Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Good afternoon, good morning, everyone. Welcome to our U.S. Customs Market Update presented to you today by our Expeditors Americas Customs team. So we are really glad that you all chose to join us and spend your time with us for the next hour to learn about what updates have happened in the U.S. Customs Market. Interesting, I think it's always funny to know that we work on this content, obviously, well in advance and then things happen within hours or the night before as they often do hear lately with customs. So we've got some very fresh updates to bring you here in just a moment. Really quick, my name is Samantha Hurst. I am one of our marketing and managers for the Americas region. I introduced myself, just to remind you, if you have any technical issues or questions about the webinar Adam in wise, you are welcome to e-mail me directly from the confirmation e-mail that you received when you registered. And that's my job here is to support here in the background while our experts give you all the valuable content. So the first thing I just want to mention is if you were unfortunately hearing my voice echo, just make sure that you are joining the audio only from 1 device that is typically the issue we see people having and we don't want to drive you crazy with mine or the speakers voices echo in your ear. So a question that we get every single webinar is how do I get these slides. That's 1 of the many questions that come through. We will send an e-mail to you within about an hour or 2 of today's webinar wrapping up and that will allow you to access the materials, it will include the recording, the presentation deck and the Q&A as well as any additional lease that we feel will be valuable to you. [Operator Instructions] If you've not joined 1 of these webinars before, you will hear that I say, please just understand that like if a question is really specific to your business, your industry, your product, we may not be able to address that on today's webinar, but we will happily set up a call with you and reach out to you to make sure that your question does get answered as fast as possible. So finally, we do have the QR code here, if you would like to receive invite for future events, perhaps the coworker forwarded you this invite, we're glad to have you. You can get those invites direct to your inbox just by scanning this Q$ code. Or in the chat, I did drop a couple of pieces of information related to these updates, and you can click on that link there that we've dropped as well. So now I'm going to move on to just a quick disclaimer. This is less fun. But just to remind you, we are not, neither any of the experts today, legal experts. We are presenting all of this content for your educational benefit, and we will even share a certificate of completion at the end that you can use for actual credit if you are maintaining a certification. But again, this is really just for informational purposes, and we pull a lot of this information from the public domain and are simply trying to give you our best viewpoint on how to manage all these changes. So now let's get on to introducing our speakers, and I'm really excited because you're going to see one super familiar base in Stephanie Holloway, our Director of Customs Operations. But today, we have a couple of other faces. Some are familiar. Actually, I guess, all 3 of these ladies are familiar. They supported other webinars before, so we really appreciate them jumping in today. So we have [indiscernible] Peterson, who's our Senior Manager of Customs for the Americas; [indiscernible] Bar, who's our Manager of U.S. Customs Compliance; and Ashley Lara, who's our Manager of Customs brokerage Houston. So thank you all so much for joining. I'm going to pass it off to Corey, who's going to get us started. And actually, Courtney, if you will pause 1 moment, I did not hit record. I don't want to miss all of this good content. So 1 second, and we will be good to go. Courtney, please take us away. Thank you so much.

