Earnings Call Transcript - CHRW Q3 2021

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2021 Conference Call. Operator provided instructions to participants. As a reminder, this conference is being recorded, Tuesday, October 26, 2021. I would now like to turn this conference over to Chuck Ives, Director of Investor Relations.

Charles Ives, Director of Investor Relations

Thank you, Laura, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our President and Chief Executive Officer; and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2021 third quarter results, and then we will open up the call for live questions. Our earnings presentation slides are supplemental to our earnings release and can be found in the Investors section of our website at investor.chrobinson.com. Our prepared comments are not intended to follow the slides. If we do refer to specific information on any of the slides, we will first 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.

Robert Biesterfeld, President and Chief Executive Officer

Thank you, Chuck, and good afternoon, everyone, and thank you for joining us today. The third quarter was another quarter of progress and strong execution, resulting in record quarterly financial results. The trajectory of our business is heading in the right direction as we continue to leverage our tech plus strategy to help customers navigate through an extremely challenging and capacity-constrained environment, which we expect to continue. Demand for our global suite of services and for the benefit of our powerful technology platform continues to be strong, and the digitization efforts continue to take hold and be ingrained in an increasing percentage of our business. In our North American truckload business, we've made steady progress in a sustained tight capacity environment. Through the continued repricing of our contractual portfolio and higher volumes of spot business, our adjusted gross profit or AGP per truckload returned to our 5-year average. And our AGP per mile in Q3 exceeded both our 5-year and 10-year averages. We accomplished this while growing our truckload volume 4.5% year-over-year and 3.5% on a sequential basis. Within the quarter, we saw an acceleration of truckload volume per business day in each month of the quarter, with 7% year-over-year growth in September, and that growth trend has continued into October. For the quarter, NAST truckload grew AGP by $83 million or 36% year-over-year through a 4.5% increase in volume and a 30% increase in AGP per load. This included a 14% increase in spot market volume year-over-year due in part to an 85% increase in volume that was driven through our proprietary dynamic pricing engine, which is now on pace to generate $1 billion in spot truckload freight for the year. Nearly half of our spot or transactional business was priced via integration with our dynamic pricing engine in the third quarter, delivering real-time pricing capacity assurance from the largest network of truckload capacity in North America. We closed the quarter with an approximate mix of 60% contractual volume and 40% transactional volume, which is consistent with our mix in the year ago period. Our average truckload line-haul cost per mile paid to our carriers, excluding fuel surcharges, increased 26% compared to the third quarter of last year. Our average line-haul rate billed to our customers, again, excluding fuel surcharges, increased 27% year-over-year. This resulted in the highest cost and price per mile on record, and a 33% year-over-year increase in our NAST truckload adjusted gross profit per mile. This, combined with a 2% decrease in the average length of haul, resulted in a 30% increase in AGP per truckload. During the quarter, we saw routing guide depth of tender in our Managed Services business increase slightly from 1.6 in June to 1.7 in September, indicating a slight deterioration of shipper routing guide performance during the quarter. Given the current structural constraints around expansion of truckload supply, coupled with the continued strong demand as we head into the holiday season, we expect capacity to remain tight, and we expect to perform well in that environment with over half of our contractual truckload business slated to reprice in the fourth quarter of this year and the first quarter of next. During the third quarter, we continued our effort to expand our carrier network, and we launched an effort to recognize truck drivers for their extraordinary efforts, and we had incredible engagement. This led to a new record of 9,500 new carrier sign-ups and increased utilization of our carrier technology and apps. Our NAST LTL business grew adjusted gross profits by $14 million or 12% year-over-year. This was delivered through a 1% increase in volume and a 10.5% increase in adjusted gross profit per order. This increase in volume was on top of a 13.5% volume growth in the comparable quarter last year. Overall demand in the LTL market remains strong, driven by growth in e-commerce, resulting in capacity remaining at a premium. Our value proposition in LTL continues to resonate with shippers of all sizes across multiple industry verticals. Turning now to our Global Forwarding business. The third quarter was our sixth consecutive quarter of strong year-over-year growth in total revenues, AGP and operating