C. H. Robinson Worldwide, Inc. Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2022 Conference Call. As a reminder, this conference is being recorded, Wednesday, November 2, 2022. Good morning, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer; Arun Rajan, our Chief Operating Officer; and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2022 3rd quarter results and outline some new cost reduction actions. Arun will provide an update on the innovation and development occurring across our digital 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, and good morning, everyone. On our second quarter earnings call in late July, I talked about a deceleration in demand that we were expecting to see in the second half of 2022 in three large verticals for freight, including weakness in the retail market and further slowing in the housing market. We’re now seeing those expectations play out and with slowing freight demand and price declines in both freight forwarding and surface transportation markets. Throughout the changes in the freight cycle, we’ve maintained our focus on continuing to improve the customer and carrier experience while scaling our digital processes and operating model to foster sustainable and profitable growth. Today, we believe that we’re entering a time of slower economic growth, where freight markets will continue to cool from their pandemic peaks and will operate more reliably at more normalized rates with fewer disruptions. These changes in market conditions, coupled with many successful endeavors on our digital roadmap directed at scaling our model to be more efficient are allowing us to take actions to structurally reduce our overall cost structure. Compared to our third quarter operating expenses, the actions we’re currently taking are expected to generate $175 million of gross cost savings on an annualized basis by the fourth quarter of 2023. Inflation, other headwinds such as annual pay increases and tailwinds such as lower incentive compensation, are expected to result in net cost headwinds of $25 million in 2023 that we expect to partially offset the gross savings resulting in net annualized cost reductions of $150 million by the fourth quarter of next year. We also continue to identify opportunities to accelerate our enterprise-wide digital and product strategy. To drive greater impact and speed of execution, Arun Rajan has been promoted to the role of Chief Operating Officer. Since joining C.H. Robinson in 2021, Arun has been a critical contributor to and strategic leader of our digital and product strategy. Arun is helping us to think and act differently as we accelerate our pace of digital transformation and scale our operating model. In his new role, in addition to leading the product organization, Arun has expanded direct responsibility for both technology and marketing organizations, bringing these three critical functions together under a single vision and leadership structure, will allow us to integrate these functions more deeply into single-threaded teams and to put the needs of our customers and carriers at the center of our organizational design to ensure that we’re positioned well to meet the needs, while accelerating the impacts across the business units of C.H. Robinson. Arun’s teams will work directly with the business unit presidents to operationalize these efforts. Now let me turn to a high-level overview of our third quarter results for North American Surface Transportation and Global Forwarding. In our NAST Truckload business, we grew our year-over-year volume for the sixth quarter in a row, albeit with a modest shipment growth of 0.5%. Volume growth in drop trailer, flatbed and temperature control was partially offset by a decline in our dry van volumes. Within the quarter, we saw mid-single-digit volume increases in July turned to declines in August and September as freight demand weakened. Our adjusted gross profit or AGP per shipment increased 20.5% versus the third quarter of last year, due to a meaningful increase in our contractual Truckload AGP per shipment. On a sequential basis, our Truckload AGP per shipment came down 15% from the record peak we saw in the second quarter, but remains above our historical average. The sequential decline was particularly pronounced in the spot market, where our AGP per shipment declined 25% as we continue to pursue volume in the spot market and collaborated with our customers in the spot market as part of their procurement strategy. During the third quarter, we had an approximate mix of 65% contractual volume and 35% transactional volume compared to a 60-40 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 from 1.4 in the second quarter to 1.3 in the third quarter, which is the lowest level we’ve seen since the pandemic impacted the second quarter of 2020. Changes in the national drive-in load-to-truck ratio also reflect the softening of the freight environment. While this ratio was between 3 and 4 to 1 for most of the third quarter, it has declined throughout October, with the latest reading of approximately 2.6:1 in week 44. The sequential declines in Truckload linehaul costs and price per mile that we saw in first and second quarter continued throughout the third quarter. This resulted in approximately 17% year-over-year decline in our average truckload linehaul costs paid to carriers, excluding fuel. Our average linehaul rate billed to our customers, excluding fuel surcharge, decreased year-over-year by approximately 13%. This resulted in a year-over-year increase in our NAST Truckload AGP per mile of 15.5%. Consistent with historical patterns, we expect to reprice approximately 60% of our contractual Truckload business in the fourth quarter of 2022 and the first quarter of 2023. Encouragingly, our win rate on large contractual bids in the third quarter improved year-over-year as we pursue profitable share gains and respond to a changing market. In our NAST LTL business, we generated quarterly AGP of $161 million in the third quarter, up 23% year-over-year. This was through a 24.5% increase in AGP per order and partially offset by a 1.5% decline in volume. The LTL volume decline was driven by decreases in final mile, temperature controlled and consolidation, while our common carrier business, which is the largest component of LTL had flat volumes. In our Global Forwarding business, we’re now seeing the market correction that has been anticipated. High inventories, reduced consumer spending due to rising inflation and a muted peak season have all contributed to reduced import demand which have also led to declining prices for ocean and air freight. For the third quarter, Global Forwarding generated AGP of $248.4 million, representing a year-over-year decrease of 20% versus a record high for a third quarter in 2021. Within these results, our ocean forwarding AGP declined by $55 million or 26% year-over-year. This was driven by a 24% decrease in AGP per shipment and a 2.5% decrease in shipments. This is compared to a 12% volume growth in the third quarter of last year. The slowdown in global ocean demand was most evident on the U.S. West Coast, where rates and volumes declined more than other trade lanes and allowed port congestion to ease. Activity on the U.S. East Coast remains stronger as freight continues to be diverted from West Coast ports and due to relatively stronger demand in the transatlantic trade lane. Improving ocean schedule reliability and the ability for shippers to accept longer transit times has resulted in conversion of some air freight back to the ocean. This combined with the slowdown in global demand has impacted air freight volumes and pricing. Airfreight capacity also continued to improve and drive prices lower in many trade lanes due to increased belly capacity on more frequent commercial flights. AGP in our airfreight business declined $12.5 million or 21% year-over-year, driven by a 16.5% decrease in metric tons shipped and a 5.5% decline in AGP per metric ton shipped. Overall, the forwarding team continues to provide differentiated solutions and customer service, selling aggressively in the market and leading to further additions of new customers and diversification of industry verticals and trade lanes. In the third quarter, for example, 60% of our AGP from new business was generated from trade lanes other than the trans-pacific lane. Additionally, we’ve obtained the status of being the leading ocean freight forwarder from India to the U.S. and from the U.S. to Australia. As shown on Slide 10 of our earnings presentation, expanding our capabilities and presence in key industry verticals, trade lanes, and geographies is an important part of our sustainable growth strategy. For the enterprise, we continue to believe that through combining our digital solutions with our global network of logistics experts and our full suite of multimodal services, we are uniquely positioned in the marketplace to deliver for our shippers and carriers regardless of market conditions. We believe our strategy and competitive advantages will enable us to create more value for customers and in turn, win more business, increase our market share and enable sustainable profitable growth. With that, I’ll now turn the call to Arun to walk you through the product innovation and development that’s occurring across our digital platform.

