C. H. Robinson Worldwide, Inc. Q3 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2023 Conference Call. As a reminder, this conference is being recorded, Wednesday, November 1, 2023. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations. Please go ahead.

Thank you, Donna, and good afternoon, everyone. On the call with me today is Dave Bozeman, our President and Chief Executive Officer; Mike Zechmeister, our Chief Financial Officer; and Arun Rajan, our Chief Operating Officer. Dave will provide some introductory comments. Arun will provide an update on our initiatives to improve our customer and carrier experience and our operating leverage. Mike will provide a summary of our 2023 third quarter results and our expense guidance for 2023, 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. 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. Today's remarks also contain certain non-GAAP measures, and reconciliations of those measures to GAAP measures are included in the presentation. 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 Dave.

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. As has been well-documented by many industry participants and observers, global freight demand continued to be weak in the third quarter. This, combined with ample carrier capacity, resulted in a loose market with low spot rates. Load-to-truck ratios remain near the low levels of 2019. The route guide depth in our managed service business of 1.15 in Q3 indicates that primary freight providers are accepting most of the contractual freight tendered to them, resulting in fewer spot market opportunities. In the freight forwarding market, ocean vessel and airfreight capacity continues to exceed demand, resulting in suppressed rates for ocean and airfreight. We are staying focused on what we can control by providing superior service to our customers and carriers, executing on our plans to streamline our processes by removing waste and manual touches, and delivering tools that enable our customers and carrier-facing employees to allocate their time to relationship building and exception management. Our focus on delivering quality and improvements to our customers, such as enhanced visibility and increased automation, has been reflected in very positive feedback from my meetings with customers, validated by Net Promoter Scores this year that are the highest on record for the company, which we believe sets us up well with customers for the eventual positive inflection in the freight market. Our customers value the quality, stability, and reliability that we provide as they work to optimize their transportation needs. This has taken on a greater importance to shippers who had exposure to transportation providers whose business models were not financially viable. During my many discussions with customers over the past four months, it's clear that they prefer partners who have financial strength and can invest through cycles in the customer experience. They also want partners who have the expertise to provide innovative solutions enabled by technology and people that they rely on to serve as an extension of their team. C.H. Robinson is that partner, with a combination of people, technology, and scale to deliver an unmatched customer and carrier experience. As I mentioned earlier, we're executing on our plans to streamline our processes by removing waste and manual touches. The result has been meaningful cost reductions and productivity gains across our business that are ahead of our stated targets. In our North American Surface Transportation business, our productivity improvements have translated into an 18% year-to-date increase in shipments per person per day. Assuming a typical seasonal volume pullback in Q4, we are on track to meet or exceed our target of 15% year-over-year improvement by Q4 of this year. From a cost reduction perspective, we reduced Q3 operating expenses in NAST by 22% year-over-year versus a volume decline of only 3.5%. In our Global Forwarding business, Q3 operating expenses, excluding $23.6 million of restructuring charges, declined 12% year-over-year despite a slight increase in the number of shipments. For the full enterprise, Q3 operating expenses, excluding $24.5 million of restructuring charges, declined 17% year-over-year compared to a 3% decrease in overall volume. As we continue to improve the customer experience and our cost to serve, I'm focused on ensuring that we'll be ready for the eventual freight market rebound. This means growing volume without adding headcount. We believe our team's continuing efforts to streamline our processes and remove manual touches will get us there. Even though I'm pleased with the progress that the team has made, I've challenged them to increase our clock speed on decision-making and improvement efforts. I started by asking our employees company-wide to share what was impeding their speed and where they saw opportunity to create greater efficiency in their daily processes. The incredible response rate confirmed the desire of our employees to strengthen the company and the speak-up culture that exists. The responses validated some of our focus items and highlighted new opportunities. We're now driving focus on a handful of concurrent work streams that are addressing the highest leverage areas to eliminate productivity bottlenecks. We're bringing forward past lessons on team structure and on mechanisms to drive adoption to deliver an improved customer experience through process optimization. Our 18% year-to-date productivity improvement is an indicator of the progress we are already making. I'll turn it over to Arun shortly to share more about this and how we're utilizing generative AI. But these focused work streams are an example of how the leadership team and I are making changes and driving focus to position ourselves for growth in our core business. Ultimately, our focus on continuously improving the customer and carrier experience and removing waste from our workflows will result in a company that is quicker, more flexible, and more agile in solving problems for our customers, providing better customer service, and creating operating leverage and profitable growth. I'm excited about the work that we're doing to reinvigorate Robinson's winning culture, and I'm confident that together, we will win for our customers, carriers, employees, and shareholders. With that, I'll turn it over to Arun to provide more details on our efforts to strengthen our customer and carrier experience and improve our efficiency and operating leverage.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, we've identified a handful of concurrent work streams that are addressing significant opportunities to eliminate productivity bottlenecks and deliver process optimization and an improved customer experience. We're leveraging the strength and experience of our single-threaded business process owners who are leading cross-functional teams across these work streams with dedicated product, engineering, data science, and AI resources assigned to each work stream, along with alignment of shared goals, incentives, and process accountability. A couple of examples of these work streams on the productivity roadmap are quoting and order entry. In both of these areas, we are reducing manual touches and our response time to customers, driving faster speed to market and higher customer engagement. In addition to our past learnings, we're leaning more heavily on generative AI to deliver process improvements. In our quoting work stream, we've utilized Gen AI to fill in the blanks where there's incomplete and unstructured information in an automated and efficient process, which has reduced the time to provide a quote from approximately 5 minutes to less than 1 minute, from the time the request is received via e-mail. In the last week of the quarter, over 10,000 transactional quotes were created using a Gen AI agent, and we have a significant opportunity to scale and grow in this area as we bring this capability to more customers, respond to more quote requests, and leverage the ability to provide transactional quoting 24 hours a day, 7 days a week. With more data and history to leverage than any other third-party logistics provider, we have opportunities to harness the power that this advanced technology now offers to further capitalize on our information advantage. And we'll continue to look for and pursue those opportunities. In addition to improved customer service and engagement, these efforts are increasing our digital execution of critical touchpoints in the life cycle of an order from quote to cash, thereby reducing the number of manual tasks per shipment and the time for tasks. This translates to productivity improvements measured in terms of shipments per person per day, which creates operating leverage. For example, a 15% productivity target translates to an ability to grow volume by 15% without adding headcount to support that volume growth. If volume growth is less than 15%, the 15% improvement target would be achieved through a combination of volume growth and headcount reduction. Both scenarios create operating leverage. As Dave mentioned earlier, we surpassed our goal of a 15% year-over-year improvement in shipments per person per day by Q4 of this year with an 18% year-to-date improvement achieved through Q3. As we raise the bar on our clock speed and deliver further process optimization and an improved customer experience, we plan to deliver the compounded benefits of additional productivity improvements beyond 2023 with technology that supports our people and processes. With that, I'll turn the call over to Mike for a review of our third-quarter results.