income. Based on low inventory-to-sales ratios and the robust pipeline of business from new and existing customers, we believe the strength in this business will continue into 2022. In our ocean forwarding business, we grew our adjusted gross profit by $126 million or 142% year-over-year. This came through a 12% increase in shipments and a 116% increase in adjusted gross profit per shipment. Demand continues to be stronger than what the overall industry can meet with limited vessel and container capacity. And although some ports are working to implement expanded operating hours, other market constraints such as the shortage of truck drivers, drainage capacity and inland warehouse space continue to be bottlenecks, and port congestion is likely to continue into 2022. Our forwarding team has done a great job of strengthening our carrier relationships and procuring incremental capacity to best serve our customers as well as working with shippers to better plan their shipping needs and to consider ultimate modes or ports. Finally, our international air freight business delivered adjusted gross profit growth of $26 million or 76% year-over-year. This was driven by a 51% increase in metric tons shipped and a 17% increase in adjusted gross profit per metric ton. Demand for air freight remains incredibly strong, partially driven by continued conversions of some ocean freight to air. Air freight capacities continue to be strained and we continue to position charter flight capacity to support demand from both new and existing customers. The forwarding team is continuing to add new commercial relationships with strategic multinational customers that are leading to increased award sizes while also ensuring that our existing customers have access to the capacity that they need to meet their needs. Our customers and our results are benefiting from the investments that we've made in digitization, data and analytics as well as our global network that's supporting our expanded geographical and vertical presence. We believe that these strategies and competitive advantages of C.H. Robinson will enable us to create more value for customers and in turn, win more business, sustain the market share gains that we've achieved and deliver solid returns for our shareholders. Our digital investments continue to deliver customer value and unlock growth in new and exciting ways. The latest example of this is our introduction of Market Rate IQ during the quarter. This brings pricing transparency to shippers by allowing them to compare their rates to the market averages and then using the information advantage of C.H. Robinson break down their rates to see potential savings opportunities. When we bring these Robinson Labs innovations to the market, we see increased engagement with our customers, higher win rates with those customers that are truly realizing the value from these new products. As I mentioned earlier, the amount of volume that's being delivered through our real-time dynamic pricing tools has grown significantly. Enabling these digital connections improves efficiencies for our customers, improves our response time for quote requests and improves our win rates. We also continue to add digital connections with our customers at an accelerated pace with 100 new customers connected via TMS and ERP connections in the third quarter of 2021. The number of daily and monthly average users across our customer and carrier-facing platforms also continues to grow. With 24% year-over-year growth in daily average users of our carrier platforms as we continue to deliver new capabilities and benefits to our carriers through both the web and mobile versions of Navisphere Carrier and Driver. During the quarter, we had over 340,000 fully automated bookings in our NAST truckload business, which was an increase of nearly 80% year-over-year. And finally, as it relates to productivity, we've again highlighted a couple of key metrics for NAST in our earnings presentation. During the third quarter, we invested in hiring and building our bench to support growth. On a year-to-date basis, we continue to show year-over-year improvement in productivity, as indicated by the 880-point favorable spread in our NAST productivity index, which represents the difference between the year-over-year change in NAST volume and the change in NAST headcount. Shipments per person per day is another metric that clearly shows the relationship between the timing of our increased digital investments and the impact to NAST productivity with an over 25% increase in productivity since the beginning of the increased investment period. We are encouraged with the progress that we're making on our digital investments and the impacts that these investments are delivering to our customers, for our carriers and the impact to our overall results. Across our global suite of services, we believe that our tech plus strategy that combines our tailored market-leading technology solutions with our global network of logistics experts and an information advantage created from our scale and our data is the right strategy and one that is aligned to the needs of our shippers and partners as we help them to navigate these highly disrupted markets and deliver for their customers. I'll now turn the call to Mike to review the specifics of our third quarter financial performance.