Thanks, Bob, and good morning, everyone. I’ll begin by saying that I’m excited to take on an expanded role as the company’s Chief Operating Officer. I look forward to further building the integration between our digital product strategy and our technology and marketing teams to accelerate delivery and adoption of our meaningful products, features and insights to both sides of our two-sided marketplace. During the third quarter, we continue to deliver enhancements to our Navisphere product platform, while extending the penetration of our digital offerings with both our carriers and our customers. Due to the digital improvements that have been delivered, the number of carriers looking for loads, the Navisphere Carrier in Q3 increased 77% compared to the third quarter of last year. Since providing carriers with enhanced capabilities to place digital offers and loads via Navisphere Carrier, which improves the carrier experience and our productivity, we saw a 34% sequential increase in digital offers from Q2 to Q3. Another data point that demonstrates our progress is the execution of 615,000 fully automated bookings with carriers in our NAST Truckload business during Q3, which is an increase of 87% compared to the same quarter last year, and represented $1.2 billion in digital bookings in Q3 alone. Broadly speaking, we’re focused on providing scalable digital solutions that deliver improved customer and carrier experiences and service levels by working backwards from their needs. Much of this is about operationalizing our information advantage at scale through features such as backhaul load recommendations for carriers. On the customer side, it’s about giving customers insights around price and coverage. And one way to do this is to scale our Market Rate IQ and Procure IQ products. Scalable digital processes will enable us to decouple volume and headcount growth and drive increased productivity, and we are laser-focused on opportunities to automate or make self-serve processes that are core to our operating model. This includes increasing the digital execution of all the touch points in the life cycle of a load including order management, appointments, in-transit tracking, cash advances, and financial and documentation processes. Scaling these processes are foundational to being the lowest cost operator, which ultimately gives us the pricing flexibility to accelerate growth and gain market share in the new side of the marketplace that we serve while delivering our long-term operating margin targets. I’ll turn the call over to Mike now to review the specifics of our third quarter financial performance.

