C.H. Robinson Worldwide, Inc. (CHRW) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Deutsche Bank Industrial Conference. I'm the transportation equity research franchise here. Thanks to everyone, [indiscernible] for special thanks to our speakers this morning, Dave Bozeman, CEO of C.H. Robinson; and Damon Lee, CFO. And we have Chuck in the audience as well. So lots to talk about here, and we really appreciate your time. Maybe we can go ahead and address the elephant in the room first, get that out of the way. The tragic lupus accident and the unfortunate outcome in license verdict that was made against you. How are you thinking about next steps? What do you think is most misunderstood regarding case that's been weighing on shares or [indiscernible]

Yes. For sure. Richa, good to see you. Happy to be here. Thanks for having us. So let's jump into that. We obviously gave some color on our quarterly earnings call. But I'll just double click and Damon can jump in as well. First and foremost, as we stated before, we totally feel like this was a case in a local jurisdiction within Dallas. That was certainly made more on emotion, in fact. We strongly believe the facts in this case are one that are on our side. And obviously, our insurance carriers thought the same things they had a pellet attorneys in there in proceedings. Playlists bars requests were unreasonable to settle in a case like this, particularly when the fact was so strong on our side. And we just won a pill within Texas, and that has a history of showing this that when the facts are presented for law that this will eventually be ruled in our favor. I strongly believe that nuclear verdicts are not going to be the norm. But I would say that we are making a call on here in various vectors. From an investment perspective, I would say, this doesn't change C.H. Robinson's strategy and what we're doing. We've had a docket. We've always had a docket. We've managed that docket extremely well for over 2 decades, and you can go back or look at 8-Ks and things of that nature. 98% of cases never see a courtroom they get settled out in doing that. And you look at the amount of freight that we broker 37 million shipments, as you know, per year. And we have tens of cases that we deal with. So do I think that the reaction to the industry, not just Robinson is a bit overdone? I do think that it's certainly a bit overdone on here. this case, advisory verdict will go in. Ultimately, the judge will put a final verdict in the next 30 to 90 days. When that happens, our pill process will immediately appeal and then the post -- the prefile motions and things like that will happen before the judge has to make a final determination. When that determination is made and filed, we'll follow an appeal, and then that process starts, and that could be a series of 18 months, 2 years and then go to the Texas Supreme Court as well. And so you're talking about this could be 5 to 7 years in doing that. But it doesn't stop the fact of who we are, how we've managed it, how we manage inflationary costs, we do it. We do it all the time when it comes to insurance costs, we feel really good about that. And I'll make this last point that this is not about Robinson. This is a bigger issue. This is really about commerce as well. Multiple vectors happening, but you have to look at commerce. And if this -- if nuclear verdicts are going to be the norm, then there are a number of the industry that will really have an issue, and we'll have an issue moving commerce within the country because 30% of commerce is moved by brokers. 500,000 truckers have 110 trucks and are small owner operators. They get their movement through brokers, and that's 500,000 out of the 600,000 that are around. So this is a bigger issue. We are pushing for a standard through the Department of Transportation and FMCSA that standard of reasonable care. We're also driving the legislation. We want Congress to act when it comes to accountability and a legislation around this issue as well, where else we will have a commerce issue. That's how we kind of look at this. So a bit overdone on stock reactions within that. Robinson is solid. You see that from our last results, and hopefully, we'll get into that. We've built a moat, and we built a system that we think wins at the low and certainly wins at the high and we don't think that a case like this, when it comes to any type of insurance inflationary cost is an issue for us. We've proven that we absorb all of that.

I'll just put a bolt what Dave said. So 2 things. We think the stock reaction is one, it's kind of hinting that nuclear verdicts will become the norm. We don't believe that's likely. And then number 2 is I think it's assuming that we won't prevail on appeal, which we feel highly likely we will prevail on appeal, right? So we think, as Dave mentioned, stock price reaction is overdone. We've certainly been active buyers of our stock and continue to be and certainly believe that this has become an attractive entry point for investment.

Yes. Why don't you believe the [indiscernible] verdict [indiscernible] is it just based on the commerce connection that you made, but it could really paralyze the state of commerce in the U.S. and the legislators are probably not going to stand for that end of the day or...

Yes, for 2 reasons. One, [indiscernible] attorneys, you can always do -- we can't stop a lawsuit per se, right? You bring a lawsuit in a particular jurisdiction, and that can happen at a local level. No one, no matter who they are, can really stop some type of losses. They happen. They happen all the time in various industries in doing that. But proving that fact set all the way through the court system, I think you kind of see what happens over time. And we think, in this case, that certainly will happen when the facts are presented to the appellate courts, it will clearly show some things that really show that Robinson is not at fault and certainly was not negligent in this in the way we went about transacting this low. Those facts are clear. And so we feel really good about that. So we don't think that, that will be a nuclear verdict. If it is, if for some reason we say that's the norm, then that's a bigger issue. And I would go so far as to say the company that really kind of stands up and has the wherewithal to do that, you need someone with an investment-grade balance sheet that has the scale that has the monetary means to do that, and that company is us to be able to stand through something like this. We're just calling on a broader look at all of transportation that this is a bigger commerce issue. We will be fine either way, but this is a commerce issue. And I do not think that there will be an appetite to have commerce slowdown and have increased costs, less service and that impact. I just don't think that we would stand ahead.