Thanks, Arun, and good afternoon, everyone. The soft freight market outlined by Dave resulted in third-quarter total revenues of $4.3 billion, down 28% compared to Q3 last year. Our third-quarter adjusted gross profit, or AGP, was also down 28% year-over-year, or $252 million, driven by a 31.4% decline in NAST, a 31.6% decline in Global Forwarding, and partially offset by a 4.6% increase in our other business units. On a monthly basis compared to Q3 of last year, our total company AGP per business day was down 34% in July, down 26% in August, and down 21% in September. The third quarter contained one less business day than both the third quarter of last year and the second quarter of this year. In our NAST truckload business, our Q3 volume declined approximately 6% year-over-year and 4.5% on a per business day basis. On a sequential basis, NAST truckload volume increased 2% versus Q2 and 3.5% per business day. During Q3, we had an approximate mix of 70% contractual volume and 30% transactional volume in our truckload business for the third quarter in a row, as the spot market remains suppressed. The sequential declines that we have seen in our truckload linehaul cost per mile since Q2 of last year continued into Q3 of this year. On a year-over-year basis, we saw a decline of approximately 13.5% in our average truckload linehaul cost per mile paid to carriers, excluding fuel surcharges. Due to the usual time lag associated with contract pricing resetting to follow spot market costs, our average truckload linehaul rate or price billed to our customers, excluding fuel surcharges, declined 16.5% on a year-over-year basis. With this price decline coming off of a higher base than cost, these changes resulted in a 34% year-over-year decrease in our truckload AGP per mile and a 36.5% decrease in our AGP per load. Within Q3, our truckload AGP per load was relatively flat throughout the quarter. In our LTL business, Q3 orders were down 2% on a year-over-year basis and 1% sequentially. On a per business day basis, our Q3 LTL orders were down 0.5% year-over-year and up 0.5% sequentially. AGP per order declined 13.5% on a year-over-year basis, driven primarily by soft market conditions and lower fuel prices. On a sequential basis, the cost and price of purchased transportation in the LTL market increased in Q3, resulting in a 2% increase in AGP per order. This was primarily driven by capacity that has likely temporarily exited the market. By leveraging our broad access to capacity in all modes of LTL, we were able to meet our customers' LTL needs at a high service level. In our Global Forwarding business, market conditions continued to be soft due to weak demand and plenty of capacity. In Q3, Global Forwarding generated AGP of approximately $170 million, a 32% decline year-over-year. Within these results, our ocean forwarding AGP declined by 35% year-over-year, driven by a 34.5% decline in AGP per shipment and a 0.5% decrease in shipments. On a sequential basis, our ocean volume grew 2.5%. Compared to pre-pandemic levels, we have grown ocean market share through adding new customers, diversifying trade lanes and verticals, and leveraging investments in technology and talent. Turning to expenses. Our productivity initiatives continue to enable us to deliver on and exceed our expense reduction expectations. Q3 personnel expenses were $343.5 million, including $3 million of restructuring charges, and that was down 21.5% compared to Q3 of last year. Excluding the restructuring charges, our Q3 personnel expenses were down 22.2% year-over-year, primarily due to our cost optimization efforts and lower variable compensation. Our ending headcount was down 14.2% year-over-year in Q3 to 15,391. Q3 ending headcount was also down 2.4% sequentially compared to Q2. As a result of the progress on our cost optimization efforts, we now expect our 2023 personnel expenses to be $1.43 billion to $1.45 billion, below the $1.45 billion to $1.55 billion range that we previously provided. As a reminder, our expense guidance excludes restructuring expenses. Moving to SG&A. Q3 expenses were $177.8 million and included $21.4 million of restructuring charges, primarily related to asset impairments driven by our decision to divest our Global Forwarding operations in Argentina. Operating in Argentina has become challenging due to its strict monetary policies and rapid currency devaluation, and this divestiture will help mitigate our exposure to the deteriorating economic conditions and increasing political instability in that region. As part of divesting our operations in Argentina, we are pursuing a path for a local independent agent or