our LTL volumes in the second quarter of 2021 were bolstered by a few large customers that benefited from the stay-at-home trend during COVID, which contributed to 23% LTL volume growth in the comparable quarter last year. In our Global Forwarding business, the team continues to provide solutions and excellent customer service in a market that's becoming more balanced. In this quarter, Global Forwarding generated another quarterly AGP record of $324.4 million, representing year-over-year AGP growth of 36%. Operating income also grew by $59 million or 55%. Against increasingly tougher comparables, Q2 marks the ninth consecutive quarter of year-over-year growth in total revenues, AGP, and operating income for our Global Forwarding business. Within these results, our ocean forwarding business generated Q2 AGP growth of $77 million or 51% year-over-year. This was driven by a 47.5% increase in adjusted gross profit per shipment and a 2.5% increase in shipments, which was on top of a 29% volume growth in the second quarter of last year. Global ocean demand is becoming more in line with the industry's overall capacity, and ocean rates while still elevated, have started to come down. China ports appear to be back to normal operations. While port congestion on the U.S. West Coast improved in the second quarter, congestion is edging back up again. Congestion on the East Coast has risen due to a higher percentage of freight being routed to their ports as shippers attempted to mitigate risk from a potential labor dispute in the West Coast. With limited new vessel deliveries in 2022, we expect ocean rates will remain elevated compared to historical levels, but may taper a bit more in the second half of the year. Finally, our international airfreight business delivered AGP growth of $4 million or 7.5% year-over-year, driven by a 14% increase in AGP per metric ton shipped, which was partially offset by a 6% decrease in metric tons shipped. Airfreight capacity has improved in certain trade lanes due to increased belly capacity, and we're seeing some conversion of air freight back to the ocean. Overall, the Forwarding team has a great foundation to continue providing excellent service to our customers and to collaborate with them to leverage our flexible solutions for their shipping needs. Our win rates in our forwarding business are strong, and we continue to implement our pipeline of new customer business. For the enterprise, we continue to believe that through combining our digital products with our global network of logistics experts and our full suite of multimodal services, along with our information advantage from our scale and data, we are uniquely positioned in the marketplace to deliver for our shippers and our carriers, regardless of the market conditions. We believe that our strategies and competitive advantages will enable us to create more value for customers and, in turn, win more business and increase our market share while delivering higher profitability and shareholder returns. With that, I'll now turn the call over to Arun to walk you through the product innovation and development that's occurring across our platform.

Thanks, Bob, and good afternoon, everyone. As I said before, the role of our products is to relentlessly address customer and carrier needs, and we continue to make good progress on both fronts. During the quarter, we continue to deliver enhancements to our Navisphere product platform while expanding the penetration of our digital offerings with both our carriers and our customers. Our work is improving both the customer and carrier experience with Robinson as evidenced by the results outlined on Slide 12 in our earnings presentation. I won't touch on each of these data points in my prepared comments, but I'll highlight a few that are extremely relevant and show progress and the benefits of our digital investments. In the second quarter, we executed nearly 600,000 fully automated bookings in our NAST truckload business, an increase of 107% compared to the same quarter last year. This represents $1.1 billion in revenue flowing through this digital channel. Because of the digital improvements that have been delivered, we've increased the number of carriers looking loads to our digital channels by 96% year-over-year. On the customer side of our marketplace, through further integrating and scaling a real-time dynamic pricing engine, we priced 71% of our spot truckload volume through this digital tool, resulting in $597 million of truckload business. Extending this capability allows us to be more responsive to changes in the market, better meet the needs of our customers while also creating additional stickiness in our customer relationships. More broadly, we're focused on designing and delivering scalable digital solutions for growth, such as the progress I just described by transforming our processes, accelerating the pace of development, and prioritizing data integrity. The four main pillars of this effort are scaling capacity and procurement, scaling demand generation, scaling quality customer outcomes, and scaling our marketplace dynamics as outlined on Slide 11 of our earnings presentation. These four pillars are focused on improving both the customer and carrier experience by working backwards from their needs and increasing the digital execution of all touch points in the life cycle of the load, including order management, appointments, carrier offers and booking, in-transit tracking, and financial and documentation processes. As we do this, we will continue to apply the appropriate rigor to direct our tests and investments towards products, features and insights that increase the rate at which we acquire, retain, and grow share of customers and carriers, which in turn serve as the primary inputs to power our future growth in the two-sided marketplace that we serve. I'll now turn the call to Mike to review the specifics of our second quarter financial performance.