Thanks, Arun, and good morning, everyone. Our Q3 enterprise results reflect truckload volume growth in NAST along with sequential and year-over-year price declines on softening demand in the freight forwarding and surface transportation markets that Bob referenced earlier. Our third quarter total company AGP was up $43 million or 5%, with growth in NAST partially offset by the decline in Global Forwarding. On a sequential basis, total company AGP declined 14% from our record AGP in Q2 with declines in both NAST and Global Forwarding. On a monthly basis compared to 2021, our total company AGP per business day was up 20% in July, down 1% in August, and down 2% in September. Q3 personnel expenses were $437.5 million, up 9.4% compared to Q3 last year, primarily due to a 13% increase in average headcount. On a sequential basis, personnel expenses declined $7.2 million due to lower incentive compensation. Our Q3 ending headcount also declined 1% from the end of Q2, which is consistent with our stated expectation of flat to declining headcount in the back half of the year. For the full year, we continue to expect our personnel expenses to be approximately $1.7 billion, which is the high end of our original guidance. This excludes one-time restructuring expenses of $15 million to $20 million related to the cost savings initiatives that Bob described. Moving on to SG&A. Q3 expenses of $162 million were up $28.5 million compared to Q3 of last year, driven primarily by increases in legal settlements, purchase services, and travel expenses. For 2022, we now expect our total SG&A expenses to be in the high end of our original guidance of $550 million to $600 million, including the $25.3 million gain in Q2 from the sale and leaseback of our Kansas City Regional Center, which is largely offset by nonrecurring legal settlement expenses. We also now expect 2022 full-year depreciation and amortization to be $90 million to $95 million, which is down from our previous guidance of approximately $100 million. Interest and other expenses totaled $16 million, down $0.7 million versus Q3 last year. Q3 this year included $20.8 million of interest expense, up $7.7 million versus last year, primarily due to higher average debt. The increased interest expense was partially offset by a $5.2 million gain on foreign currency revaluation. In Q3 of last year, FX revaluation was a $3.8 million loss. Our Q3 tax rate came in at 16.9% compared to 16.0% in Q3 last year. Our year-to-date tax rate is 19.2%, and we continue to expect our 2022 full-year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal, state, or international tax policy. Q3 net income was $225.8 million, down 8.6% compared to Q3 last year, and we delivered diluted earnings per share of $1.78, down 4% versus last year, but up 78% compared to Q3 of 2020. Turning to cash flow. Q3 cash flow generated by operations was a record $625.5 million compared to $73.5 million used by operations in Q3 of 2021. The $699 million year-over-year improvement was primarily due to a $359 million sequential decrease in net operating working capital in Q3, driven by the declining cost and price of purchased transportation in our model. Conversely, Q3 of last year included a $412 million sequential increase in net operating working capital as costs and prices were rising. From the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1.5 billion. As the cost and price of purchased transportation have come down, we have realized the benefit to working capital and operating cash flow on a lag basis based on our DSO and DPO. To the extent that freight prices continue to decline, we would expect a commensurate reduction to working capital. Capital expenditures were $31.3 million in Q3 compared to $22.7 million in Q3 last year. We expect our 2022 capital expenditures to be at the high end of our previous guidance of $110 million to $120 million. Driven by the increased cash flow in Q3, we returned approximately $607 million of cash to shareholders through a combination of $536 million of share repurchases and $71 million of dividends. The Q3 cash return to shareholders significantly exceeded net income and was up 156% versus Q3 last year, driven by the record cash flow. From a capital allocation standpoint, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our share repurchase program to deploy excess cash. Now on to the balance sheet highlights. We ended Q3 with approximately $1.1 billion of liquidity comprised of $896 million of committed funding under our credit facilities and a cash balance of $188 million. Our debt balance at the end of Q3 was $2.2 billion, up $472 million versus Q3 last year, primarily driven by share repurchases due to our expanded capacity to borrow, given our EBITDA performance. Our net debt-to-EBITDA leverage at the end of Q3 was 1.36x, down from 1.39x at the end of Q3 last year. Finally, as Bob discussed, we are taking actions to reduce our costs by $175 million. When including expected net headwinds of approximately $25 million, driven by inflation and merit increases in 2023, we expect to realize net annualized cost savings of $150 million by the fourth quarter of 2023. This savings is in comparison to the annualized run rate of our operating expenses in the third quarter of this year. Related to these actions, we are expecting nonrecurring restructuring charges in the fourth quarter of this year of approximately $15 million to $20 million, which are incremental to our 2022 expense guidance, as I mentioned earlier. These net annualized cost savings are intended to be long-term structural changes. Investments to scale our digital processes, particularly in NAST, enable us to take these actions and adapt to changing market conditions to foster long-term profitable growth for our shareholders. Now I’ll turn the call back over to Bob for his final comments.