agents to ensure continued service to our customers with shipments in that region. Excluding those Q3 restructuring charges, SG&A expenses of $156.4 million declined approximately 3.5% year-over-year, primarily due to reductions in contingent worker expenses and legal settlements. We expect our 2023 SG&A expenses to be near the midpoint of our previous guidance of $575 million to $625 million, including depreciation and amortization expense that is expected to be toward the high end of our previous guidance of $90 million to $100 million. As you recall from our Q1 earnings call, we raised our cost savings commitment to $300 million of net annualized cost savings by Q4 of this year compared to the annualized run rate of Q3 of last year. With the progress to date on our productivity initiatives, we are on track to deliver approximately $360 million in cost savings in 2023 at the midpoint of our updated guidance, with the majority of cost savings expected to be longer-term structural changes. Consistent with our strategy, these cost savings improve our operating leverage and will help our operating margins as demand and a more balanced freight market return. Q3 interest and other expense totaled $20.7 million, up $4.8 million versus Q3 of last year. Q3 included $21.8 million of interest expense, up $1 million versus Q3 of last year due to higher variable interest rates against a reduced debt load. The reduced debt load drove a $1.4 million decrease in Q3 interest expense on a sequential basis. Our Q3 tax rate came in at 11.7% compared to 16.9% in Q3 of 2022. The lower tax rate was primarily driven by lower pretax income and incremental tax benefits from foreign tax credits. We now expect our 2023 full-year effective tax rate to be in the range of 14% to 15%, down from our previous guidance of 16% to 18%. Adjusted or non-GAAP earnings per share, excluding $24.5 million of restructuring charges and $5.5 million of associated tax provision benefit, was $0.84, down 53% compared to Q3 last year. Turning to cash flow. Q3 cash flow generated from operations was $205 million, which demonstrates our ability to generate cash and make meaningful investments despite the continued soft freight market. Our Q3 cash flow compares to $626 million in Q3 of last year. The year-over-year decline in cash flow was primarily driven by changes in our net operating working capital. In Q3 of last year, we had a $359 million sequential decrease in net operating working capital driven by the sharply declining cost and price of purchase transportation. With the more moderated sequential declines in cost and price in Q3 of this year, we had a $55 million sequential decrease in net operating working capital. In Q3, our capital expenditures were $16.7 million compared to $31.3 million in Q3 of last year. We now expect our 2023 capital expenditures to be toward the lower end of our previous guidance of $90 million to $100 million. We returned $76 million of cash to shareholders in Q3 through $73 million of cash dividends and $3 million of share repurchases. The cash return to shareholders equates to 92% of Q3 net income but was down 88% versus Q3 last year, driven by the $153 million of cash used to reduce debt. Now on to the balance sheet highlights. We ended Q3 with approximately $1 billion of liquidity, comprised of $837 million of committed funding under our credit facilities and a cash balance of $175 million. Our debt balance at the end of Q3 was $1.58 billion, which includes debt paydown of $615 million versus Q3 last year. Our net debt-to-EBITDA leverage at the end of Q3 was 2.1x, up from 1.81x at the end of Q2. Our capital allocation strategy is grounded in maintaining investment-grade credit rating, which allows us to optimize our weighted average cost of capital. Our $615 million in debt paydown helped maintain our strong liquidity position and investment-grade credit rating. Keep in mind that the cash that we use to reduce debt generally reduces the amount of cash for share repurchases. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with our long-term EBITDA growth. Our dividends and share repurchase program are important levers to enhance shareholder value. Overall, I'm encouraged by the progress that we continue to make on our productivity initiatives and look forward to our ability to build on that progress. By leveraging generative AI combined with machine learning to take the capability of our people to an even higher level, we are positioned well to further reduce waste and increase operating leverage and value for Robinson shareholders. With that, I'll turn the call back over to Dave for his final comments.