Thanks, Arun, and good afternoon, everyone. In Q2, we continued to leverage the strength of our non-asset-based business model to deliver another record quarter of financial results. Our second quarter total company adjusted gross profit or AGP was up 38%, reaching a record high of $1 billion with growth in each of our segments and services. On a sequential basis, AGP was up 14% and also grew in each business segment. On a monthly basis, compared to 2021, our total company AGP per business day was up 43% in April, up 39% in May, and up 31% in June. After seven consecutive quarters of increasing price and cost per mile in our North American truckload business, both declined sequentially in Q2, with costs declining faster than price due to a softer demand environment and capacity that has grown over the past 12 months. The linehaul cost and price per mile, which excludes fuel surcharges, declined sequentially in each month of Q2. As the cost of purchased transportation declined, our contractual truckload AGP per shipment improved and our NAST team managed our load acceptance rates to optimize our truckload AGP and look to the spot market to find additional volume opportunities. Q2 marked the seventh consecutive quarter of flat to increasing truckload AGP per mile. Truckload AGP per shipment improved 26% sequentially and by 48% compared to Q2 of 2021. Now turning to expenses. Q2 personnel expenses were $444.8 million, up 22.6% compared to Q2 last year, primarily due to increased headcount as we support growth and transformation opportunities across our business. We also incurred higher incentive compensation due to an increase in our projected annual financial results. For the full year, we now expect our personnel expenses to be at the high end of our previous guidance of approximately $1.6 billion to $1.7 billion due to the higher expected incentive compensation. As we discussed in our last earnings call, we expect headcount additions to be weighted more towards the front half of 2022. For the remainder of the year, we expect our headcount to be flat to down. If growth opportunities or economic conditions play out differently than we expect, we'll adjust accordingly. Moving on to SG&A. Q2 expenses of $117.2 million were down $8.5 million compared to Q2 of 2021. Excluding the $25.3 million gain from the sale and leaseback of our Kansas City Regional Center, Q2 SG&A was up 13.4%, driven by year-over-year increases in purchased services and travel expenses. For 2022, we continue to expect total SG&A expenses to be $550 million to $600 million, excluding the gain from the sale and leaseback of our Kansas City Regional Center. We also continue to expect $100 million of depreciation and amortization in 2022. Q2 interest and other expense totaled $27.4 million, up approximately $13.9 million versus Q2 last year, primarily due to a $10.3 million loss on foreign currency revaluation due to the strengthening of the U.S. dollar primarily versus the Euro and Yuan. This FX loss was $8.4 million higher than the $1.9 million loss in Q2 of last year. Interest expense increased $4.3 million due to a higher average debt balance, but with lower net debt-to-EBITDA leverage. Our Q2 tax rate came in at 21.3% compared to 21.6% in Q2 last year, which brings our year-to-date tax rate to 20.0%. We continue to expect our 2022 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to state federal or international tax policy. Q2 net income was $348.2 million, up 80% compared to Q2 last year, and we delivered record quarterly diluted earnings per share of $2.67, up 85% year-over-year. As a reminder, our Q2 net income included the $25.3 million gain from the sale and leaseback of our Kansas City Regional Center and a $10.3 million loss on foreign currency revaluation. Turning to cash flow. Q2 cash flow generated by operations was approximately $265 million compared to $149 million in Q2 of 2021. The $116 million year-over-year improvement was primarily due to the $154 million increase in net income. Over the past 2.5 years, our net operating working capital increased by approximately $1.5 billion driven by the increasing cost of purchased transportation. This reduced our operating cash flow by the same amount over that time. If the cost and price of purchased transportation come down, we expect a commensurate benefit to working capital and operating cash flow. In Q2, our accounts receivable and contract assets were down 1.5% sequentially and our days sales outstanding, or DSO, was flat sequentially. Capital expenditures were $43.2 million in Q2 compared to $16.3 million in Q2 last year. We are raising our 2022 capital expenditure guidance from $90 million to $100 million to $110 million to $120 million, primarily due to higher level of internally developed software, which is tied to higher future returns. We returned approximately $409 million of cash to shareholders in Q2 through a combination of $337 million of share repurchases and $72 million of dividends. That level of cash to shareholders equates to approximately 118% of our Q2 net income and was up 100% versus Q2 last year. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and in using our opportunistic share repurchase program to deploy excess cash. Now on to the balance sheet highlights. We ended Q2 with approximately $1.1 billion of liquidity comprised of $826 million of committed funding under our credit facilities and a $239 million cash balance. Our debt balance at the end of the quarter was $2.27 billion, up $901 million versus Q2 last year, primarily driven by increased working capital and share repurchases. Our net debt-to-EBITDA leverage at the end of Q2 was 1.35x, down from 1.49x at the end of Q1 due primarily to increased EBITDA. Let me take a moment to comment on our return on invested capital, or ROIC, which is an important metric for many investors. With our asset-light business model, we operate with a relatively low capital base which naturally enhances ROIC relative to other asset-based logistics providers. In fact, 88% of our operating asset base is comprised of accounts receivable and noncash intangible assets with AR representing 67%. As a result, all else equal, ROIC for Robinson is impacted more by changes in receivables driven by changes in the price of purchased transportation than from proportionate changes in our capital expenditures. In Q2, we delivered our highest ROIC in a decade at 32.1%, up 890 basis points from Q2 last year despite the contribution of a historically higher receivables balance to our operating asset base. Going forward, if the price of purchased transportation continues to fall, then receivables, which represent 2/3 of our operating asset base will follow and represent a tailwind to ROIC, all else equal. By driving scalability into our model with focus on the four main pillars that Arun talked about, we expect to generate growth and efficiencies that support long-term growth in our total shareholder return. Thank you for listening. Now, I'll turn the call back over to Bob for his final comments.