Thanks, Mike. As inflationary pressures weigh on consumer discretionary spending and global economic growth, we continue to believe that our global suite of services, our growing digital platform, our responsive team, and our broad exposure to different industry verticals and geographies, supported by our resilient and flexible non-asset-based business model, put us in a position to continue to deliver strong financial results. But we also need to continue evolving our organization to bring focus to our highest 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. The work that our team is executing on related to scaling our digital processes and operating model while working backwards from the needs of our customers and carriers is entirely focused on driving improvements in our customer and carrier experience which in turn will drive market share gains and growth. We’re focused on improving productivity, which in turn reduces our long-term operating costs and increases profits, leading to continued strong returns to shareholders. This concludes our prepared comments. And with that, I’ll turn it back to Donna for the Q&A portion of the call.

The floor is now open for questions. The first question today is coming from Todd Fowler of KeyBanc.

Great. Bob, I guess maybe to start, if you can maybe share with us on the cost savings that you’re expecting going into ‘23, maybe some comments around the buckets where you see those savings coming from? How we should think about those across segments? And as you think about kind of this initial stab on the cost side, do you see additional opportunities as you move beyond this? Do you have to wait until you get to the end of these cost savings for some other opportunities? Or can you identify some things as you continue to move forward? So a lot kind of packed in there, but maybe you can share some thoughts on that?

Yes, I can start, and I’ll let Mike weigh in a little bit too, Todd. In general terms, if you think about our cost structure right now, it’s about 75% personnel, 25% SG&A. And so generally, I think about the cost reductions kind of following that same approach. As we look forward, I think there are really three drivers in terms of what’s driving these cost reductions. Obviously, we’re seeing a changing marketplace. We’re seeing supply chains operate more efficiently, more effectively with less disruptions. And so over the course of the past couple of years, we’ve had to really ramp staff in order to deal with many of those exceptions; just it required more human engagement, more human labor. And as supply chain ease, it will allow us and afford us the opportunity to make some difficult personnel decisions there in order to take cost out of the model. Additionally, Arun talked about a lot of work on the digital endeavors to scale the overall model and drive efficiency, and that too will provide us those opportunities.

Yes, I think that covers it. I think I’d put an additional emphasis just on the digitization efforts. And while $175 million worth of cost reduction initiatives, net $150 million is important for our model. It’s not where we end. It’s just an articulation of the progress that we’re making, and that digitization is really the key for us to continue to drive costs down going forward.

And I think, Todd, you asked kind of five segments. And I would just state that this will be broad-based, primarily NAST and forwarding related, but there will be cost reductions across the enterprise.

Thank you, operator. Bob and team, good morning. I appreciate you taking my call. We’ve been seeing a lot of talk about spot pricing in the Truckload sector, and there has been some talk about maybe finding a bottom here, if you will. Would love to hear some of your thoughts on that. And then maybe if I can squeeze one more in. Just thoughts on that 60% of the new business being generated from lanes other than trans-pacific in Global Forwarding.

Yes. I’ll provide some insights on the cycle and spot market in more detail. We frequently refer to the TMC routing guide to gauge overall industry routing guide performance. It’s essential to understand how well routing guides are performing in the contract segment to assess unplanned freight entering the spot market. The depth of tender in the TMC routing guide was around 1.3 but fell to 1.24 in September. Historically, from a load acceptance standpoint, this is comparable to periods like 2009, 2019, and the first half of 2020. This illustrates the current state of contract compliance. Regarding the cost market outlook for 2023, we anticipate the cost forecast at both the beginning and end of the year will be fairly similar. However, we expect there will be a decrease in spot and truckload pricing in the first half of the year followed by a slight increase later. We believe that the cost floor will emerge around April or May, and currently, there is minimal unplanned freight in the spot market. We’ve noticed some shippers are intentionally using the spot market to achieve lower cost savings while keeping some freight out of the contract market. In response to your second question about forwarding, we take pride in our leadership in the transpacific area, and we are actively expanding our global forwarding portfolio to reduce reliance on it. You can see strong growth in regions like Europe, Southeast Asia, Oceania, Australia, Latin America, and India as examples. We have reached the top position as the leading forwarder from India to the U.S. and from the U.S. to Australia. I hope this provides some clarity.