Michael Zechmeister, Chief Financial Officer

Thanks, Bob, and good afternoon, everyone. As Bob mentioned, we delivered another quarter of record financial results in Q3, driven by strong performance in a favorable market as we continue to execute on our tech plus strategy. Our total company revenue increased 48% over Q3 last year, and our adjusted gross profit, or AGP, was up 43%. Increased AGP was driven by both volume and AGP per shipment across ocean, air, truckload and LTL. Total company AGP also improved by 13% sequentially and 33% over the pre-pandemic quarter of Q3 2019. On a monthly basis compared to 2020, our total company AGP per business day improved in each sequential month of the quarter and was up 51% in July, up 39% in August and up 40% in September. For the fifth consecutive quarter, prices and costs rose across our North American truckload business with cost per mile and price per mile each reaching new highs in each month of Q3 due to the persisting supply-demand imbalance. Our NAST team navigated through this environment by continuing to grow spot volume, which was up approximately 14% year-over-year in Q3, marking the fifth quarter of double-digit spot market volume growth. Within our contractual freight business, where Q3 volume was flat, we continued to selectively reprice the portfolio to reflect the ever-increasing cost of purchased transportation in this market. As Bob mentioned, our Q3 truckload AGP per mile is now above both our 5-year and 10-year averages. AGP per mile and AGP per load are key metrics in our truckload business rather than an AGP margin percentage, which naturally rises or falls with the changing market cycle pricing. For those following AGP margin percentage, if or when the market loosens within the current cycle, with the greater than 2/3 of our truckload volume on 12-month contracts, we would expect to see AGP margin percent expansion as we typically have in the past. We continue to focus on overall AGP dollar growth by optimizing volume and AGP per shipment across our service offerings. With enhanced customer focus and digital investments, we expect to drive long-term growth and efficiency into our model. Now turning to expenses. Q3 personnel expenses were $399.9 million, up 32% compared to Q3 of last year, primarily due to higher incentive compensation costs and the impact of short-term pandemic-related cost reductions in Q3 of last year. Our Q3 average headcount increased 7.1% compared to Q3 last year. Despite the tight labor market, we successfully hired the talent we need to support our growth expectations, particularly in Global Forwarding and NAST. Given the increase in incentive compensation resulting from our profit expectations for 2021 and the additional headcount, we now expect 2021 personnel expenses to be in the $1.5 billion to $1.55 billion range, which is up from our prior expectations of $1.42 billion to $1.48 billion. Q3 SG&A expenses of $133.5 million were up 13% compared to Q3 of 2020, primarily due to the impact of short-term pandemic-related cost reductions in Q3 of last year. We continue to expect 2021 total SG&A expenses to be approximately $0.5 billion, including approximately $90 million to $95 million of depreciation and amortization. Our Q3 income from operations was a quarterly record at $310.8 million, up 85% versus Q3 last year, and our adjusted operating margin of 36.8% was up 820 basis points compared to last year and up 510 basis points from the pre-pandemic quarter of Q3 2019. Third quarter interest and other expense totaled $16.7 million, up approximately $9.2 million versus Q3 last year due primarily to the impact of currency revaluation. Q3 results included a $3.8 million loss on currency revaluation compared to a $3.3 million gain in Q3 last year. Interest expense was also up $1.2 million due to the higher average debt balance. Our Q3 tax rate came in at 16.0%, our second lowest tax rate on record, which was only eclipsed by the 15.1% rate from Q3 last year. This year's Q3 rate was lower than our expectations, primarily due to the favorable mix of foreign earnings and U.S. tax incentives. We are now expecting our 2021 full year effective tax rate to be 18% to 19% compared to our prior estimate of 20% to 22%. Q3 net income was $247.1 million, up 81% compared to Q3 last year, and diluted earnings per share was a quarterly record at $1.85, up 85% versus Q3 last year. Turning to cash flow. Q3 cash flow used by operations was approximately $74 million compared to $169 million used in Q3 last year. Sequentially, cash flow from operations declined by $223 million, driven primarily by a $679 million sequential increase in accounts receivable and contract assets, and partially offset by a $267 million increase in total accounts payable and the $247 million in net income. In Q3, accounts receivable and contract assets were up 19.6% sequentially, while total revenue was up 13.2%. The resulting 3.9 day increase in days sales outstanding, or DSO, was driven primarily by the mix shift associated with higher revenue growth in Global Forwarding where our DSO runs approximately double that of our NAST business. While our accounts receivable balance has grown, we are not seeing quality issues as our percentage past due and credit losses have both improved compared to our 3-year averages. Over the long term, we expect AGP growth to outpace working capital growth. Capital expenditures were $22.7 million in Q3, up from $15.2 million in Q3 last year. We now expect our technology-driven 2021 capital expenditures to be $70 million to $80 million, up from our previous expectation of $55 million to $65 million. We returned approximately $237 million of cash to shareholders in Q3 through a combination of $168 million of share repurchases and $69 million of dividends. That level of cash returned to shareholders represents a 230% increase versus Q3 last year when we were not repurchasing shares out of an abundance of caution due to the pandemic. During Q3 this year, we repurchased approximately 1.9 million shares at an average price of $90.58. At the end of Q3, we had approximately 3.2 million shares of capacity remaining on our 15 million share repurchase authorization from May of 2018. Our cash balance at the end of Q3 was $203 million, down $41 million compared to Q3 of 2020, and we continue to work down our cash balance through efficient repatriation of excess cash from foreign entities with the end goal of carrying only the cash we need to fund operations. We ended Q3 with $571 million of liquidity comprised of $368 million of committed funding under our credit facility, which matures in October of '23, and our Q3 cash balance. Our debt balance at quarter end was $1.73 billion, up $633 million versus Q3 last year, driven primarily by increased working capital and share repurchases. Our net debt-to-EBITDA leverage at the end of Q3 was 1.39x, up sequentially from 1.25x at the end of Q2. From a capital allocation standpoint, we continue to be committed to disciplined capital stewardship, maintaining an investment-grade credit rating and generating sustainable long-term growth in our total shareholder returns. Overall, our NAST team made progress towards our truckload volume growth expectations. As you saw in Q3, the percentage increase in price per mile was higher than the percent increase in cost per mile for the first time in 9 quarters. While there is no telling where the market is headed, inflections like we saw in Q3 have historically led to periods with our highest AGP margins. The Global Forwarding team continued to generate significant earnings while building on a solid foundation for future growth. The expanded global team, with upgraded tech and more uniform operations across the globe, is now onboarding its strongest pipeline of new customers. Thank you for listening this afternoon. And I'll turn the call back over to Bob now for his final comments.