Thanks, Mike. So as questions linger about global economic growth, inflationary pressures and consumer discretionary spending, our global suite of multimodal services, our growing digital platform, a responsive team of logistics experts, our broad exposure to different industry verticals and geographies and our resilient and flexible non-asset-based business model put us in a position to continue delivering strong financial results. While we're pleased with our performance this quarter and the fact that both NAST and Global Forwarding delivered operating margins above our publicly stated targets, we know that we have work to do to consistently deliver at these targeted levels. The work that the teams are executing that Arun referenced, related to scaling our model, eliminating internal legacy processes, and improving quality while working backwards from the needs of our customers and carriers will drive continued improvement in operating profits long term. As this work is focused on growth, customer satisfaction, and productivity improvements, which will in turn reduce our cost to serve our customers. As we look to the second half of the year, we are watching economic conditions closely, and the management team and the Board continue to consider all strategies to grow operating profits and maximize long-term shareholder returns through all phases of the business cycle and various economic scenarios. This concludes our prepared comments. And with that, I'll turn it back to Donna for the Q&A portion of the call.

The first question today is coming from Todd Fowler of KeyBanc.

Congratulations on the results. Bob, I guess maybe to start, if we take a look at Slide 7 where you've got the truckload AGP. And it's certainly helpful to see, obviously, the profit per load versus the percentage. But can you talk to your thoughts around the sustainability. The profit per load is obviously at a very elevated level versus the last 10 years would you expect it to be able to remain at this level with some of the dynamics in the marketplace? Or how do you think about kind of the sustainability of the profit that you're seeing right now?

Thanks, Todd, for the introduction. Let me share how we've observed this situation develop in the past and connect it to our current position. After experiencing seven consecutive quarters of increasing costs for purchased transportation in our truckload business, we finally noticed a moderation and a decline in these costs on a year-over-year basis this quarter. While future economic conditions are uncertain, historical data shows that after a quarter where costs shifted from rising to declining, costs generally decreased for about seven more quarters. We can look at examples from Q3 2015 and Q1 2017, as well as from Q4 2018 through Q2 2020. While we can't be sure this pattern will repeat itself, it's noteworthy to consider past trends. In the second quarter, AGP per load reached its highest level in the last decade. We don't view this as the new normal in our long-term planning, as we expect it will eventually return to typical levels. Our primary concern is the timeframe for this adjustment. We're not basing our long-term strategy or cost structures on sustaining the high earnings per load we saw in the second quarter. On a positive note, we are making strides in our digital initiatives, and as Arun mentioned, an increasing number of our transactions are being processed through more automated and seamless methods. While the market will change over time, we have a clear understanding of what is necessary to achieve our 40% operating margin goal throughout various cycles, taking into account volumes, AGP per transaction, and our overall cost structure. As we continue to digitize our operations, we foresee a clear opportunity to reduce operating costs per transaction. As I mentioned earlier, if we look past the fluctuations in quarterly data since 2013, the average AGP per shipment has remained largely stable over two, five, or even ten-year periods.