So I just want to come back to the conditions in the contract market, Bob, you had a 65-35 split. You had spreads with spot market contract kind of widening out through the quarter, but margins came in a little bit weaker than we would have thought or at least that would have historically suggested. Was that the compliance aspect of it that caused some of that weakness? Was it just less spot market volume than we would have thought? I mean it does seem like it declined fairly quickly. And then just a quick clarification, maybe for Mike on that legal settlement. It sounds like that’s in the SG&A guide and offsetting the other charge-offs. I wanted to see if you could expand on that and perhaps where that was located from a segment perspective because that was a fairly large number you just called out.

In the Truckload AGP, we observed continued strength in AGP per truckload shipment within our contract business this quarter, showing significant year-on-year growth. The model is performing as expected in the contract sector. In the spot business, we are aggressively pursuing market share and increasing volume, which has resulted in a notable decrease in overall AGP per shipment due to 35% of the volume coming from the spot market. Currently, our margins and AGP per truckload shipment in the spot market are much lower than in the contract space. This situation is the opposite of last year's third quarter, where spot margins were much higher than contract margins. Overall, however, our AGP per truckload has risen considerably compared to Q3 of last year and remains above the historical average.

Yes. And then, Brian, just to add a little bit of clarity on SG&A. We were up 21% in the quarter, 28% overall, guiding to the high end of our original guidance, including the $25 million gain on sale leaseback of our Kansas City Regional facility, which was in Q2. But we also had called out in your point about nonrecurring legal settlements in the quarter and on the year, largely offsetting that gain from Kansas City. And so just a little more specifically in the quarter on the legal settlements. They represented about 1/3 of that increase in expense in SG&A for Q3.

And Mike, which segment, in particular, did that impact? Or was that more on the corporate line item?

Yes, it’s a corporate line item, but impacting NAST business.

Yes, thank you, operator, and good morning, everyone. Bob, referring back to your second quarter commentary in July, you expressed a cautious outlook, particularly regarding Global Forwarding, and it seems that caution was justified. The division's EBIT decreased by nearly 50% sequentially. We were somewhat surprised to see that you continued to add headcount, increasing by about 100 people quarter-over-quarter. Could you help us understand how those two situations align? Why were you increasing headcount despite the conservative outlook?

Yes. It’s in forwarding admittedly, we likely got ahead of ourselves in terms of headcount. We certainly did not expect that the market was going to come down as rapidly as it did. We were certainly cautious. A lot of the headcount, the way that we preplan our workforce plans groups, we’re hiring in advance of opportunity. And so many of those hires were already in, I’d say, in-flight leading into the quarter, there were offers that had been extended and accepted. And we didn’t feel like it was the right thing from a talent brand perspective to be rescinding offers in that environment. So as we talk about the cost reduction initiatives and kind of that balance between SG&A and personnel, that will clearly deliver a drawdown in headcount commensurate with the cost reduction. And as I said before, that will be focused primarily in NAST and Forwarding.

Okay. Fair enough. And then just maybe to follow up really quickly. Can you give us an update on how you’re thinking about the portfolio just in terms of strategic alternatives that maybe you consider what businesses you see as core or non-core? And whether you have any kind of processes in place to maybe monetize some of those assets?

Yes. Bruce, I think it’s really prudent to continually review the business portfolio and to assess the best way to create long-term shareholder value, right? That goes without saying. As you see in our earnings deck on Slide 10, we continue to believe that global growth and continuing to drive share gains through our integrated solution design between forwarding, surface transportation, managed services, and fresh are part of that sustainable growth strategy. And each of them in its own way, kind of feeds the flywheel of growth overall, particularly across NAST and Forwarding, as we look at instances where we engage customers with both of those services, in comparison to where customers just engage one or the other. We see on a five-year CAGR, we see over a 450 basis point increase in the five-year revenue CAGR growth rate of customer revenue when we integrate both services with those customers. So we see greater growth and greater retention. And so again, we continue to review the portfolio. We continue to take the view that we have to do what’s right for the customer and for the company and for the long-term value of our shareholders, but there is nothing to update today specific to the portfolio.