Yes. I would just add, look, as Dave mentioned, the vast majority of cases that are litigated, they settle right? The plaintiffs want to settle, the defendants want to settle. Very difficult to settle cases with this type of expectation, right, of a nuclear verdict. So we just don't believe that is the norm, right? And in fact, history is shown in most industries that is not the norm, right? In fact, even in this case, if you read what the plaintiff attorneys have published post the verdict, they've always wanted to settle this case, right? They didn't want it to go to a jury verdict, right? So we believe history will be proven right that this is a unique outcome and that ultimately the history that shows the vast majority of the cases become settled at reasonable amounts will be the norm. As Dave mentioned, if this becomes the norm, it is certainly not a C.H. Robinson loan issue, right? Logistics, the movement of goods, commerce as we know it, will be severely impacted. And I've said this morning, I mean, think about what we look through at COVID, right? I mean, I think you could see similar type events with empty shelves. Service levels dropped and substantial inflation because, again, an industry cannot provide for its customers if the norm is nuclear verdicts, right? So in that scenario, certainly the government. Congress would have to do what we're asking them to do today, which is to develop a national standard and to enforce reasonable liability as it relates to that standard, right? I mean that is something they could do today. Hopefully, Congress does not wait until we end up with a situation where things are much more dire to act. But again, that's not the case we're saying is base case. We believe this verdict is unusual. This case is unusual. We believe that history will be more the norm. That's our base case.

As you said, you're very emphatic that this is motion versus [indiscernible] and the factoring [indiscernible]. So we just cash out kind of the fact here, you've hired carrier that had a safety -- satisfactory safety in the FMCSA, which is not easy to get, by the way...

Only 6% of a [indiscernible] rating, and it was pre and post accident as the government came in and did an audit after that accident and upheld that satisfactory rating for that carrier. That carrier was less than 5% of Robinson's business that did that and was used by multiple entities, brokers and shippers alike.

And then what about the concept of [indiscernible] employee. How do you [indiscernible] what are the fact [indiscernible]?

I mean, the facts are this. We did not contact that driver. The fact that when you look and say, "Hey, that driver to their dispatch and we actually rescheduled that load for 4 days later." That's just the facts. Now what's out there is [indiscernible] I'm giving you the facts of why this is bullish. That's just the facts of what we did. And that stands on what it is, and that's why we feel really good on appeal.

We had no communication with the driver. We did not control the actions of the driver. The driver was an employee of carrier. I mean, it's that simple.

And Robinson did not act as a mod carrier in this particular case. That is a really important fact.

And that's what we believe on appeal. Those facts will be taken into consideration, and we will prevail.

The appeal has not been filed yet. The final judgment has not been named yet. And is there some discussions that just maybe think about the facts and then the actual [indiscernible]

There is just has a lot of way in what she can determined. We're not expecting that, but she could change everything from the liability to a number of other things within this case. We are prepared as our insurance carriers are well to do the immediate appeal.

One question to lead off the topic. Can we move on? All right. So let's shift [indiscernible] as you talk about [indiscernible] before getting to [indiscernible] the market. [indiscernible] rates significantly throughout the year. But that was very much past year supply, right? How are you feeling about the prospects for a stronger demand to come back? Where are you going [indiscernible] your customers?

Yes. Good question. The -- you're absolutely right that this has been a supply-driven kind of inflection on overall cost. On demand, I would say this, it's a [indiscernible]. We certainly see some green shoots that are out there, but we're also cautiously optimistic because you have to break it down. Again, I will reiterate, we really look at housing, retail and kind of this industrial manufacturing when we started looking at free, what are really the things that drive freight. There certainly are tech industrials going on with data centers and things of that nature. That is certainly active. But if I look at housing and I look at retail on consumer spending, some of those are a bit flattish, and we certainly would like those to have an inflection to go up and to the right to really start driving this kind of demand rebound. And up to this point, we're just cautious about that. The main thing is that, as you know, we built a system that wins at the low and it's going to win demonstrably at the high. And I think we've proven that by out beating the cash freight index, 13 quarters in a row. And that is our secret sauce and our system that does win. And when the market does inflect, we will win on both the contractual and spot like we've been doing, but we'll do it in a more demonstrable way.