Thanks, Mike. Over my first four months here, it's become apparent that C.H. Robinson has a secret sauce with people who have deep expertise in the freight market and long-standing relationships with their customers and carriers. Combined with Robinson's strong technology and large dataset, our people are able to provide innovative tech-enabled solutions powered by our information advantage for the benefit of our customers and carriers. This secret sauce is not easy to replicate with a digital-only solution. Robinson has shown the strength of this model through cycles, and our balance sheet continues to be strong. The investments we're making to improve the experience and outcomes for our customers and carriers, combined with the work that we're doing to accelerate our clock speed, waste reduction, and productivity improvements should position us well for the eventual freight market rebound and to deliver improved operating leverage and returns for our shareholders. I continue to see an opportunity for the company to reach its full potential and create more shareholder value by improving our value proposition, increasing our market share, accelerating growth, improving our efficiency and operating margins, and increasing overall profitability. I'm incredibly excited about our future. This concludes our prepared remarks. I'll turn it back to Donna now for the Q&A portion of the call.

Today's first question is coming from Chris Wetherbee of Citigroup.

I'd like to start, maybe it's helpful to get the monthly breakout of AGP. Could you give us a sense of maybe how October is trending? Keeping in mind that there have been some changes in the dynamics within brokerage, obviously, there are some headlines about some high-profile exits from the market. I'm just kind of curious about how October is trending. And if we are seeing some volume move back to Robinson. Dave, I think you mentioned in your prepared remarks that the customers are valuing some of the stability and strength that you guys provide. Just want to get a sense of maybe how that's playing out in October.