I have a quick housekeeping question. Mike, was the legal settlement in the third quarter around $8 million or $9 million? I want to clarify if that falls under NAST or corporate. That’s my first question. Secondly, regarding the $150 million in cost savings, could you explain why it's taking four quarters to implement? Also, Arun, as you work on your technology initiatives, do you anticipate that number might increase over the next few quarters as new efficiency opportunities arise?

Yes, Jack, let me just start off and cover your question about the legal settlements the legal settlements in Q3. The legal settlements were $9.4 million, they impact NAST, the business.

Yes. And in terms of timing, we’re going to take the appropriate pace to this to ensure that we’re able to not disrupt the business, not disrupt our customer relationships and not put future growth at risk. Arun can talk about the roadmap and kind of some of the things around operationalizing, and we’ve talked about kind of making self-serve automating and eliminating some of those legacy tasks. And so some of this will phase in as those are delivered as well.

Yes, Jack. We currently have a clear plan to boost productivity in NAST by approximately 15% by the end of 2023, which aligns with the $150 million that Bob mentioned. Regarding additional opportunities, we’ve discussed the lifecycle of a load, beginning with order management through to appointments, in-transit tracking, financial documents, and more. Our initial focus for the 15% productivity improvement is on in-transit tracking and appointments. However, there are certainly other opportunities that are in the early stages. We are more confident in the 15% increase related to in-transit tracking and appointments. As we build confidence in other initiatives, there may be additional opportunities, but we don’t have clear visibility on those just yet.

Maybe just following up a little bit. Can you talk to a little more of the timing of the cost savings as they roll through next year? Or is it evenly spaced? And is there a way to get some sense for what SG&A and personnel expense could look like in 2023 after all these savings? And then finally, I know you don’t give guidance per se, but holistically thinking about this plan and the productivity savings you just mentioned, can that EBIT margin stay north of the 30% level for the total company?

Yes. Just in terms of the timing on the expense savings initiatives, we obviously want to get after those as quickly as possible. But as Bob said, we’ve got to do it with the right cadence in terms of what we’re delivering on the business, the market conditions, the pace of the digital efforts. We, in our normal course, will come back and give you guidance on many of our expense line items on our Q4 earnings call.

Yes. And in terms of kind of the operating profits of the business, we will continue to work backwards from our stated operating margin targets of 40% for NAST, 30% for Forwarding, and mid-30s for the Enterprise. And so we’re using that as a guide as we continue to move forward here and kind of solve for and so that in itself will help to kind of determine the pace in which the cost reductions come.

Great. Mike, just to clarify, the $25 million gain last quarter is only partially offset by the $9 million legal settlement, correct? It wasn’t a complete offset. I wanted to confirm that based on what you previously stated. Bob, regarding the profitability of NAST and Truckload, were there unusually high fuel gains last quarter that contributed to this? I’m trying to understand the sequential decline in margins. What changed to cause that? Your percentage dropped from 40% to 35% on the spot market, while you mentioned that contract margins were significantly better. I'm trying to understand why the overall margin decreased so much. Is it still worthwhile to pursue the spot volume business? Does it still contribute positively?

Yes, Ken, let me take the first part of your question just to make sure we’re clear on that SG&A. The comments about Q2 and the Kansas City gain were in the context of our annual guidance being at the high end of the original guidance that we gave on SG&A. And so with that, we had one-time legal settlements in Q3, but we also had smaller settlement, and we’re really talking about what we believe will happen for the year. So the comment about nonrecurring legal settlements largely offsetting the $25 million gain was really a comment about the year in its entirety, all of 2022, not just what we experienced in Q3, which was a $9.4 million charge for nonrecurring legal settlements. I hope that’s clear.

Yes. And as it relates to the contract business, as you know, the contracts are constantly repricing. And so part of the drag on the contract AGP per shipment in third quarter was caused by bids that we repriced in the second quarter and through the third quarter that are resetting at lower AGP per shipment. We’ve seen costs. They came down precipitously if that’s the appropriate word to use in the second quarter, which caused that record spread that we had, the highest AGP per shipment in our history, and so costs have normalized as contracts are repricing, we’re still in a place where we feel very good about the health of the contract portfolio. The spot market business is still contributory in terms of pursuing those share gains and those volume gains. So yes, it’s down from second quarter. We certainly didn’t look at the second quarter as being a sustainable adjusted gross profit per shipment, and certainly, we’re not building any plans around that. But to be clear, too, there is no fuel impact to our Truckload business. It’s a straight pass-through. There are headwinds and tailwinds with fuel in our LTL business when fuel is going up, it tends to benefit our LTL business when it comes down, it’s a headwind.