Robert Biesterfeld, President and Chief Executive Officer

Thanks, Mike. I'll take a couple of minutes here and wrap up our prepared comments before we turn it back to the operator for our live Q&A. I believe that our results once again this quarter continue to demonstrate that our model is working and that our strategy is sound. There's no question that we're in a time of unprecedented supply chain disruption across the globe that reaches virtually every mode of transportation. I believe that Robinson continues to be uniquely positioned to help customers not only navigate this environment, but to succeed in this environment. None of us know exactly when this cycle is going to begin to turn or how long it will last. But with everything that we see today, we believe that this cycle will, in fact, extend due to the global constraints around adding capacity and labor while demand remains strong. I certainly don't believe that having 70 ships anchored in Los Angeles is by any stretch the new normal, but I also don't see us reverting to a market resembling 2019 anytime soon. As referenced on Slide 3 of our earnings deck, one of the pillars of our tech plus strategy is our people. Our customers continue to tell us that our team around the globe are the people that they rely on. As I said before, I believe that the people at Robinson are the most capable team of supply chain experts in the world. And I'm incredibly proud of how this team has continued to help thousands of customers navigate this environment while also delivering record financial results for our shareholders. These past couple of years have been stressful times to work in a supply chain. In many parts of the world, we continue to work in a primarily remote environment. We're certainly hopeful to start getting more people back in the office into a hybrid model as soon as we begin to see the Delta variant begin to fade. Solving for the complexities of today's supply chain issues is not a 9 to 5 job, it's 24/7/365. And I want to again recognize and thank our people for the great work that they're doing. In a time where labor participation rates are low and companies across the globe are challenged to have team members, we were able to grow the size of our team to support our customers and to fuel our future growth. People are choosing to join Robinson today because of the strength of our global brand and the opportunities that we offer for both personal and professional growth. As I close out my prepared remarks, I'd like to reference Slide 6 in our earnings deck. For those of you that have been following us for a while, you know that a decade ago or so, we were primarily known as a North American truckload brokerage company. In 2012, we had a belief that, strategically, it would be important for our future to have a more balanced portfolio of services. We believe at that time that supply chains will continue to become more global, and that if we have a strong Global Forwarding business to complement our industry-leading North American Surface Transportation business, we can really hold a unique position in the marketplace and bring a more comprehensive solution to life for our customers, which would in turn drive growth by connecting supply chains across the globe. We also believe that if we execute in that effectively, we can create a business with operating margins in line with other industry-leading forwarders that could help us to offset some of the cyclicality in our core truckload brokerage business, and we could deliver more consistent results to our shareholders. At that time, prior to the acquisition of Phoenix International, Forwarding represented around $150 million of adjusted gross profit. And I guess at that time, we called it net revenue, and that was less than 10% of our enterprise net revenue and contributed very little to operating income. Since that time, we've made a string of strategic acquisitions in the forwarding space, and we've delivered strong organic growth and execution while creating a single global operating model supported by our Navisphere technology platform. Today, we're the number one NVOCC in the trans-Pacific eastbound trade lane and a Top 5 NVOCC in the entire global ocean freight industry, while we've also driven strong growth in both air and customs. Our successful execution of this strategy, along with favorable tailwinds in the marketplace, has allowed us to deliver on a trailing 12-month basis over $944 million in Global Forwarding AGP and $422 million in operating income. Global Forwarding now represents 37% of our total company AGP for the past quarter, while we delivered 97% growth in AGP and an operating margin of over 53%. In looking at the left side of that slide, we can zero in on NAST a little bit. We stated that we'll continue to pursue profitable market share growth within this business, which we achieved again this quarter. Volumes increased both year-over-year and sequentially. Within NAST, we've spoken extensively about our investments in technology as we transition to more of a digitally-led company. And you can see here the multiple proof points to our advances in technology and the evolution of our business process are driving successful outcomes. Our NAST business is healthy today, and the pace of evolution to our business model continues to accelerate. In today's environment of global supply chain disruption, customers are looking for solutions that span the globe and cross all modes. An ocean freight solution alone doesn't solve for the problem that customers are facing, neither does a stand-alone truckload or an LTL solution. And we continue to be uniquely positioned to serve customers during this time of disruption and beyond to orchestrate end-to-end supply chain success for these customers. So just as we believed in 2012, we continue to believe today. Our ability to deliver a global suite of services fueled by great people supported by industry-leading technology and information advantage that's unmatched due to the scale on the $26 billion of freight under management that we have matters. And I'm confident that it's going to continue to drive our growth in the future. Going forward, we're going to continue to leverage the strength of this diversified non-asset-based business model that delivers strong returns on invested capital. We'll stay the course with our strategy of pursuing market share gains that align with our profitability expectations, and we'll continue to invest back into the business to drive innovation, improve service to our customers and carriers and to drive growth across all of our global suite of modes and services. So this concludes our prepared comments. And with that, I'll turn it back to Laura for the live Q&A portion of the call.