Yes. Chris. I'll have Mike break in and just kind of give you some details of what we're seeing. You set that question up well, then let's just jump in.

Yes. Overall, we're seeing a soft freight market. We referenced that. I think you've been hearing that from others. It seems to be lingering. We're not seeing any meaningful inflections yet in volume or rates. But I would also add that the way we approach this is regardless of where we are in the cycle, our pursuit is to outperform the market. We remain focused on providing exceptional service to our customers and streamlining our processes, amplifying the expertise of our people with our tech, improving our operating leverage, and gaining market share. We feel like in Q3, we made progress on all those fronts. You kind of asked about going into October, where we're at. I think looking forward, there's going to be some consumer spending that normally happens during the holiday season, and that will impact the market a little bit. Generally speaking, we see a seasonal bump in spot rates in Q4, mostly driven by the upcoming holidays and some carriers taking time off over the extended holidays. But nothing there that would suggest that there's something sustaining or something different. I think generally speaking, the trends that we're seeing have been pretty consistent.

The next question is coming from Jack Atkins of Stephens Inc.

So I guess I would love to get your thoughts kind of broadly as we begin the bid season process here over the next 30 to 45 days and think about the spring bid season of next year. How are you guys approaching that? Obviously, it's an extremely challenging market out there. I think most folks are expecting additional capacity to come out and perhaps a turn in the freight market at some point in 2024. How are you guys thinking about that as we head into the bid season process here?

Yes, Jack, let me address a few points. First, on the capacity front, while carrier capacity is decreasing, the reduction is not as significant as we might have anticipated at this stage. With the market hovering at low levels, pricing is approaching breakeven for carriers, which has led to a slower exit rate. This could be due to their past profits, government assistance, or reduced operating costs. As we look ahead to the upcoming bidding season, our goal is to enhance both our margins and market share. It's a competitive landscape, and we recognize that. Just five quarters ago, we experienced record high prices in AGP per shipment, and now we're witnessing a shift in the cycle, with spot market volumes being scarce. Brokers are becoming more aggressive than before, and in this environment, I expect some brokers may face challenges and potentially exit the market. As we prepare for the season, we must navigate the current market conditions effectively, aiming to outperform while safeguarding our margins and maintaining a good balance between the two.

The next question is coming from Jeff Kauffman of Vertical Research Partners.

David, appreciate your overview on the direction of progress. I'm just curious, with some of the other brokers out there starting to shut down operations, if we saw a turn, whether it's after the holiday season, Lunar New Year, or early '24. With your employee count down, what do you think your excess capacity is to be able to handle incremental volume without having to add bodies at this point?

Yes, good question. It's something that we talk about often. First of all, I'll start and say I feel really strong about our capacity, and it's something that we execute on each day. As a matter of fact, we're building ourselves up, as you know, for the eventual rebound of the market. For that eventual rebound, we need to have the capacity while keeping our headcount in check. For me, it's about our installed capacity base, and we've been talking about installed capacity. We feel like we have sufficient capacity for what would be a normal recovery. Certainly, we talk about different execution styles on the types of recoveries that will happen, whether very aggressive or mild recoveries. But the bottom line is I feel good about our installed capacity, where we are. I think we're well positioned for the eventual turnaround that puts us in pole position here. So good question. Glad you asked it.

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

Your slide with truckload profit per shipment is basically at an all-time low. Are we confident that we're at the trough? Or is it just too early to tell? And then just separately, I just want to understand what's going on with personnel costs. There was a big step down from Q2 to Q3. But based on the guidance, it looks like personnel then takes a step up from Q3 to Q4. Is that right? And help us understand what the right run rate for personnel is heading into '24.