Yes. No, I got that in the comments. So that makes sense, and it sounds like that from your view, we're still relatively early in kind of the cycle with what we typically have seen.

The next question is coming from Jason Seidl of Cowen.

Bob and team, congrats on a good quarter. I wanted to talk a little bit on the pricing side. I think you guys said that pricing ex fuel was up on the contractual side, about 1.5%. But you also made some comments that you were proactively repricing some business. Can you talk to the instances where you took the proactive stance to reprice that business and just how much that might have come down from prior pricing trends? And where do you think that should set up for in 3Q?

Sure. Just to clarify on the data point, the 1.5% was the overall book of business, not just the contracts. So I just want to make sure that everyone is clear on that. Largely, if I think about the contract side of our business and the repricing, we continue to see most of our business that we've repriced in the first half of this year, renew on 12-month terms. Just as we saw kind of in the upward trajectory of the market over the past six or seven quarters, there was constant repricing there. We expect to see that now, not broad-based, but us proactively going back and having conversations with customers, aggressively and intentionally using the spot market as a strategy to help customers access lower cost of purchased transportation outside the course of their contractual agreements. That drives volume for us and savings and opportunities for the customers. Within the contract book of business, our win rates for the quarter were strong. We define our win rates as kind of the percentage of freight that we bid on that ultimately we were awarded. That increased by 110 basis points in the second quarter of '22 compared to the second quarter of '21 and was right in line or ahead of kind of our long-term average win rates. As I said, most of these are coming at 12-month terms. I would say the market, at least our customer relationships, are mostly acting rationally as it relates to these contracts. We're not seeing shippers largely come out and rip up bids or awards or go back and repricing activities. So we feel good about the state of the contract business as well as our ability to use the spot as an intentional strategy with our customers to continue to drive volume.

The next question is coming from Brian Ossenbeck of JPMorgan.

So I wanted to ask more about the automated bookings as substantially again on a sequential basis. How much further room to run do you have on that metric alone? And maybe you can talk more broadly about how that integration of more technology, more automation is impacting employee productivity? Is there any pushback on the receptivity of it? And then if you can just tie in some comments about digital competition, digital natives overall as some of them have been paring back headcount. Wondering if you're seeing anything in the markets from that side as well.

Yes, you bet. I'll use the technical term that Arun and I will ham and egg the answer to this one, and I'll kick it off. I mean on the carrier bookings side, we had about $1.1 billion in freight that was booked through the digital channels. If you think about the question of how much of your freight is that, I think we were right around $4 billion in truckload freight in NAST for the quarter. Check me on that, Chuck, right? And so about 25% of the revenue running through that fully digital channel, and that will give you a perspective of the $600 million on the customer side as well. From a productivity perspective, even with the additional headcount that we've added in NAST over the past several quarters, if I use 2018 or 2019 as a comparison before the pandemic, our shipments per person per day in NAST are up about 16% in total. Obviously, the technology investments have a lot to do with that. One point that I'd add to that, though, is that over that time period, our headcount has started to include more and more employees that work in our consolidation and warehouse facilities post the acquisition of Prime. Knowing that those warehouse employees are never going to really contribute to the productivity focus of our truckload marketplace. If you net out the increase in those warehouse employees, our headcount in NAST is actually down about 2% in terms of the employee base that really focuses on the customer and carrier marketplace compared to 2019. The productivity index there, the shipments per person per day were actually up about 1%, and in total over that time period. As it relates to kind of the digital natives, we're not seeing anything necessarily drastically different in terms of how the marketplace is acting right now. I think there's less focus on growth at all costs in this industry and many others. A rational pricing environment and an environment where industry participants with scale are pricing the market rationally, we think is a good thing for Robinson. I may open it to Arun to see if there's anything you'd add.