Operator, Operator

Operator provided instructions to participants. Your first question comes from the line of Tom Wadewitz with UBS.

Thomas Wadewitz, Analyst, UBS

Yes. Congratulations on the great results in forwarding in particular, and it seems like you're really taking advantage of the market and doing well. My question is on NAST. You gave a lot of good stats on technology and how you're getting traction on that, but it seems like it's not necessarily translating in terms of growth or profitability in NAST. Is there a mismatch between how well you're doing with technology and how that's flowing through in terms of growth or profitability in NAST relative to the strong brokerage market?

Robert Biesterfeld, President and Chief Executive Officer

Sure. Thanks for the question, Tom. I'd reiterate my closing comments, and we tend to look at the sum of the parts here, and we feel pretty good about the fact that we just delivered enterprise operating margins that are the highest that we've delivered since the third quarter of 2016. Specific to NAST, there are really two things at play. The first is the increased investment in technology and the investments that go with that, whether it's expensed or capitalized, which come prior to some of the benefits. We haven't fully harnessed the impacts because we're continuing to drive adoption, both internally and with our carrier partners. We talked a lot about connectivity, and connectivity eliminates friction from these transactions and allows us to drive greater efficiency. When I think about our transactional pricing engine being up to the level it is, some 85% year-over-year, that's a great example of us taking friction out and driving better outcomes. The second area that is weighing on operating margins today is still the higher level of negative loads in our truckload business. While we improved that on a year-over-year basis by about 390 basis points or about $12 million, it was pretty consistent from Q2 into Q3. If you net out those negative loads and they looked more like historical averages, you would see operating margins that look very similar to what we've experienced in the past in NAST.

Thomas Wadewitz, Analyst, UBS

Do you think there's an acceleration coming when you talk about the traction, the spot loads and the technology? Is it reasonable to think that accelerates at some point looking forward?

Robert Biesterfeld, President and Chief Executive Officer

I would say that we're seeing some of the acceleration right now. When I saw an 880-point spread between headcount and volume growth, that's a real accelerant. We talked about a 25% increase in shipments per person per day; that's an important proof point of the productivity that we're gaining. The automated bookings number — 340,000 in a quarter — likely exceeds many digital upstarts' total load volume for a quarter. So I do think we are making progress. The biggest drag on operating margins relative to past quarters has been those two factors: increased technology investment and the negative loads in truckload. We expect to gain better value from that technology over time and to narrow the negative loads as markets settle. We'll reprice about half of our contractual truckload base in Q4 and Q1. I see the market going in a couple of directions. Scenario A: we maintain current tight markets at elevated prices, we will reprice accordingly and should eliminate some negative loads and settle at a certain AGP per shipment. Scenario B: the market starts to cool and you see margin expansion. I don't anticipate that we're going to continue to see year-over-year increases at the same rate in cost of purchased transportation as in the past few quarters.

Operator, Operator

Our next question comes from the line of Jordan Alliger with Goldman Sachs.