Thanks, Samantha. I appreciate it. And thanks, everybody, for joining us. We're going to talk about some great topics and on bias because a part of the webinar. We've got some great trade developments of some bonus content that's not listed here that I'm excited to talk to you about. There's some ongoing legal challenges, things that are coming up. I'm super excited to share with you guys our takeaway from the trade and cargo security summit that we had that we attended. Ashley is going to give an update on that. And [indiscernible] fortunately, the compliance transform. So super excited. So let's get into it. This slide should be familiar to you if you've joined our webinars in the past. And the main thing I wanted to cover here is that there's a brand new [indiscernible] that you can say. So familiar 4 on the left, but there's 338 brand new on the far right. And what I like you to take away from here is that things come on quickly, kind of, out of the blue and for 338 specifically, it's interesting because these were -- the section came out of nowhere and then is actually only valid a little bit later. So they set the actual implementation date a month ahead in advance. So what we've seen from the current administration is that either to go in immediately yesterday in 3 hours, or they give a lot of breathing room for them to actually implement. And when that happens, it's mostly trying to get people, it's a tactic to get people to come to the negotiation table, right? That's what's unique about those. So sometimes they go up, sometimes they get negotiated out in the final hour so we can just keep our fingers crossed, but maybe some negotiations will go down with Canada. And also, these are governed by the U.S. ITC and they've posted a comment period. So hopefully, it's about what does discrimination mean under Section 338 and so this is just the new crossroads of a brand-new trade basis that the administration is trying to implement tariff under and it's going to come with a whole set of legal challenges. So Section 338, it is -- we were kind of hoping that it wasn't going to happen. But here we are, this is one of those ones that it had a further implementation, and now we are seeing very, very high rates to be implemented. We've seen even higher from China. And so the main thing I want to talk about here is tariffs kind of old news, we always know that there's list. There's things that are happening. I want you to remember that even though the proclamation says alcohol beverages, dairy and motor vehicles, that does not reflect the products that are covered. These are actions meant to come back their treatment of alcohol beverages, dairy and not vehicles. And so the products cover are all not under those tactics. So please check the list, please check the provision, check your products against those because it's not just those 3 product categories. I also wanted to make sure I call out that the scope had changed. So we had additional conformations that came out, 2 of them to cover alcoholic beverages and motor vehicles that added, removed and modified to HCS numbers underneath those actions. So please note that the list have changed from when they were originally announced back in August. But the main thing I wanted you to take away from this are the import bans. So we've seen a lot of tariffs. We've seen very, very high rates, but we've never seen an outright ban. I think this is something that we should all pay very close attention to and recognize what it means for the implementation of 338. 338 is not just tariffs, it's also outright banning product and it's indicative of the length that the administration is willing to go to for this and any future tri-remedy actions. I think that is something that is very notable, and we should be confident obviously going forward. And another thing I wanted to mention for Section 338 is the difference between the language that is used for the tariffs, the actual tariffs, the 50% is entered for consumption or withdrawn from warehouse for consumption, very entry based. The import bands are actually more about the date of importation was imported on or after. So we're interpreting this to mean it's not necessarily that you have to make entry on those bills. The goods just have to be in the country. So the options that I wanted to highlight before the ban goes in on the 29th of September is you can't just do the usual, bring your goods in, clear the goods and your home free. But if you're trying to beat the deadline, if you're trying to get these things in before September 29, before the import ban is actually implemented, and doing an entry on all of those goods, trying to push them all through at the same time is prohibitive because of the [indiscernible]. You can also explore FTC admissions. It doesn't exempt you from the duty, but it does put off that duty [indiscernible] you could do the mission to get all those things into FTC and only [indiscernible] of duties as you pull it out of the zone. So you could mitigate or put off that duty payment using a FTC and inbound warehousing. So if you enter your goods into an inbound warehousing, you can also gamble that, that duty rate will be set when you remove it from the warehouse, so you could also see if maybe that 50% rate change. So it remarks me of the IEEPA China situation from way back when -- when a lot of importers were gambling or [indiscernible] gambling that the duties was stick at 125%. So a lot of importers were letting good sit at the port. They were just trying to move this inbound give themselves more time so that when they finally did the entry, that the duty rate will be lower. Forces is complicated because this is Canada and the transit time is much shorter than something from China. But something that we wanted to comment on something [indiscernible]. My next topic is CBP Form 5106. So if you're not familiar with the 5106, it is the form that you use to update your contact information as an importer of record for CDP. So if your companies import of record on your entry, you need to make sure that the records that CBP has on their side are accurate and complete. That's the primary thing I want you to think about before you went on to the rest of this because they manufacture, exporter, seller, import of record, they're not necessarily the same company, so you need to determine if you are the import of record. And I also wanted to call out that before a 5106 was kind of administrative. It was very easy. Brokers would just submit them on behalf of you. It's just