Yes. I think the only thing I'd add is that there's definitely more room to run. I look at digital bookings as sort of the first step, and that was sort of the first proof point of how we can move the needle. But if you look at digital execution of every step in the life cycle of the load, order management, appointments, carrier offers and booking, which we've made progress on, but in transit tracking, financial, and documentation processes. Then just looking at the entire life cycle of the load, while we made progress on the productivity front, as Bob pointed out, there's still a lot more opportunity for us to drive up digital execution and all the steps.

Arun, could you phrase that maybe use a baseball analogy, what inning we're in? How far you can get to 25%, anything else just to give us some additional context of where you are versus where you expect to be in several years' time?

If you consider our 25% booking rate, I believe we have significant potential for improvement, and while I won't specify a target percentage, there’s no reason we shouldn’t aim to double that figure. Regarding other parts of the process, I'm not ready to make any firm commitments just yet, but the opportunities are definitely there. You could think of it in terms of a digital versus manual ratio for each of these steps. I would say we’re just getting started on that front.

Yes. And I would say, too, just some of our conversations in terms of our prioritization of work. While digital bookings is probably the metric that people talk about the most as being kind of the leading edge of digital transformation, we actually believe the highest leverage points are not the actual booking and much more so some of the operational tasks that Arun spoke to because that's really where a lot of our people's time ends up being spent. The more we can move those towards digital on the back end of a digital demand signal from a customer or before digital booking with a carrier, that's where the real productivity lift and ultimately, our ability to drive down the cost of an incremental transaction really happens.

The next question is coming from Ken Hoexter of Bank of America.

I thought that was a great answer. Thanks for the updates on the digital side, and congratulations on a successful quarter. I'm curious, Bob, about your comments on the market. Other carriers seem to indicate they aren't feeling the impact yet. However, it’s clear that you’re noticing a decline in spot rates and the cost benefits you mentioned. Could you elaborate on what customers are saying about the impact and your thoughts on our current market situation? Is this a reflection of what smaller carriers are experiencing compared to larger ones in terms of that disparity?

It's an interesting question, Ken. A lot of talk about the small carriers and the rate and the speed or if they are exiting the market at pace. Ken, I was quite surprised to see that we actually added 12,000 additional carriers throughout the course of this quarter, which I think is a record number of new carrier sign-ups for us in any given quarter. I really had expected that, that number would go down. So perhaps the health of the small carrier is a bit better than is being advertised. The other way you might look at that is if those small carriers were working with another broker, those that other broker doesn't have the network density today that they once had that they're retreating to safety or retreating to Robinson. Overall, in the network, I mentioned it in the prepared comments or the industry, I mean, we're definitely seeing on the consumer side things start to soften there. We're seeing the consumer trade down. On the construction side, we're starting to see that manufacturing holding up relatively well compared to those other areas. Our aggregate demand in truckload has come down sequentially from Q1 to Q2 just in terms of the total number of tenders. On the flip side of that, we've seen acceptance rates go up significantly, many fewer cancelled loads, many fewer negative loads. The health of the business on the contractual side has been really, really good. As I say, using spot as an intentional strategy to automate that with customers, giving them access to the lower-cost spot market has helped us to maintain share.

The next question is coming from Gordon Alliger of Goldman Sachs.

So shifting to the forwarding side of the equation. Can you maybe give a little more color on your thoughts on the outlook from here? Obviously, trends have been super strong, and we've seen some moderation. But I guess maybe more importantly, can you talk to the share gains that you mentioned? What's actually driving that above the market? And what customer base are you penetrating to get these share gains and who might you be taking share from?

It's a lot there, Jordan. No, that's all right. I probably won't get these in the right order. So let's talk first about kind of the customer base and where the growth is coming from. If I give you a really simple customer segmentation, A, B, C, D, with A being really big customers and B being smaller customers. Going into the pandemic, our customer mix tended to skew towards the seasons, more mid-cap to smaller customers. As we went into the pandemic and throughout and into today, we've grown in all segments, but we've grown outsized in really that what I'll call customer type A or the really large global customers is where we're winning the most and the most impactful to our overall volume. In terms of the forward look on the Forwarding business, we do expect that we will continue to see some softening in the marketplace within forwarding and domestically as well. But given the share gains that we've made, given the work that the Forwarding team has done to really structurally put that business in a different place in terms of profitability, we feel like we've got a forward look that's going to allow us to continue to deliver at or above the kind of stated 30% operating margin targets for that business. We are today the number one NVOCC from all of Asia to the U.S., along with number one from China to the U.S. So if we are going into some moderating economic environments, we're doing it with a strong tailwind and still a strong pipeline of customers to implement. So maybe tell me if I hit on your question and what did I miss?