That is very impressive with 13 straight quarters of [indiscernible] Can you speak to that a little bit more, right? Like what is the value position that customers are particularly gone to? [indiscernible] you'll talk a little bit about your unique tech platform here, but I'd love to hear more about sort of what different from their competition.

Yes, I'll start and Dave jump in. I think it's -- at the end of the day, we provide our customers a very high level of service at a very competitive market price, right? I mean that is the equation. Now what enables us to do that is what we've talked about often, which is our Lean AI approach to execute our strategy, right? And so we get the question often, how does your customer benefit for your Lean AI approach, right? And one example we give often, which is we have one agent that handles transactional freight quotes and prior to the current Lean AI approach, we only touch 60% to 65% of those requests in our NAST business. Today, we touch 100%. So if you're the customer, historically, if you're only getting a response in the time you need to get a response, 60% to 65% of the time are probably not happy all the time. Today, they get a response, 100% of the time, and that agent responds 7 days a week, 24 hours a day, right? And so in our #1 role as it relates to deploying our Lean AI strategy is do no harm to the customer. It's the bare minimum, right? If any approach, we believe, is going to create any deficit with the customer experience, we don't implement that technology. What we've seen over the last 2.5, 3 years is that the customer experience, our service levels, our service customer rating scores have gone up as we've implemented our Lean AI strategy. So we always have to be market competitive. We always have to provide a differentiated sys and certainly, our Lean AI approach has allowed us to do that in an exponential way with our customers.

And let me tie that up on what Damon said, which I think is right. But as CEO, I'll let you and say, we are not just a global order and freight broker. That's the price of admission at Robinson at scale. It's much more than that. So when you start talking about the customers, we're solutions provider, a technology solution provider at scale for our customers. And that separates us out from, I think, the industry and competition we drive solutions when it comes to topology and onshoring and customs and really hard decisions that customers are making about very complex chains. And we do that with things that we've recently launched, our Lean AI planner, a lean AI engineer, scans, supply chains constantly gives answers to those supply chains, saving our customers' money on inefficiency and things of that. So we are becoming more than a forwarder and just a broker. This is a solutions provider company. It's something we've been building along with our system as we transformed the company in the last 3 years.

I think it could also be helpful here why to your competitors talk about the importance of human touch when the cycle keeps up, [indiscernible] can address all these [indiscernible] that come in, but next iteration, maybe something was along with the load and want to cost the humans, right? Talk about how your solutions are maybe making it easier for our folks to handle maybe more content?

Let's get into that and be really, really clear about what we're doing here because I hear that some time. I want to make sure people understand what's going on here. The no customer, and I'll speak for everyone here. No customer, no matter what your customer is once pay for back-office repeatable ask. If you think that back-office repeatable tasks are going to come back and you will add cost in to do those back-office repeatable tasks, that is inefficient. And I don't think that, that is supporting your overall customer. We no longer are going to do that. We have very much put our technology into our order-to-cash process to automate some of those repeatable tasks that really are set themselves up to be automated, such as tracking and quoting and a number of other things. So when the market comes back, we are not adding humans back into those particular repeatable tasks. What we had on is taking our people and allow them to do the things that I just talked about, solutions providing customer touch. We have the best logisticians in the world. And so when we start talking about solutions setting, and touching base with the customer. That's where we're focusing our people on, small, medium business, investing in people going out and doing that work. But order tracking, and quoting, that's not coming back at Robinson. That has contributed to a 50% productivity since 2022, but it's on a solid ground of what we've built. And I want to be really, really clear about that.

And just to add to that, I mean, we process that we've automated at Robinson has a human in the loop, right? And so if a customer our shipper wants to talk to a human. They can, absolutely, right? But our technology is enabled in such a way that they don't need to, right? And I think if you use their own life, for example, in most cases, if you can go online and solve your problem in a satisfactory way, you probably don't want to talk to somebody, right? Well, most of our shippers are that exact same way. But they want to talk to somebody...

We'll meet them where they are.

We'll meet them where they want to be. The way we think about our technology is not about replacing the human touch. It's about augmenting the human touch. We've taken the employees that our shippers love to deal with, and we've given that account manager to be available to that customer, 24 hours a day, 7 days a week, right? And that human can [indiscernible] into that automated touch point anytime they choose to. So for us, it's not about either/or. It's not about HiTouch or technology. It is both and we feel like we've got the right recipe to give the ship for that optimal combination of human touch and automation. And as Dave mentioned, if you were to ask a customer, what are you willing to pay for? Those tasks that they're not willing to pay for, we've automated those almost 100%. And the feedback from the customer has been extremely favorable on that journey that we've been on.

Let's talk about [indiscernible] just a theory out there that it's only a matter of time for competitors to catch up.

We've been hearing that for 2 years.