Yes, Scott, let me chime in on those. First of all, we talked about the marketplace and where we're at. You're right. I think it's Slide 8 in the deck that points to where we are in the cycle, and at this point, we've been bouncing along the bottom for quite some time. What's unusual about this point in the cycle is we've had an opportunity to reprice our contracts pretty much across the board, so we've kind of reset them now. It's a question about when the rebound comes. When it comes, a couple of things happen, as you know. When demand comes back or capacity exits the markets or a combination of both, we would expect prices and costs to start to move up. The impact of that on our business is different in the contract market versus the spot market. Let me take contract first. On the contract side, because we're locked in on contracts for different terms, we will feel normal pressure on those margins. The good news is on the spot market, as demand comes back, we should get both better AGP per shipment and more demand at the same time. So there are offsetting impacts there. And that's not unique to Robinson; that's the way it usually works in this market. Your second—so I'll leave that one there. Well, maybe I'll actually add one more point, which is to talk about where we are right now, given how soft the spot market has been. Our mix of volume in truckload is 70% contract and 30% spot. That's unusually tilted toward contract for where we are in the cycle. But again, as those things turn, you'll see us go back to closer to where we were in 2021, where three quarters of that year, we were at 55% contract and 45% spot. So that's just to show that when that price turns and when the costs turn, there's an impact on contracts that squeeze and an impact on spot that's beneficial, and it helps to dimensionalize how that can go. Over to personnel costs, I think you're right. I think what you're doing is you're looking at the guidance that we provided. Just as a recap, we were at $1.45 billion to $1.55 billion in personnel expense. We took that down to $1.43 billion to $1.45 billion, which is a reduction at the midpoint of $60 million, but it does represent off that midpoint about a 4.5% increase in Q4 over Q3. So we had in Q3 some incentive costs that got reset lower because of performance of the business. With those accruals down, that's a benefit to Q3 that we're not expecting to repeat in Q4, which explains a little bit of that. More broadly, our productivity initiatives continue. The efforts and the pipeline of work that we have are ongoing. We would expect headcount to be a little lower in Q4 than it was in Q3. That should be favorable. Also, Q4 is usually a seasonally lighter quarter for us in terms of volume. That just adds another point there. But generally speaking, I think that covers your personnel.

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

Dave or Mike, maybe just to clarify a comment earlier in the LTL, I think you noted that temporary capacity exited the market. Are you then assuming a rebound in that? It sounded like you said you were assuming a rebound in capacity. Just want to understand that commentary on the LTL. And then, Mike, I guess just a follow-up on that NAST gross margin write down to 12.5%. I guess that's the same as gross profit per load. With spot rates remaining here, I just want to understand, you're saying that the $450 million of gross revenues from Convoy that freed up into the market, that's not easing the capacity constraints on the brokerage squeeze? Does that mean this weak environment? Is it getting worse as you move through into peak season? Are you seeing anything that suggests we're starting to ease off that? Or maybe just talk about that as we go into the holiday season, I guess, before the bid season that Jack was talking about.

Yes. On the second part of that, I think you were talking about Convoy going out of the market and how that impacts the market. I'll make a couple of comments on that. First of all, the size of that business doesn't have a material impact on our results. That being said, certainly, that business came available as the announcements were made. We've participated in that. Where there's profitable volume to be had that fits with our model. We certainly like the longer loads, and we've been participating in winning some of that business. A lot of that business is also localized in short runs, multiple runs, density around certain geographies. While we compete for that, that's not a sweet spot for us in terms of profitable volume. Overall, I would say it's not having an impact on the market, just given the size of that business. Regarding LTL capacity exiting the market, while Yellow went out of business and that capacity came out, there is a process where the assets that are still useful will be redeployed by new ownership and probably return to the market at some point. That was the intent of the word temporary, to the extent that the assets are still viable and useful, they will find a new owner or home, and probably make their way back into the system.

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

Regarding the year-over-year improvement in shipments per person per day, you're up to 18%, the target is 15%. You're confident in the 15%, and you're already there. How low could that go, or how high could it go, I guess, as a percentage? And what does that equate to as we think about an operating margin through the cycle? What's the new kind of productivity metric mean for, I guess, the beginning of the cycle and then a mid-cycle as it continues to build?

I can start. In terms of productivity improvements, we're at 18% year-to-date, and we expect to end the year at 15%. Having said that, we feel pretty confident in setting targets for subsequent years at a similar rate. We are working on our 2024 operating plans, and I would expect we target a similar productivity improvement compounded at over 30% by the end of next year. I feel pretty good about that. Productivity ultimately is a measure that considers volume. You asked the question of Dave, what if your volume increases next year? So our volume increases 15% next year, and our productivity improvements are 15% that we wouldn't have to add any headcount to serve that 15% additional volume. However, if we grow just 5%, then we'd achieve the other 10% through headcount reduction. Regardless of the cycle, we measure productivity and adjust it based on volume.