And then just to clarify on the $150 million, Bob, is that a shift in incentive compensation pay and commission structure? Or is that just reducing the personnel, as you mentioned earlier, given the digitization? I'm sorry for the follow-on.

Yes. There will be a combination of different factors to consider. We anticipate both positive and negative influences for the upcoming year. Incentive compensation will positively contribute, while a reduction in headcount will have an effect. As I mentioned at the beginning of the call, if you consider a 75-25 split between personnel expenses and SG&A, it will likely align closely with that distribution.

Just going back to Forwarding, if we look at the sequential trend, gross profit was down $75 million or so from 2Q to 3Q, yet operating costs were up $6 million. Can we drill into that a little more besides that count question earlier? Just how much of this is a lag ability as you respond? And how much of this is a structural cost increase? Because if we look at spot rates, it seems that that pressure will certainly be more this quarter than last and with the West Coast being all the way back to, call it, 2018 levels, but the cost structure and OpEx and Forwarding being 50% above that this quarter. So any thoughts on that would be really helpful.

Yes, it’s almost exclusively personnel expense, Bascome.

And the ability to control that going forward?

There is a plan in place to manage this moving forward. We still believe that a 30% operating margin is the right level of profitability for our Forwarding business. When considering how to achieve that, there are three key factors to examine. I don’t mean to oversimplify, but these factors include the trends in volume, the trends in average gross profit per shipment, and the personnel expenses required to deliver that operating margin.

Bob, I wanted to ask you about your sort of philosophy on volume growth. I think there’s been push to continue to try to gain share through fluctuations in the market in NAST. And it sounds like this quarter, that was challenging from a spot perspective. So I wanted to get a sense of maybe how you think about it. Volume growth was pretty close to breakeven in NAST. Is it something that you think you can do? Does it make sense to do in these types of markets where you might end up seeing sort of an impact on profitability as a result? I just want to get your sense on how you’re thinking about that.

Yes. Generally, as we have discussed previously, we believe that volume growth throughout the cycle is a crucial aspect of the overall business health. However, the strategy we implement varies based on market conditions. Arun and his team are working diligently to systematically optimize yield and identify the right volume levels, corridors, and terms for accepting freight. Looking ahead to 2023, if we anticipate volume growth, it will mostly come from the contract market. We plan to reprice about 60% of our Truckload business between the fourth and first quarters, and we recognize that to foster growth, we need to adopt an aggressive stance in our Truckload pricing initiatives. If this doesn't fully address your question, Chris, I'm happy to elaborate further.

It does. It’s helpful. I guess, that sort of gets to the point that you mentioned on the approach to contract pricing. Anything you can share with sort of where the market is today relative to how you might think about that, what type of aggressive actions you might need to take to be able to get share in that piece of the market?

We believe we have made significant strides in our pricing strategies and our responses to bids, and we are noticing strong demand signals in short haul and drop trailer sectors, to which we are actively responding. Generally speaking, while I won't make specific predictions about market trends, I can say that in the early renewals this quarter, the average gross profit per truckload shipment is coming in lower than our contract freight has been in recent quarters. Therefore, to achieve growth in NAST in 2023, we will mainly need to focus on increasing volume.

Mike, I have a few follow-up questions for you. Can you provide some insight on the $10 million in losses at corporate, as it appears to be higher than usual? Also, if my calculations are correct, will SG&A increase in Q4 compared to Q3? Lastly, I want to clarify regarding the $150 million in savings. Are you calculating that based on the reported Q3, which includes the $35 million to $40 million in annualized legal expenses, or are you excluding the legal settlements when discussing the savings compared to Q3?

