CHRW - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will open the line for a live question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, October 30, 2024. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations.

Thank you, Donna, and good afternoon, everyone. On the call with me today is Dave Bozeman, our President and Chief Executive Officer; Arun Rajan, our Chief Strategy and Innovation Officer; Michael Castagnetto, our President of North American Surface Transportation; and Damon Lee, our Chief Financial Officer. I’d like to remind you that our remarks today may contain forward-looking statements. Slide 2 in today’s presentation list factors that could cause our actual results to differ from management’s expectations. 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 the slides, we’ll let you know which slide we’re referencing. Today’s remarks also contains certain non-GAAP measures and reconciliations of those measures to GAAP measures are included in the presentation. And with that, I’ll turn the call over to Dave.

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. I’d first like to acknowledge the challenges that many communities are facing after the recent hurricanes to hit the Southeastern U.S. Many of our employees were impacted, and I’m proud of the incredible support that our company and our employees provided to help those in need and our customers. The commitment and compassion are truly inspiring and it makes me extremely proud to be part of this team. Turning to the quarter. I’m pleased with our third quarter results that reflect continued improvement in our execution as we continue to deploy our new operating model. We are raising the bar even in a historically prolonged freight recession with strong execution and disciplined volume growth across divisions, while delivering exceptional service for our customers and carriers. I want to thank our people, one of our greatest competitive advantages for their relentless efforts to embrace our new operating model and execute in a fit, fast and focused way so we can keep pushing that bar higher. Due to a focus on constantly testing market conditions and optimizing yield, we improved the quality of our volume in Q3 and continue to expand our NAST gross profit margin. We also continue to push our efficiency to higher levels in both NAST and Global Forwarding, and we remain on track to deliver greater than 30% compound growth in productivity over the two-year period from the end of 2022 to the end of 2024. Michael will cover the NAST results in a little bit, but I’d like to give our Global Forwarding team some recognition as well. In Q3, the team continued to be nimble and highly engaged with our customers to help them navigate various market disruptions and to provide excellent service. This resulted in a 7% year-over-year increase in our ocean shipments and a 20% increase our air tonnage. At the same time, they’ve embraced the rigor and the discipline driven by our operating model, and they’ve decoupled headcount growth from volume growth, reduced their headcount by more than 10% year-over-year and lowered their cost to serve. This improved operating leverage, combined with elevated ocean rates resulted in a 230% year-over-year increase in Global Forwarding’s Q3 adjusted income from operations. This combined with our improvements in NAST gross margin, productivity and operating leverage resulted in a 75% increase in our enterprise Q3 adjusted income from operations. Our new operating model has changed how we discover and inspect root cause issues and quickly implement countermeasures to improve the level of our operational execution. The reliability of our operating reviews continues to increase as we leverage our data-rich environment to inform our decision-making and enhance our competitive differentiation. At an organizational level, we continue to cascade the operating model deeper into the organization and build operational muscle at various levels of the enterprise to deliver on our strategic roadmap. As part of this effort, an evolving tool kit is being used by our employees in the form of problem resolution, balanced scorecard reviews, daily management and value stream mapping to name a few. Empowering our people with the Robinson operated model is creating a flywheel of performance, talent development and accountability that is evolving our culture to be driven by progress, execution and proactive problem identification and resolution. This has shown up in improvements such as more disciplined pricing and better decisions on the volume that we’re seeking. We are still early in our journey, but the operating model is helping us execute a solid strategy even better, and we expect further improvement as our team continues to embrace this new way of operating. As I’ve said before, I know from my past experiences of implementing lean operating models that improvement isn’t always linear, but I’m confident in the team’s willingness and ability to drive a higher and more consistent level of discipline in our operational execution. As freight markets continue to fluctuate due to seasonal, cyclical and geopolitical factors, we remain focused on what we can control, including deploying our new operating model, providing best-in-class service to our customers and carriers gaining profitable share in targeted market segments, streamlining our processes, applying lean principles and leveraging generative AI to drive out waste and optimize our cost. We also continue to focus on ensuring that we’ll be ready for the eventual freight market rebound with a disciplined operating model that responsibly grows market share, decouples headcount growth from volume growth and drives operating leverage. I’ll turn it over to Michael now to provide more details on our NAST results.