name, address, phone number just standard stuff. But with the release of this enforcement EO, there is a significantly higher burden being placed on anyone that is submitting this information on behalf of an importer. It comes with additional betting and verification. I as a broker and saying, I verify that this importer is actually named this and is at this address, and this is their current contact information. And we've never had to do that before. So that being said, the best way that you can update your 5106 information is directly in the ACE portal. You can see what's in there, you can monitor it, and you can correct anything that might be incorrect. The downside of this is CBP can void an importer number if your 5106 information is inaccurate or incomplete. So I beg you to please make sure that information is correct. The last thing you want is notification that your importer number is voided and you cannot make entry in your stuff for any entries that you have left to file, you won't be able to file them. So that will be terrible, and I don't want that for you just because an address is outdated because your office need. So please go on to the portal, review and correct any information and use that as a tool to go forward. [indiscernible] also sent out a job A. Hopefully, we're seeing the job A. We have a screenshot of it on the next slide. And that will help you identify the field that you need to make sure are updated and accurate. The [indiscernible] portal is kind of wild, there's a bunch of different ways, there's kind of the similar things or the same thing. So if you didn't get this email, if you didn't get this job [indiscernible] and your interested in it, please reach out to your local Expeditors contract, and they can get you this job aid to help you go through this to update your contact information. Okay. So transitioning back into tariffs is the new Russian sanctions. We've seen this before where it's 100% tariffs on goods for countries that purchase Russian crude oil or natural gas and is one of the -- either the 5 large purchasers of Russian crude oil or 1 of the 5 leading facilitators of Russian oil sanction divisions. So we've seen this kind of secondary tariffs before under the IEEPA [indiscernible] for Russian oil for India. So this is something to keep in mind that although it does have 500% tariffs on imports of Russian origin goods than there are some exemptions. The piece of this that's going to be hard to track down as this will up to 100% tariff on goods on countries that purchase, right? So you are going to have to go through your sourcing, identify countries that could fall within 1 of either of the 2, 5 largest purchasers by country or find leading facilitators of russian oil sanctions divisions. We have not received any actual implementation instructions. We have not seen any information regarding affected countries. So the best thing you can do right now is, guess, google it, I'm sure you have googled this. I've googled it, look at the countries that are -- that come up in those kind of conversations and just not check your potential impact. You make a quick path in your sourcing and see if you have things from those countries and just plan on that, that's the best thing we could do right now. Just remember that it's not just Russian origin. That's not going to be what you do to figure out your impact, right? It's going to be those additional countries that deal often with Russia. In my last bonus slide, it is last night, we sought a new FRM and draft status for the Section 232 pharma. The main thing I want you to take away from here is that 22 continues to evolve. It's not a won and done. It's not like the thing comes out, you get an FRM, the CMS, and this is your life now. What we're seeing more and more now is -- and then there's changes and then there's updates. And now there's exclusion. And now there's a comment period and there's so many things rolling. So for this pharma new FRM that came out last night, they identified the 0 rate categories. There are specialty products, new specific definitions that are in there, and I encourage you to go read for yourself, but these [indiscernible] calls for a 0% Section 232 for pharma, but it needs to be from an eligible jurisdiction. So you can see at the bottom of the slide, there's all of the countries that are eligible. If you have a product that is a 0 rate category or even another highly specialized pharmaceutical product that is either not from one of the eligible jurisdictions or not included. They do have another path that you can take if your product is meeting an urgent U.S. health need. You can apply to e-commerce for approval for that 0% rate. There's some information that you need to include in your request to [indiscernible], and they've said in the FRM, and they've been very specific that the decisions are going to be individual, back specific and company specific. So it's not going to be like the 232 cases was been kind of someone also applies for a product exclusion [indiscernible]. I have that same product, I don't use that same exclusion. Unfortunately, not the case, every single company that is producing some product needs to apply for that individual specific and they will be notified if they are approved and then we can start using that exposure. Also included in the FRM are some HTS changes. There's the additional 0 rate header. They updated some definitions for pharmaceutical and generic pharmaceutical particles. And before you free out, the HTS changes are not general, they are specifically to address the statistical changes from July 1. So this is the first 232 that we've seen that takes a specific HGF change and actually have implemented these changes into their list. There's also some other technical amendments that they did, which I think are just -- maybe mistakes, maybe things that they didn't intend on the marginal list and not realizing that coverage. This is the first 232 that has addressed these stim changes. Most of the other ones are just saying, is it split, it applies to both. So I think that's very interesting that they're reviewing that from July. And the main thing I want to address with this 232 pharma is, again, 232 program continues to evolve. It does not just stay -- this is not the final word. We're going to hear about 232 form. Again, I'm sure there's lots of questions still out there. So we look forward to keeping up with all. That's it for current trade trends. So I'll kick it over to Stephanie for the legal battles that are going on.