Jordan Alliger, Analyst, Goldman Sachs

Just curious, taking a spin on the freight forwarding side, which continues to do quite well. There are questions on sustainability. Could you talk to your thoughts on how long the tightness in the supply chain could potentially linger and drive these outsized gains? More importantly, once the frenzy dies down, do you feel you've reached a new platform level such that even if things die down, you won't drop back to pre-COVID levels in base profitability?

Robert Biesterfeld, President and Chief Executive Officer

Yes. I don't see us going back to the base levels of profitability we demonstrated in 2018/2019. The forwarding team has engineered their cost structure to deliver improved operating margins over time. We've cited a target of 30% operating margins in that business, and we've shown capability of delivering margins well in excess of that. I won't forecast precisely when the cycle ends, but labor participation issues — truck driver shortage, warehouse labor shortage, port labor shortage, rail yard labor shortage — permeate the supply chain and are slowing fluidity. Inventory-to-sales ratios show demand pent up behind that. I believe this will extend for quite some time.

Operator, Operator

Our next question comes from the line of Jack Atkins with Stephens.

Jack Atkins, Analyst, Stephens

Going back to the reference in the slides around the 340,000 fully automated bookings in the quarter: one, is there a way to quantify what percentage of your truckload shipments that represents? Secondly, do you feel you're at a point where you can see the bottleneck around capacity procurement that has historically been labor-intensive? Are you starting to see technology breakthroughs that can accelerate fully automated communications and bookings with carrier partners?

Robert Biesterfeld, President and Chief Executive Officer

I won't comment on the exact percentage of total, but year-over-year and sequentially it continues to grow in a hockey-stick fashion. We've captured low-hanging fruit and early adopters in the carrier community, those that naturally want to interact fully automated. There's a lot coming in terms of greater adoption of booking APIs. This isn't just about mobile applications; it's about meeting carriers where and how they want to interact and removing friction from the process. The next six to nine months are critical in this journey, and I expect us to deliver strong results related to carrier procurement automation over that period.

Operator, Operator

Our next question comes from the line of Jason Seidl with Cowen.

Jason Seidl, Analyst, Cowen

I want to stick to forwarding. You're doing a great job and showing fantastic revenue growth. As we look to the back half of the year, what scenarios can we see for revenue growth versus falling off because of difficult comps?

Robert Biesterfeld, President and Chief Executive Officer

What gets me feeling good is that our forwarding business is grounded in strong volume growth, not just rate. This quarter we saw 12% in ocean and over 50% in air. We have several large opportunities and a robust pipeline of customers we've yet to fully implement — customers where we've agreed to take over portions or all of their forwarding business but haven't implemented large chunks yet. So we think the pipeline is robust. Macro conditions will dictate some of this, but the growth trajectory for that business is something we feel strongly about.

Jason Seidl, Analyst, Cowen

So to be clear, you do think there are scenarios where you can grow your revenue in the back half of the year?

Robert Biesterfeld, President and Chief Executive Officer

Yes. After the second quarter of last year when comps were extremely difficult, we still delivered growth, and based on where we sit today we think it's realistic to continue to deliver growth in that business into the back half of the year.

Operator, Operator

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

Todd Fowler, Analyst, KeyBanc Capital Markets

Bob, on Slide 9, Mike made the comment that for the first time in nine quarters your sell rate exceeded your cost of hire. Can you talk about whether that's due to contract renewals and repricing work or the ability to pass through higher spot rates? As we think about this curve, what would be the reason why it wouldn't be sustained going forward?

Robert Biesterfeld, President and Chief Executive Officer

If you look at cost per mile and customer pricing week by week, we've started to see those flatten out in terms of dollars per mile billed and paid. We're not experiencing the week-to-week volatility any longer; it seems to be flattening at a much higher level. That change is driven by spot market opportunities and selective repricing within our contractual portfolio. We continue to take the long view on strategic contractual customers — for some, in Q3 we lost 20% to 25% of their loads, but they're important 20-year customers where we expect to reprice in Q4. Being overly aggressive in Q3 to chase those losses could have negative implications into Q4 and beyond. So we expect this trend to continue, with differences in year-over-year change in rate and cost, and if we reach a more stable market, we think we have the opportunity for sustained performance.

Operator, Operator

Our next question comes from the line of Chris Wetherbee with Citi.

Chris Wetherbee, Analyst, Citi

Wanted to zero in on NAST operating expenses. Is there incentive compensation in there based on the business you're doing in the quarter? How should we think about that going forward? Adjusted gross profit per load was high, but operating income per load — how does that compare? With heads growing slower than volumes, I would have expected a better relationship. Can you clarify?