Yes. The only other thing was like who might you be taking share from? Is it like a smaller freight forwarding base out there? Is it larger players? Any way to assess that?

It's really difficult to assess. I think you can look at our share gains relative to some of our peers and draw your own conclusions on that, Jordan, but I don't have a kind of a play-by-play that I would feel comfortable sharing in a public forum that would have any level of accuracy to it.

The next question is coming from Bruce Chan of Stifel.

Congrats on the great print here. Bob, you've had some really helpful comments on the overall demand equation, and I just maybe wanted to pick up on some of that. I know it's still kind of early to talk about peak season here, but as you start discussions for capacity planning on the Global Forwarding side, what are you hearing from them, especially if you think about some of those issues that you mentioned with labor disputes and increasing congestion at ports?

Yes. We're currently assessing the peak season, particularly considering our involvement in the ocean market. Focusing on the transpacific trade lane, where our density is concentrated, we have observed a steady decline in rates over the past few months. This appears to be mainly due to high inventory levels and the reduction of purchase orders caused by ongoing inflation affecting consumers. At the same time, other shippers are advancing their orders and preparing for the holiday season earlier than usual, following years of congestion and labor negotiations at West Coast ports, along with potential congestion on the East Coast. We believe the combination of these factors may result in a more subdued peak season. Regarding air freight in the same corridor, our air volumes have started to decrease slightly in recent months, influenced by the anticipated slower peak season, as a significant portion of our air freight volume comes from ocean conversions. We expect to see some additional slowdown in this area for the remainder of the year. An alternative perspective could be that we might experience a delayed peak as we manage our domestic inventory, which could lead to a situation where we realize we lack sufficient stock for the holiday, resulting in a later peak. However, this is merely speculation at this time.

Okay, that's really helpful. And then just maybe a quick follow-up. We've heard some noise about maybe some concerns about production over in Europe with some of the Russian gas supply. Have you seen any of that on your European trans business or on your forwarding side?

Not that I could speak to, Bruce, with any level of expertise. It hasn't elevated itself to any of our really broad-based management team discussions related to trends in the business.

The next question is coming from Jack Atkins of Stephens.

Congrats on the great quarter. So Bob, I guess maybe just kind of going back to the thoughts on the sustainability of the 40% net operating margin in NAST through cycle. Historically, we've seen your profitability in NAST follow AGP per load pretty closely. I guess as you sort of look forward, and you think about over the next several quarters and a normalization of that AGP per load, do you feel like the product work that Arun has been undertaking over the last couple of quarters, and the efficiency gains and productivity gains that you guys are beginning to see in the business are going to be able to spool up enough to really sort of offset a normalization of AGP to the degree that it materializes either later this year or into 2023?

Yes. It's the right question to ask, Jack, and I'll take that on and then open it up to the rest of the team here too. So I want to lead in with one comment when you say that the work that Arun is leading is the appropriate thing, but I also want to characterize this work as not just being technology work or product work, but really us thinking about the entire system of how C.H. Robinson works and system not in the reference of technology systems, but just the entire system from quote to cash. How do we best engineer every touch point along the way, both through technology and thinking differently about how we execute the business? This is critical work at the core of unlocking value at C.H. Robinson, and we're making progress there. But let's go back to kind of how indirectly I think your question, Jack, is, hey if AGP comes down, can you grow volume enough to drive the business? Here’s how I'm thinking about that a bit is we've now grown truckload volume for five consecutive quarters. It's the first time we've done that since 2016 into 2017. Volume in our truckload business in July continues to be positive year-over-year. On a per business day basis, it's at the highest level of the year in both truckload and LTL. Our total truckload volume has increased on a per business day basis sequentially each month of this year, including July. The employee additions that we've made into the team over the past several quarters are starting to get their legs under them a bit, a little bit more capable to actually help us drive growth, and there are signs that the freight market is decelerating. You probably saw in our client advisory that we published on July 21. Based on the indicators we look at, we now expect truckload costs to decline on a full year basis around 15% for the full year. Given that type of environment, we believe we will continue to see increased acceptance rates in our contractual business. We would expect to see less volatility in the cost of purchased transportation over the next several quarters in that environment, which allows us to lean in a bit more in terms of accepting volume and taking on a bit more risk. Because the risk on the downside just simply isn't as great in that type of environment. I do feel very confident that our team should be and will deliver volume growth through the back half of this year. If we execute the plan accordingly, we could start to see that volume growth ahead of headcount growth even by the end of this year.