That was quite the transition. Let me see here. Okay. So tariffs under legal challenge are as Courtney said, legal battles. So let's dig through this a little bit. This section, obviously, our colleague, Ted always does and I appreciate him for doing that because I don't like talking about the legal system. I feel so ill-equipped. A couple of months ago, somebody put a question in the box saying most of us aren't lawyers, how are we supposed to understand any of this, and I felt that deeply. So regardless of how we feel about the -- the legal system or lawyers, I guess, we all have to pay attention to this. We all have to kind of keep our finger on the pulse because it is such a game changer as we saw with IEEPA. So most of my updates today are referring to IEEPA, I kind of feel like this is one of those things that it's like nobody cares move on. But there was some stuff that came out in the last month that I want to make sure for some of you will be very impactful. And for the rest of us of course. This might be just IEEPA, you duties back on. But as we know, there's a lot of other legal challenges going on with Section 122, potentially at some point -- Section 3014 labor, maybe Section 338. I don't know. So this is why we really have to pay attention to this. So with that said, for IEEPA, one of the best places to look is at the filings that U.S. Customs does. Brandon Lord files most of those, and he just filed one exactly well -- probably him not personally. But he signs off on them. And a week ago, there was 1 filed in the Court of International Trade. I have a link here and they kind of gave an update, and it's a little bit interesting. So you can see here, this is the jump in entry. So it went from $17 million a month ago to $27 million and actually had to go refresh my brain. So it's, I think, 55 million entries that needed refunds. So they're about halfway through the count, but then they have given back $134 billion, and that's out of $166 billion. So they're about 80% the way through the actual dollar figure, okay? So not super shocking. They've given back 50% of the entries, but 80% of the value. An interesting thing he had in there, of course, was that $1.3 billion has not been sent to treasury because there's not a bank account, a U.S. bank account associated with that refund. So it kind of just gets into a holding pattern, okay? So if you think that you should have a refund, but you haven't gotten it yet, this might be one of the reasons why. Also in that report, Brendan Lord called out Cape Phase 3 okay? So [indiscernible] Phase 3 has some major nuances to it. So I'm going to get a little in the weeds here. If you have gotten all your IEEPA money back, then you can just put your head down and take a little break for a second. But if you haven't or you were waiting on Phase III, let's unpack this real quick. So Phase II is going to cover something called finally liquidated entries, okay? And finally, liquidated entries. Unfortunately, I'm going to go over to this crazy chart is after liquidation occurs. So we have our entry filed. There's roughly 314 days. At that point, you can make updates to it typically through a post-summer correction is called at 314 days, liquidation occurs, as I always say, the book kind of gets closed, okay? Then there's 180 days post liquidation where you can make changes traditionally, most of the time you're going to be doing a protest if you owe CBP more money. What we have learned through this process is that CBP views the first 90 days after that liquidation date, fine. And they are processing those entries through Cape and they have no problems doing so. There's the second bucket that's between 90 and 180 days post liquidation date, that they deem with this term finally liquidated and -- that bucket is stuff within 90 to 180 days. What CBP is saying or what they have argued is that if you're in the finally liquidated bucket, they can only give a refund to you if it has been ordered by the Court of International Trade and you need to be a plaintiff. Essentially, you need to have filed in the Court of International Trade. You have to be suing the government to get this money back, okay? So what's a little bit tricky is that customs has been saying, "Hey, we're prepping Phase III, but at the same time, arguing against having to give all that money back? Judge Eaton at the Court of International Trade has said all the money needs to go back regardless of what state it isn't, okay? So that's the newest court kind of battle. So the -- this is a battle. Courtney was right. Okay. So what's happening on August -- or August? October 6, that was hard for me is that if you had filed in the Court of International Trade prior to July 30, and you can request your money on the finally liquidated entry starting October 6. Hopefully, you all followed that. So if you do not have a core order and you have enough filed suit, this will not apply to you, okay? So you have to be in the court, you have to -- in your lawyer that has filed, I've heard from some of our importers, they are a -- CIT is an active conversation with them, okay? So you should definitely know what's going on and if you're in this bucket, okay? So that is good news for a number of these folks. But obviously, the eligibility, the big piece