Michael Zechmeister, Chief Financial Officer

Chris, on NAST we have increased headcount slightly to remove bottlenecks and align with long-term growth. We're also seeing personnel expense increases driven primarily by incentive payments as enterprise results have improved. At the enterprise level, personnel expense was up $97 million year-over-year; over half of that was incentive (equity, commissions and bonus). About one-quarter of that increase is due to short-term pandemic-related savings that existed a year ago and normalized this year. Headcount makes up the remainder. Going forward, as we roll into next year, those outsized incentive payments will be a tailwind as we normalize back to targets.

Chris Wetherbee, Analyst, Citi

Okay. So operating profit per load can probably start to ramp up in that scenario?

Michael Zechmeister, Chief Financial Officer

Yes. It really depends on what happens to AGP, but all things being equal, yes.

Operator, Operator

Our next question comes from the line of Scott Group with Wolfe Research.

Scott Group, Analyst, Wolfe Research

So in Q3 NAST net revenues were up sequentially, but NAST earnings were down sequentially. Is that more of a one-off and going forward, if NAST net revenues grow, earnings should grow? Also, on the forwarding business, you've built something strong — how do you think about M&A, being an acquirer or selling businesses?

Robert Biesterfeld, President and Chief Executive Officer

Over time we expect NAST operating income to grow at a rate ahead of net revenue or AGP growth. On acquisitions: we continue to look at companies in the marketplace. They must meet certain criteria — strategic fit culturally, fit within Robinson, and opportunities to enhance technology or drive growth. Being C.H. Robinson, we see many opportunities and evaluate them. Our acquisition strategy is driven by strategic needs, and we'll pursue inorganic growth if it aligns with our strategy. At present, our goal has been about growing the forwarding business rather than other strategic alternatives.

Operator, Operator

Our next question comes from the line of Bascome Majors with Susquehanna.

Bascome Majors, Analyst, Susquehanna

As an acquirer, would buying a U.S.-centric truck brokerage make more sense today compared to prior years? Also, if approached, how does the Board perceive the process and what obligations do you have as a target?

Robert Biesterfeld, President and Chief Executive Officer

I won't go deep into specifics, but 'domestic brokerage' has evolved and there isn't a one-size-fits-all. Same guidelines apply: strategic fit culturally and within Robinson, potential to enhance technology, drive growth or transform through acquisition. We see a lot in the market, and we determine interest accordingly. Our acquisition strategy is driven by strategic needs and we'll control the process for any inorganic opportunities. Regarding the Board, if we were approached there are governance mechanisms and a process we would follow to maximize value for shareholders.

Operator, Operator

Our next question comes from the line of David Zazula with Barclays.

David Zazula, Analyst, Barclays

You have competitors touting success in the power-only brokerage line. Do you feel this offering is impacting your business, and if so, how are you adjusting?

Robert Biesterfeld, President and Chief Executive Officer

It's a great part of our business. We launched Robinson POWER+ about five years ago and it's been fast-growing. About 10% of the business Robinson manages in NAST today is drop trailer loading. We take two approaches: a 'rainbow fleet' aggregating trailer pools across smaller carriers with interchange agreements, and the Power+ piece where we lease trailers or have leasing agreements with carriers and move those trailer pools on specific corridors between customers. It gives us another way to act like an asset for customers with specific trailer pool needs, and it's a fast-growing part of our business.

Operator, Operator

Our next question comes from the line of Ken Hoexter with Bank of America.

Ken Hoexter, Analyst, Bank of America

Two small questions. One: the CapEx — is that targeted to scaling the take rate on the digital brokerage? In other words, is it looking to regain market share through share gains? And two: on the ocean side, given container rates scaled so much, the differentials between ocean and air have collapsed — are you starting to see scaling on the air side or more swapping into air due to the gap?

Robert Biesterfeld, President and Chief Executive Officer

On the airfreight side, we've seen tremendous growth in our charter business. When container rates spike, charters can become more feasible, and some spillover from ocean to air is driving growth. On CapEx, Mike can add detail.

Michael Zechmeister, Chief Financial Officer

Ken, we increased our 2021 CapEx guidance to $70 million to $80 million from $55 million to $65 million. Our CapEx is almost entirely technology spend. We deploy capital when risk-adjusted returns are high. A higher CapEx spend is encouraging because it means a stronger pipeline of projects with attractive returns. We prioritize those projects in our capital allocation plans.