The next question is coming from Scott Group of Wolfe Research.

If I go back and look at some prior cycles, your costs and pricing historically have bottomed at sort of low double-digit declines. It sounds like you think it will be worse this time around. I'm just curious for your thoughts on why? If I look at your price versus cost in the second quarter, it was a 650 basis point spread. Do you think that that spread starts to compress from here? If that does happen, just any thoughts or implications on margins, PGP, all of that?

Scott, take me back to the first part of your question where you talked about the decline, I wasn't quite tracking that.

Sure. If you look back, you have been providing your price and cost numbers for some time, and they usually bottom out in the low double digits.

We're looking at Slide 6 in the deck. I didn't mean to suggest that I believe this situation will be worse than before. If that impression was conveyed, I want to clarify that I don’t have enough visibility to determine that. What I do agree with is that we're experiencing an all-time high in AGP per shipment, and we aren't basing our cost structure for business operations or investments on that situation. In recent cycles, it has typically taken six to seven quarters to move from peak to trough and generally an equal amount of time from trough to peak. I'm using that framework to consider what might happen in the next couple of years. Usually, it takes a few quarters to return to median AGP per file from peak levels. While I can't predict the future, I often find that looking at past trends can help us anticipate future outcomes, which is how we are framing our thoughts on this cycle.

And Scott, I'd add relative to the 650 basis points that you're referring to, which is price up 1.5% cost down in this business, as you know, the price follows cost. That spread will really be determined by how steep that cost drop-off is. If it tapers off, you could expect that spread to be lower; if it's steeper, that spread gets wider. So that's really back to how long will it take for this thing to bottom out.

Okay, that makes sense. I didn't want to assume anything, sorry. I thought you mentioned earlier that you expect full year costs to decrease by 15%. They initially increased by 20%, which suggests a significant decline in the second half.

Yes, yes, yes. Yes, that's accurate, Scott. More specifically, I would say, within that advisory, we go on to say that we believe that the first quarter is the only quarter that's going to see any sort of industry-wide price increase. In order to get to a year-over-year down 15%, you have to see some decreases in the back half of the year. We're calling week 43 the floor, because you run in support of the cost to operate a truck at that point. We would expect to see it kick up there for the seasonal last several weeks of the year leading into the holidays.

The next question is coming from Chris Wetherbee of Citi.

I wanted to comment on the 40% operating margins in NAST, a little bit from the cost side. So you talked a bit about the volume growth on the truckload side, which obviously has been really strong over the last few quarters, as you noted. I guess I want to get a sense in a tougher market, sort of the cost initiatives that you're working on. I know heads are first half weighted. So we'll probably see some benefit as we move into the back half of the year. What are the other things that you think can help support that 40%? In the last quarter, you gave us sort of a peak into the second quarter in terms of how things were operating from an operating margin perspective in April, curious if you have the ability to do that in the month of July, just to give us a sense of how things are going.

Yes. We won't talk about the sequential operating margins by month within the quarter. But again, maybe Arun and I can kind of take this on together. If we think about headcount in NAST, definitely believe that the second quarter will be the peak. We've got a number of interns that will cycle through the second quarter and the beginning of the third quarter that will draw down headcount. Based on where we see the economy going and what we've added, we are slowing hiring towards the back half of the year. In NAST, if we ended the year with a headcount number that was lower than where we are today, it would certainly not be a surprise to anybody in this room. As it relates to the highest leverage points of how we drive efficiency and reduce our cost per transaction, it leads back to the work that Arun referenced that he and the team are leading. We've identified a very specific opportunity to eliminate costs associated with non-revenue-generating activities. We have an idea of the amount of operation and personnel expense associated with executing that. Through investments in the whole system and the digitization of those, we see a very realistic way to reduce the operating expenses within NAST. Arun, if there's anything you'd add.