Yes. So first, I’ll kind of go backwards. So first of all, the annual run rate is just as reported, so not including the legal settlement. The SG&A, we guided to the high end. And so yes, I guess, if you take the very high end of our guidance of $600 million, and look at our year-to-date, you’d be seeing 172, 173-ish kind of number would be the Q4 plug to get to the high end, which is higher than what we had in Q3 of $162-ish. And then back to your first question, I think you were asking about in our all other and corporate results, our income from operations, which was a $10 million loss compared to what would have been a $3.4 million loss a year ago, and that’s driven by unallocated expenses that we hold at the corporate level and think about that as primarily our investments in growth in the product organization. In terms of the other business units, like Robinson Fresh, Managed Services, and EST, which are included also in that group, those are generating income positively and up versus Q3 last year.

Okay. And then maybe just, Bob, real quick. The price versus cost spread still positive, 4 points in Q3. Do you think that stays positive into Q4?

From where I sit right now, I would believe that to stay positive in Q4.

I think we’ve covered a lot, Bob, about the ever-evolving market here. It’s changing awfully quickly. I was wondering if you can provide some perspective on this cycle versus prior cycles, most especially how are some of your competitors acting? If you’re going after volume aggressively maybe at the expense of yield, are others doing the same? Is it more discipline this time? Does it offer you a better opportunity for Robinson specific market share growth versus prior cycles? Just any context to this upcoming maybe 12 months versus ‘19 and ‘16.

Yes. Each cycle has its own unique characteristics, but generally, we see that an up cycle lasts about seven quarters, followed by a similar duration in a down cycle. As we look ahead to the next few quarters, we anticipate downward pressure on contractual pricing. Regarding competitor behavior, I believe our strategy aligns with industry trends, suggesting that if we aim to increase our market share next year, it will primarily come from the contract market. Therefore, I expect to see heightened competition and aggressive pricing as about 85% of truckload freight typically operates within this market, leading companies to be competitive in order to secure their share. It’s hard for me to forecast that from where we sit right now. I think we believe that the cost floor is higher than where it has been in the past. So if you take that then potentially, it means higher lows, if you will. And I think what we’re seeing from customers today is in pricing, they’re tending to move back towards a 2-month duration of their bids. So not seeing as many, many bids or short-term bids and the sub some more normal pricing circumstances. Customer objectives in pricing is, there’s been obviously a lot of disruption to service and cost and networks over the course of the past couple of years. And so working with shippers to try to get back to the quality expectations that they had pre-pandemic, in some cases, back to the pricing expectations that they had pre-pandemic and also helping shippers to kind of reevaluate their network and their network footprint to optimize their overall costs.

I have a question about the cost savings plan. I appreciate the breakdown between growth in net cost savings. However, I’m trying to understand how much of the $150 million net is actually realized in 2023 compared to ongoing projections. Additionally, Bob, you mentioned that Arun has helped the organization think and act differently. Could you elaborate on that? What does Arun's appointment as COO accelerate, and what are the financial implications? I’m curious if there is a significant change occurring due to this leadership shift at the COO level, considering the company has a strong market position and is in a high-return business. Should we expect a real inflection as a result of this appointment?

Yes. Regarding your first question, Amit, we will provide guidance on the run rate and how much impacts the bottom line in 2023 during our Q4 earnings call. Typically, we will share insights on personnel and SG&A for the year, which will help illustrate how these figures compare against the challenges posed by inflation and merit increase investments, among other factors.

Yes. And related to Arun’s role in his promotion, I guess what I would say from where I sit is Arun is a seasoned executive, and he’s got experience in many facets of executive leadership that extend beyond just product and technology. And while he’s highly skilled and technical, he’s also, from a leadership perspective, really a transformational leader that elevates the performance of people and teams around him. Expanding his scope at Robinson is going to help us to bring together teams that are critical to advancing our progress in digital which in turn is going to fuel growth and improve efficiency, allow us to compete to win as our industry, right? Our industry continues to evolve and change at a rapid pace. And we’re really thinking about where is this industry going to be 3 years from now, 5 years from now? As I think you know my technical knowledge is deep in the supply chain space and his is deep in the world of digital-first companies and building scalable platforms and collectively, we complement each other’s skill sets and we work collectively with each of the business units to achieve our long-term growth goals. The work up to this point has been exclusively focused within the NAST organization, and this allows us a platform to bring together those critical components and work across the enterprise.

Unfortunately, that brings us to the end of the time we have for the Q&A session. I would like to turn the floor back over to Mr. Ives for closing comments. Thank you. Yes, that concludes today’s earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a great day. Ladies and gentlemen, thank you for your participation and interest in C.H. Robinson. You may disconnect your lines. I’ll log off the webcast at this time, and enjoy the rest of your day.