CH Robinson Worldwide Earnings Call NUGGETS: Taking a Longer-Term Approach, Margin Compression
On Tuesday, CH Robinson Worldwide, Inc. (NASDAQ:CHRW) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Taking a Longer-Term Approach
William Greene – Morgan Stanley: John, you had a good sort of synopsis there right at the end that makes a lot of sense with a lot of strategic initiatives you are trying to put in place. One question that comes up though a lot when in have discussions on the name though is what can Robinson specifically do to change the growth trajectory now, right like so, I understand that you’re making investments in that, sets you up for a better outcome later when the macro get better, but it sounds like every time it comes back to okay but the macro, if it doesn’t improve there’s not much we can do. But I’m not sure that’s what you’re trying to say. Do you have any thoughts on that if it can be done outside of macro?
John P. Wiehoff – Chairman and CEO: I think there are some short-term things that we could possibly do to improve our short-term earnings, but I don’t know that that would be the right thing to do for the long-term. You can always be more aggressive on pricing at the risk of the relationship or we probably could do some cost-cutting or some other things that would improve our short-term earnings, but I really do think we’re staying pretty focused on the long-term investments and while we’re spending more on people and spending more on technology and making investments in containers, and a lot of these things. We’re opening offices in Europe despite all the economic uncertainty because we continue to believe that there is a really good long-term opportunity for us there. We’re also looking at acquisitions and other things that that maybe could help us grow little bit faster in the shorter term like the Timco acquisition did on the Sourcing piece of it. So, it’s not that we’re not trying to improve it in the short-term, but we clearly have a biased towards the longer-term approach.
William Greene – Morgan Stanley: You mentioned the investment in automation and if I remember correctly and you can correct me if this number is wrong, but I thought about 5% of your loads are sort of tendered and matched electronically. Is there a step function we could get? Could you see sort of this number be 15%, 20% or 25% or so if loads sort of tendered electronically such that we could have a whole step-function change in the way we perceive operating margins?
Chad M. Lindbloom – SVP and CFO: I’m having trouble remembering what step that was that’s 5% because I think our electronic tendered — of loads tendering in from the customers probably closer to 30%.
William Greene – Morgan Stanley: Yeah. I thought it was a match – the electronic match, but maybe I’ve got the number off?
Chad M. Lindbloom – SVP and CFO: The 5% is we have some preexisting in a very limited amount of our capacity when we commit to certain programs, (the) customer will go on contractually hire those carriers as well. That type of relationship will probably continue to grow but it’s got a pretty limited application today where it makes sense. But when you look at things like our LTL automation, a lot of those transactions end up being no-touch because we have carriers, each common carriers rate in our system, and we automatically pick the rate that will meet the service requirement of the customer. So we’ve been making many different technology enhancements to LTL, to truckload, to try to integrate with more of those customers, try to integrate with our carriers. In addition to the kind of the pre-purchased capacity we also have grown with some of our truckload carriers that we can tender them a load offer electronically and they can respond electronically. I’m not quite sure what that percentage is. So there’s many different productivity initiatives driven by technology and a lot of them are electronic interface, EDI and other electronic communication methods, but I don’t have any real new stats to give you.
William Greene – Morgan Stanley: Yeah, but I guess it still comes back to the kind of margin improvement that you’ve seen over the like the last 10 years is going to be difficult to repeat that even with these productivity initiatives.
John P. Wiehoff – Chairman and CEO: Yeah, we’re pretty consistent about saying we went from under 30 to over 40. We’re not going to see that type of expansion – we can see it today at least where that type of expansion would be possible in the future, but as we’ve mentioned in some previous calls, yeah, we could get up into the mid-40s, and maybe even higher if we didn’t care about growth. (For me this) business is constantly balancing growth and efficiency.
Justin Yagerman – Deutsche Bank Securities Inc: John, you mentioned this is already a longer period of margin compression than you would’ve expected, given experience in past cycles. So yes with double-digit volume growth not translating to similar types of net revenue, at what point do you actually say okay, maybe this is the systemic environment from a capacity standpoint where I’m not getting the leverage that I need and I’ve got to reevaluate the volume versus the price dynamic that we are pushing with our workforce?
John P. Wiehoff – Chairman and CEO: I’d like to think we’re doing that every day. When we look at those account management strategies that I emphasize and when I talked about sort of systemic margin compression, that margin compression really is across all the freights; the existing freight, the new freight. So we’re very comfortable that this 10% volume increase that we got came at comparable margins to the core business that we had before, and there’s even a fair amount of churn within that core business through rebidding and different transportation cycles. So the way we think about the business and profitability and the elasticity of pricing is looking at account-based profitability around the total margin and the total workload managing that freight entails and the labor and costs that we have associated with it. And that is a very fluid perpetual process that we’re adjusting literally daily around pushing back on our customers if we need more automation and more help to be able to keep that freight profitable. So we are doing that every day.
Justin Yagerman – Deutsche Bank Securities Inc: If I think about it in terms of my business, if I have a trader who is taking losses in dealing with customers that will get stopped out at a certain point. I mean are you micromanaging it to that point on a regional basis where if the customer is running you over too many times, you start pushing back in a very big way?
John P. Wiehoff – Chairman and CEO: Absolutely. And as we’ve talked before, every single day we lose money on some of the loads that we move, but some of them are growth investments, some of them are bundled freight commitments with other good freight and every office, every zone, every manager is continually looking at the profitability of the freight and trying to reprice or decline fright where they have to, honor commitments where we’ve made, it’s a very fluid perpetual thing, and we’re not losing on a significantly higher percentage of the loads today done several years ago. It’s compression across the board based on the macro environment, but we feel like our day-to-day account management and pricing disciplines are very consistent and very reliable like they have been in the past. It’s just that the market has not given us the same spread that we’ve had in other periods.
Justin Yagerman – Deutsche Bank Securities Inc: I mean is it that the market is just moving away that much faster and that you guys aren’t reacting fast enough. Then I guess, in terms of bid season, as we go into the back half of the year, is it maybe just a contractual issue and we’re about to get some relief as July 1 brings new pricing across the board with many of your contractual customers?
John P. Wiehoff – Chairman and CEO: No, I think our results are very consistent with every other industry data point we’ve seen. In that, the carrier base especially that we rely very heavily on the medium and small carriers continue to fuel lot of economic pressure. There is a lot of churn. There is no new – not much new capacity coming into the market place and they are very aggressive looking for price increases because it’s still a challenging economic environment for them with a fairly balanced freight environment. Shippers on the other hand are dealing with all the economic uncertainty and looking for cost savings ideas in the supply chain as aggressively as possible, and really, I mean one of the things that we have discussed a lot the last couple of quarters is that, I think traditionally a lot of the easy market share gains and high margin freight for the third party providers like ourselves comes from the growth in the freight and the unplanned and surge in seasonal freight that’s difficult for a shipper to manage, and in this environment, there hasn’t been a lot of that. So, the market share has come more out of existing customer relationships and making more aggressive price commitments like keeping rates flat to retain or increase your volume when you know you’re going to have a couple of percent increases on the supply side. That’s a very typical example of the types of market pressure and squeeze that we’re under today, and yet we know that through more automation that we can be very profitable on that freight and as market conditions change hopefully see some margin expansion or improvement as we go forward.