Yes. I would just say, I think Bob nailed it with like it's really scalability of the operating model that we're going after, and that means changing processes, eliminating processes that maybe don't make sense, automating things that ought to be automated, or making self-serve things that are better made self-serve. That impacts the whole system, like Bob said, the business system and the operating model. We have clear line of sight in terms of initiatives that drive unlocks in terms of manual work that could be directed elsewhere or manual head count that can be directed elsewhere.

The next question is coming from Tom Wadewitz of UBS.

Bob, you've experienced many freight cycles and have valuable insights into how they function. Your comments today seem quite cautious regarding activity and the apparent softening in freight. When I assess the second quarter, it appears that activity hasn't really declined significantly. Imports have remained strong in the first half. Do you believe we are facing a notable decline, and that we may see a lag in the effects of weaker consumer activity before any actual decrease in freight occurs? Or are you observing more of a slowdown? Additionally, regarding contract and spot rates, do you think contract rates will hold up better while spot rates face more pressure? Or do you expect contract rates to experience a substantial drop as well? So, I have two questions within that.

Certainly. I'll address the second question first. We're observing resilience in our contract business. While there have been some changes, discussions with customers continue, and our contract portfolio is increasingly shifting towards traditional 12-month bid cycles. Overall, I wouldn’t say there's significant downward pressure in the contract markets. I anticipate that as we approach the third and fourth quarters, especially during bid renewals, pricing will differ from what we experienced in the fourth quarter of last year and the first quarter of this year. I feel optimistic about this quarter; we grew our truckload volume during a challenging market. Ocean volumes were positive, and while LTL volumes declined, we can attribute much of that to a few specific customer losses or changes in their activity influenced by stay-at-home trends. The business fundamentals appear strong, but I'm concerned about consumer conditions based on recent retail reports. We're finding ourselves working with retail customers to manage inventory internally more than we have in the past. The situation with inventory is significant, and it’s becoming apparent in our operations. I'm cautiously optimistic, but I see a clear path to continued growth in the latter half of the year across our services. There are about 200 million truckloads that C.H. Robinson isn't handling at the moment. Regardless of whether the market experiences a recession, contraction, or expansion, that shouldn't limit our growth potential. I hope this clarifies things.

Yes. And it's really focused on the market, not so much. Your business has performed remarkably well in the quarter, right? It was a great quarter, and you can do better than the market, but it's more a question on the market. So it sounds like you think maybe more moderation as opposed to a big step down in activity in the market.

I think that's right. I mean if I just look at the DAT load-to-truck ratio, and that's one that we use in our client advisories. We look at it internally. I mean we're coming off of ridiculous high levels of load-to-truck ratios in January, it was 12 or whatever. Last year, it was 5.75:1. It's basically right now at the 5-year average, 3.6, 3.7 to one. This feels a lot different for all of us industry participants than it did 12 months ago, but it kind of feels average. I don't think we're in a freight recession or freight Armageddon. I just think we might have forgotten what average feels like for a while here, and the business is executing. Routing guides are holding up, and first tender acceptance rates are up. I don't think that from where I sit, we've got a healthy market still, but we should exercise caution on a forward look.

The next question is coming from Jon Chappell of Evercore ISI.

Bob, Jordan kind of alluded to this as it related to the forwarding community, but in the traditional broker business with the NAST, what's the competitive landscape shaking out like? I mean, on the one hand, you have some pretty full pockets from a phenomenal last few quarters. But on the other hand, the labor market is still tight, inflation is really high. There's a lot of uncertainty in the market right now. Does this push a lot of the smaller brokers out? Does that provide opportunity and/or risk to see it rising going forward?

It's notable that there are around 20,000 property brokers in this industry, ranging from small local businesses to larger firms like ours. One significant challenge for these smaller brokers is the need for working capital, especially with the high truckload pricing seen in recent years, making it difficult for them to fund and grow their operations. As the market potentially softens, we might see some smaller brokers exit the market. However, given their size compared to ours, they don't pose an immediate threat to our business model. Many newer companies that emerged in the past five years, backed by venture capital and private equity, are likely shifting their focus from prioritizing growth to achieving profitability. This creates a more rational competitive environment in which we continue to succeed daily.

Ladies and gentlemen, this brings us to the end of the question-and-answer session. I will turn the floor back over to Mr. Ives for closing comments.

That concludes today's earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a good evening.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.