Robert Biesterfeld, President and Chief Executive Officer

To add, much of that CapEx is directed toward scaling the digital platform for truckload and the truckload freight exchange, but there are many other high-return projects across LTL yield management, global forwarding operational processes, and more. These projects benefit different parts of the business.

Operator, Operator

Our next question comes from the line of Charlie Yukevich with Evercore ISI.

Charles (Charlie) Yukevich, Analyst, Evercore ISI

Congratulations on the results. I wanted to ask about the collaboration with SPS Commerce. How should we think about this partnership with regards to automation and incremental volumes within LTL? Also, any commentary on how you're positioning for the holiday season in such a tight freight environment would be appreciated.

Robert Biesterfeld, President and Chief Executive Officer

We're in the early innings with SPS Commerce; the partnership launched about 7 to 10 days ago. SPS Commerce is a leader with over 95,000 customers on their platform connecting into the retail ecosystem. It's a natural partnership given our strength in retail and food & beverage. Our ability to be the LTL provider and help SPS customers access the LTL marketplace in a fully automated way is a win for their customers and incremental for us. We continue to look at alliances across the supply chain to extend the ecosystem and pursue digital initiatives. Regarding peak season, it feels like we've been in peak for months. Our job is to be agile, work with customers to navigate unknowns, be mode agnostic, help them move ports or modes, and collaborate with other shippers to drive greater utilization. This is a 24/7/365 effort and our global teams are working to help customers navigate these challenges.

Operator, Operator

Our next question comes from the line of Jeff Kauffman with Vertical Research Partners.

Jeffrey Kauffman, Analyst, Vertical Research Partners

Congratulations on a very strong quarter. I wanted to focus on forwarding. This morning UPS reported procedural impacts related to the Delta variant out of Asia that impacted shipments. Did this impact your forwarding business? Was the net of that impact positive or negative?

Robert Biesterfeld, President and Chief Executive Officer

Net to service on the water has been negative. The active fleet is at very high utilization and service reliability on the water has never been lower than today; this is due to the amalgamation of supply chain issues, not solely steamship line performance. COVID-related shutdowns in Asia caused plants and ports to shut or be skipped, further exacerbating delays. I can't quantify a specific number for impact to earnings or volume. Both were strong sequentially and year-over-year, but clearly these disruptions caused additional delays in the supply chain. The net impact wasn't meaningful to report as positive or negative in aggregate.

Operator, Operator

Your last question comes from the line of Brian Ossenbeck with JPMorgan.

Brian Ossenbeck, Analyst, JPMorgan

Bob, I'd like your closing thoughts on balancing volume, market share and margin, as measured in AGP per load. I would have thought negative files would at least improve sequentially given how strong the market is. I appreciate the comments about important customers, but won't they share in some of the disruption costs? Also, how do you think the cycle will change relationships going forward — more shorter contracts, more pricing visibility and indices — and you mentioned you still have two-thirds booked annual contracts. Any thoughts?

Robert Biesterfeld, President and Chief Executive Officer

On negative files: our Managed Services business is a good proxy for the contractual marketplace. Since last fall through today, we've been in an extended tight trucking environment with many bids, repricings and reshuffling of routing guides across the industry. There's been virtually no improvement in routing guide depth of tender over 15 months — it's been around 1.6 to 1.7. Our consistent negative files are analogous to that; the market continues to reset. We've been experiencing consistent year-over-year increases in cost. Part of our model is we sell long and buy short, so when there's upward pressure on purchased transportation costs, we see more negative files. This is the highest it's been, and we expect to draw it down. I would be disappointed if after Q4 and into Q1 we still had negative files at these levels; I expect them to decline sequentially and year-over-year. Regarding contract terms, about two-thirds of our business is still on 12-month terms. The other one-third being on different terms is relatively new in the industry. Pricing transparency is important — our Market Rate IQ product gives shippers visibility to benchmark rates and behaviors that affect rates. Our dynamic pricing engine provides real-time pricing and an intermediate solution between guaranteed contractual business and spot market, keeping shippers from falling to the bottom of routing guides. We spend a lot of time delivering innovative pricing solutions that work for both customers and us. Annual contracts remain the primary mechanism for customers to request pricing today.

Brian Ossenbeck, Analyst, JPMorgan

Do you think that contract structure will hold pretty much into next year based on conversations so far?

Robert Biesterfeld, President and Chief Executive Officer

Looking into Q4, that appears to be the case. Beyond that would be speculation I wouldn't be comfortable making at this point.

Charles Ives, Director of Investor Relations

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.