Jon, just to add on that. Arun hit it; we’re focused on driving productivity as well as growth, whichever one will do it in combination while driving that. This is super important, and that laser focus extends to the rebound as well. I can't express that enough that as we prepare for this market rebound. This will be essential for us from a productivity perspective, separating headcount and volume growth.

The next question is coming from Bruce Chan of Stifel.

When I think about some of the cycles, maybe one cycle or two ago, there was talk about structural pressure on AGP as a result of better customer price discovery and digitization trends. Obviously, you've had a lot of changes in the industry since then. How are you thinking about a good baseline AGP for the business through the cycle based on what you're seeing now? Is there any reason to believe that you shouldn't be able to get back closer to the mid-teens? Is AGP going to be lower as a result of some of these structurally higher capacity costs? Or might you be able to make up for that with lower cost to serve? Any comments around the direction of AGP in the future would be great.

Yes. Let me take that one. I think your observations are accurate. Generally, when you talk about the industry and price transparency, and I would even perhaps add length of load as pressures on AGP that are realities in the marketplace. Now what we're focused on are other factors that help us in that regard. Our plans include the ability to buy better. I talked about the competitiveness that we're seeing right now. You always see this competitiveness at this part of the cycle. Given the strain on the balance sheets and income statements of many brokers in this fragmented universe, there's substantial pressure. I think there's unusual aggressiveness at this point that sits in the marketplace. I would expect that to shake out here soon. We're already seeing it anecdotally. And so I think that's a factor. Similarly, I mentioned the capacity. On the capacity side, we expect to see some things shake out there. We've got anecdotal evidence suggesting that capacity is already coming out. One of the data points we look at is our new carrier sign-ups. We're about 4,900 here in Q3, which is less than half of what it was in Q3 last year. As these rates persist lower for longer, that capacity comes out, and demand comes back. That's when I believe you'll get back closer to long-term averages on AGP per shipment and AGP margin. We'll probably come up a little short of where it's been on a 10-year average but likely closer to where it's been on the 5-year average. That's where I foresee that shaking out. To the extent that the work we're doing provides tailwinds, like some of the automation and initiatives on the buy side, we can also help ourselves relative to the marketplace regarding AGP margin.

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

You talked a fair bit about things on the digital processes, optimizing processes, etc., which is very helpful. I'm just curious how much of the technology and automation tools, etc., are essentially ready to roll out versus how much additional spending and/or development still need to take place on the tech front? Or is it pretty much ready to go, or is there still more to do?

Yes. Let me hit that a little bit and then pass it over to Arun. We've got a great pipeline. We've been executing on that pipeline. You can see it in our results. If you look back at some of the cost savings initiatives we talked about, we started at $150 million cost savings against the Q3 run rate last year, then to $300 million, and now we're now talking about $360 million. So you can see the productivity initiatives that we've had in our pipeline are working through the results. Yes, it's there. You just heard Arun discussing productivity again in the future at similar levels. It's not a one-project kind of thing; it's a many-project kind of thing. I'll let Arun elaborate on that a bit more.

The way we look at it is continued focus on operating leverage. We have a multitude of new tools in our toolbox, including Gen AI and Lean. When we discussed this, we outlined this as a multiyear roadmap of opportunities. We achieved 15% productivity improvements this year, and we have a big backlog where we believe we can continue to unlock significant productivity improvements in subsequent years. We target another 15%, as mentioned, in 2024. In terms of technology spend, we don't expect to increase our spend year-over-year; however, we will continue to stay at the current levels of technology spend and execute on our existing roadmap.

Yes, Jordan, this is Dave. I'll just add on there that I feel really good about the teams embracing the new clock speed initiatives, driving more definitive and quicker decision-making. It sets us up well to drive out waste and minimize manual touches. Everyone's really working together on that.