on this is that our Phase III is not open to everybody. It is open to this very select group of importers who already had filed in CIT and their lawyers have worked with CIT and CBP to get these entries prepped and ready to go, and they can file them on October 6. With that said, there are some of you who are like, "Oh, maybe I should file." And I do think that is probably the fastest way to get your money back. But before you go down this road, I would absolutely say, first of all, quantify. How much money do you have? How much refunds do you have falling into that finally liquidated bucket? Then really try to understand, some of you are saying, "hey, it's just a couple of entries. It's not worth it. We don't want to pay for the lawyer fee for that." That's fine. What you can do, though, is still try to preserve your right a bit, and that's really where the kind of the cheapest insurance policy you can get yourself as a protest because what we're trying to do is buy enough time while this decision works itself back through the courts, okay? So the decision being can importers get their refund if they don't have a filing in the CIT. What a mess, right? So the other big thing is if you have -- this is, once again, not a lawyer, but I believe you have a 2-year CIT filing deadline, and we are actually coming up on that. So it's 2 years, I think, from the date of injury. Most of you had started to pay IEEPA, China fentanyl in the beginning of February 2025. So we're actually not that many months out. So this is something that, first of all, quantify it, figure out how much you have and then you can actually make a strategy from there, keeping these other things in mind. Okay. I think we've had enough fun with that topic. Let's talk a little bit about on the horizon. I only have one slide in here. Actually, let me flip back real quick. One thing, of course, many of us are watching is that China is, of course, going to be at the White House, I think, today, and they'll be doing a more formal dinner. So I think many of us are keeping our eye on that as China is traditionally been a very important partner to the United States and the amount of goods that we import from there. From what I've read and you can read what you want to, it doesn't seem like maybe a lot of tariff activity will come out. But just thinking about it, there is still so much on the table. One of the strategies of the Trump administration often is kind of to kick the can down the road. And we actually have a number of tariffs that have been kicked that sounds weird. But we have a number of tariffs that have been moved out that are specifically related to China. So we have the Section 301 Maritime. We have an open Section 301 on did China fulfill its phase -- was it called Phase 1, commitments? We have the open Section 301 on structural excess capacity. So there's a number of ones in the Russian sanctions bill, honestly, too, I think China is one that many people agree is a large buyer of Russian oil. There's many things out there that can kind of be used and leveraged for additional tariffs on China as desired. So we'll watch, we'll see what happens, of course, with the rest of the world and then report as it actually becomes more impactful. So with that said, let's talk briefly about the FCC. So there was a pretty key comment period that actually just closed yesterday. And what this was looking at is the FCC is looking at different types of imports. So I think in July, they actually did -- oh, I shouldn't say this out to because I'm going to mess it up. It was like an import ban on robotics and 1 other thing that is going out of my head. So they're making more moves in this space. And this is really looking at restrictions affecting equipment covering certain components in software. These are things like routers, things with the radio signal and the list is pretty extensive, okay? So this comment period was open. It just got closed. So it will be very interesting to kind of see what shakes out of this. Similar to what Courtney was kind of alluding to on the Section 338, these are more restrictions than what we have traditionally seen in the last 18 months. In the last 18 months, there has been a lot of just more tariffs, right? And if you can pay it, it still can come -- this could fundamentally change that as well or require more restrictions or more data or things that you might have to provide ahead of time to the FCC. So this is something that we're really keeping our eye on. Just for fun, if you want, you can go out there. I have the link here to where the docket is. And you can see things that people submitted in their comments. And there are companies that have submitted, there's everyday citizens. It is just the government in action. So with that said, that's a great transition. I'm going to ask Ashley to come on. So she attended with Madeline and Kelsey from my team in person to the CBP Trade and Cargo Security Summit 2 weeks ago, I think, in Dallas. So she'll walk us through what she heard and what you should all be aware of if you didn't have a chance to attend.

Hello -- can you all [indiscernible]?

Yes, we can hear you, but I can't see you, Ashley.

We have seen a choosing this moment in time [indiscernible] silence. Let's see. [indiscernible] about that.