Yes. So talk about what's different here. I feel like -- it's 2 years ago, the management team right [indiscernible] willing to break things -- make things and maybe that's it. But like -- you talk about [indiscernible]

Yes, I think a good [indiscernible] on it. The first mover advantage. I actually disagree with that, with that premise. And we do this because we just have to go back into a little bit of history. You can go back to 2015 or so, and the digital inserts came in, remember that. And the digital insurance came in, it was like, hey, Robinson is done because this is going to like take away all of like brokerage and automated and things like that. And that ultimately didn't work out. I mean the thesis was a pretty good thesis, but the issue is that now. You look at a 120-year company at scale that has 100 trillion data points and proprietary data, largest data center in the industry. And now it's the disruptor because that thesis has some flaws in it because moving freight is really hard, and it didn't account for that variability. Well, we actually do account for that variability and the proprietary technology that we've used along with our operating model, it has given us to be a disruptor in the industry. So we didn't create lean, and we didn't create AI. It's all been out there and anyone can get that. How you orchestrate that and how you implement that is different. That's what we have an advantage. And therefore, it can't be a first-mover advantage. It's just an advantage. And it's not going to be one that we give up because you assume when that question is posed that if someone even tries to catch up, that we would be in the same spot. We will not.

By the way, [indiscernible] for example. So a pretty good means [indiscernible] All right. Low single-digit growth in volumes that you guys have been seeing. Of course, in a down market, and I think 13 quarters of outperformance versus the industry. But could we see more meaningful growth, especially as you recently hit your margin targets start to come to the Street impressively before we reach mid-cycle commissions? You talked about maybe more into growth once we achieve that target where there now. Curious the fact that [indiscernible]

Yes. I mean we certainly believe having optionality is one of the tools and levers to drive performance is going to be critical for us going forward. Now we've said this many times before, and we always like to clarify this, which is the freight market on Monday is completely different on Tuesday, it's completely different on Wednesday. Meaning there's going to be some days where we can take demonstrable share and it's at the economics we want and we do that. There's other days where the freight quality is just not there. And we'd much rather the competition take that share because it doesn't meet our standards, right? And so what I would say is we now have one more tool. Now that we've established that baseline quality of earnings, the mid-cycle margins, you referenced 40% for NAST and 30% for Global 4. Now that we've established that baseline quality of earnings. Now we have one more tool to drive out growth. And so we do believe that will be a meaningful contributor to our outgrowth in future quarters. I would think of it more as situational versus linear, right? I don't think you can say every single quarter that optionality is going to yield. I'll make up a number, 100 basis points of outgrowth, right? As I mentioned, the freight market is quite different every quarter, every month, every day. But we do believe, on a situational basis, it will add meaningful outgrowth to our performance.

And then just like the supply [indiscernible] you've kept ADP a little flat, [indiscernible] that might affect. But it is creating a bit of a near-term sort of [indiscernible] sign. So do you -- like what [indiscernible] in and we level out, when do [indiscernible]

Yes. I would say -- I mean I think we're in an elevated spot rate market for longer, right? I think if you just look at the fundamentals of the market. I would say we're in the early innings, and I'll get to the next tranche of why I think we're in the early innings. One is just, I mean, a lot of capacity has left the market. The current regulatory environment is going to keep that capacity out of the market. And so I think the elevated rates that we've seen even though the rate of decline may slow down, I still think they're going to stay at an elevated level, and we believe our revenue management capabilities allow us to win incrementally in that type of scenario. You mentioned purchase transportation. We believe through that revenue management capability that I just spoke of that we procure freight better than anyone else in the marketplace. So even though the cost is going up, our relative performance to the market on that purchase transportation, we believe is industry-leading, which allows us to deliver a flat AGP per load like we did in Q2. Now the other tranche of why I believe spot rates will stay higher for longer is what we've talked about around the legal environment, which is we mentioned post Montgomery that there would be a consolidation of small- and medium-sized brokers and carriers in the industry. We think now the combination of Montgomery Plus Life, Lupus Superior is going to even exacerbate that even more, right? And as the industry consolidates, certainly Robinson will be a winner in that consolidation. And certainly, that consolidation will keep spot rates higher as well. So we think the fundamentals as I just laid out, are a pretty solid recipe to keep spot rates higher for longer.

[indiscernible] very fragmented market. So we [indiscernible] to see what's happening in private side as much as you do. Are you seeing that already [indiscernible] see [indiscernible] opportunities?

We are. We are. Yes, we are. Yes, it's on a couple of different fronts, we see small, medium brokers. First of all, as a fact over 20% of brokers had kind of burned down in the last couple of years just on the macros of the Indian we've talked about that. We've seen a bit more of a spike on now some of the other issues that are hitting be it headwinds on cost that they have to deal with. So we do see a bit of a spike on that. Ultimately, as Damon said, I think we'll see potentially small carriers could have some of those headwinds as well as there is some consolidation that could happen as we all continue to navigate this current environment.