The next question is coming from David Vernon of Bernstein.

So Mike, you talked a lot about trying to beat the market. I wonder if you could elaborate, maybe as a team, on what that means? Are we talking about volume, or are we talking about value? I think the volume is a little bit better than the shipment index from Cass, and pricing is a lot worse on a per mile basis. How should we think about how you're approaching that NAST market? Are you just going for volume, and you'll figure it out at the other end when the market corrects, or are you also focusing on kind of value share?

Yes, Dave, thanks for the question. It's super important. Let me be clear that our pursuit is both market share gain and margin. When I talk about beating the market, I talk about maintaining our margins given the market that we're operating in while also gaining market share. Let's take market share first. We don't want our volume to be down. When you look at the market we're operating in and some of the metrics out there—Cass index was down 8.7% in the quarter, and I think the U.S. Banks Index just came out close to almost 10. That makes us feel a little better about that, but we still want to grow. On the other side of that, we operate within this market in terms of pricing, and we are constantly evaluating opportunities and ways to improve our margins. A lot of the work we’re doing aims at improving our margins. In the short term, there are interesting competitive dynamics due to many being aggressive among brokers, given that they are struggling. The important point for Robinson is that because we have a strong business model, we continue to generate cash even in the toughest times, like this quarter. We are making investments throughout this downturn in the market. Where others may be worried about their viability, we're continuing to make investments to better ourselves. I think that relative positioning will help us with confidence about where we'll be when this market returns to a more balanced state.

The next question is coming from Tom Wadewitz of UBS.

Let's see, I wanted to ask you, I guess that Slide 8 is intriguing to look at and try to figure out where we're going. When I look at prior cycles, the spot rates eventually bottom and move up, there's typically a period where the NAST gross margin percent would get squeezed. I think, Mike, you referred to that kind of 70% contract mix being larger than normal, and that's where you would see the squeeze. Is it wrong to consider that there could be further pressure on that NAST gross margin when spot rates come down, or might this be a different cycle? Also, just quickly, on net revenue in Forwarding, do you think we are close to the bottom?

Yes. Tom, let me take your first part first, which I think we’ve covered in various elements. You’ve characterized it fairly within the contract space—as prices rise, there may be some ability to get squeezed. Whether this cycle is like the past cycles, I think will depend on the pace or magnitude of pricing increases. If we see slow increases, our margins may hold up well as they improve. If it’s a sharp spike, then the squeeze on the contract side will be greater. That usually coincides with a significant demand spike in the spot market; during that time, we’re typically there competing for our share. Every cycle is a little different, including this one. Another thing I alluded to is that broker competitiveness appears stronger than in the past. As for Global Forwarding, we've observed no significant changes from Q3. We feel great about our business and the share we’re growing, along with the work the team has done to prepare for when demand returns. Alas, no green shoots to report yet.

We're showing time for one final question. Today's last question is coming from Stephanie Moore of Jefferies.

I think it might be helpful just for us on the outside to get some examples of the tech changes or digital changes that you've implemented year-to-date. Do you view these changes in technology as aiding in keeping your headcount in check whenever the market rebounds?

Yes. Let me give you a couple of examples. One example might be appointment automation. We work with a lot of customers who utilize different systems for making appointments for our carriers to load and unload. We've gone through and identified where we have the most leverage with customers using a certain scheduling system, automating our appointment-setting into that system. This significantly reduces our dependence on people for scheduling appointments. Another example is track and trace. We’ve discussed that earlier in the year, where we are working with carriers—we’re getting our carriers to also provide us automated updates, thus reducing the need for human checks on where trucks are. This unlocks productivity improvements while also enhancing the customer experience, which is beneficial. Recently, we've also looked at Gen AI. Historically, our company has grown by engaging customers in various ways, including receiving quote requests or order information through unstructured emails. We're now using Gen AI to parse those emails and automatically respond with quotes and enter orders into our systems without human involvement. These examples all contribute to our overall productivity improvements, and there are many more similar initiatives as we continue to work.

Yes, that concludes today's earnings call. Thank you for joining us today, and we look forward to talking to you again. Have a great evening.

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