Thanks, Dave, and good afternoon, everyone. Supported by our new operating model and armed with innovative tools, our team of freight experts is responding to the challenging freight environment, and we are acting more quickly and more effectively to provide solutions to our customers and carriers and to improve the quality of our volume. In Q3, we delivered further optimization of our adjusted gross profit per truckload, which increased 21% year-over-year and 5% sequentially. Compared to a year ago, the improvement is being driven by better pricing discipline in new management process that we’ve stood up and a cost of higher advantage delivered by our procurement teams and the growing usage of our digital brokerage capabilities. All of this led to significant improvement in the AGP yield within our transactional truckload business and a 180 basis point improvement in our NAST gross margin. From a volume standpoint, we continue to be in a prolonged freight recession, as Dave mentioned. The cash freight shipment index was down 2.8% year-over-year in Q3, and except for the pandemic year of 2020, the Q3 index is the lowest Q3 reading the industry has seen since 2010. In this environment, our total NAST volume increase [indiscernible] 2.5% increase in LTL volume and a 3.5% decrease in truckload volume. Our team is continuously testing the best combination of volume and margin to deliver the quality of earnings that we’re targeting. We know we have the optionality to increase our volume when the conditions are right. But right now, our tests are showing us that pursuing volume beyond what we delivered wouldn’t result in sufficient profit. We are ready to pivot when it makes sense to do so, but we’re going to maintain our discipline. From a market balance perspective – continue to be in a drawn out stage of capacity oversupply. Although carrier attrition is occurring, it remains at a slower pace and not enough to materially impact the overall market. After experiencing some upward pressure during produce season, load-to-truck ratios retreated to 4:1 or lower for most of Q3. Looking ahead, Q4 is typically a seasonally weaker quarter compared to Q3. The 10-year average of the cash freight shipment index, excluding the pandemic impacted year of 2020 and reflects a 3.3% sequential decline from Q3 to Q4. As Dave said, we remain focused on what we can control. Our people and their unmatched expertise enable us to deliver exceptional service and greater value to our customers. In line with the disciplined and focused approach to capture growth opportunities in targeted customer segments, we have invested in our sales organization, and we will continue to support our people with industry-leading tech and solutions to enhance their capabilities. As we recently announced, one of those solutions is our growing drop trailer offering, which is nearly a $1 billion business for us. The breadth of our carrier network and the associated trailer pool provides us with the flexibility to customize a drop trailer program for our customers and to best meet their needs and we’re now the fourth largest drop trailer provider in North America. We’ll continue to lean into this offering and our other capabilities to responsibly capture market share growth. I’ll turn it over to Arun now to provide an update on the innovation we’re delivering to strengthen our customer and carrier experience, increase AGP yield and improve operating leverage.

Thanks, Michael, and good afternoon, everyone. In the third quarter, we continued to make progress on a number of important fronts, including scaling our process innovations and our use of generative AI. From a process standpoint, we continue to increase the rigor and discipline in our pricing and procurement efforts, resulting in improved AGP yields across our portfolio. With continued innovation in our digital brokerage and dynamic pricing and costing we’re responding surgically and faster than ever of the dynamic market conditions. On an annual basis, we’re now generating over 215 million algorithm-driven spot rates across truckload and LTL, enabling digital connectivity for our customers. And by way of continuous experimentation, we're performing more frequent price discovery and enhancing the quality of the pricing that we deliver. The continuous learning of our algorithms is not just through experimentation, but also from the active role that our people play from a human-in-the-loop perspective to drive continuous feedback to our algorithms on a regular basis in the form of expert market adjustments. Our revenue management discipline and tools are also contributing to our improved yield management. As we focus on optimizing yield, our teams are armed with intelligence and surgical countermeasures that can be taken to implement a disciplined, pricing strategy based on individual customer value propositions. We also continue to scale our use of GenAI across the lifecycle of an order. Whether being used to automate customer quoting, order entry, load tenders, appointment scheduling or other manual tasks, our GenAI tools and capabilities are enabling us to respond faster than ever to customers and carriers and to dynamic market conditions. The reduction of manual touches by the growing use of our GenAI tools is freeing up time that our customer and carrier facing employees can devote to relationship building, exception management and value added solutioning. In addition to improving the customer and carrier experience, GenAI is contributing to our productivity gains and will enable us to effectively scale our operations when the market returns to growth. Our productivity is on track to our 2024 goals which will enable us to increase our NAST and Global Forwarding shipments per person per day by more than 30% over the two-year period of 2023 and 2024. Our productivity improvements won't end in 2024 and they serve as critical inputs into our plan to create further operating leverage. This is a core part of our enterprise strategy along with responsibly growing market share and expanding gross margin to greater operational discipline and innovative technology that improves our execution. I look forward to our upcoming Investor Day where we'll go deeper on these strategies. With that, I'll turn the call over to Damon for a review of our third quarter results.

Thanks Arun and good afternoon everyone. This quarter we delivered significant year-over-year improvement in operating income driven by an increase in adjusted gross profit or AGP, while controlling cost through our productivity initiatives and thereby driving higher operating leverage. Disciplined revenue management and procurement of capacity in the face of continued soft freight market conditions improved the quality of our volume and benefited our AGP, which was up a $100 million or 15.8% year-over-year. On a monthly basis compared to Q3 of last year our total company AGP per business day was up 13% in July, up 18% in August and up 11% in September. Within our two largest businesses of NAST and Global Forwarding, AGP, operating income and adjusted operating margin all improved on both a year-over-year and a sequential basis. And while elevated ocean rates are benefiting our forwarding business, the continued discipline that our people are showing as they embrace our operating model has enabled both businesses to be more fit, fast and focused and to grow operating margins. As we look forward Q4 is typically a seasonally weaker quarter from a volume and gross profit perspective. Michael mentioned the typical sequential volume decline that the trucking market experiences in the fourth quarter. From a Global Forwarding perspective, there are several indications that customers pulled forward some of their peak season ocean freight due to the ongoing concerns about geopolitical issues and capacity disruptions, including the Red Sea conflict and the potential for labor disruptions at the east coast and gulf coast ports of the U.S. this could dampen ocean demand in Q4. Additionally, ocean rates have steadily declined since early July. Given the mix of contractual and transactional volume in our ocean business, the impact of changing market rates generally takes one to two months to flow through to our average profit per shipment. Consequently, we began to see the negative impact from declining rates in our profit per shipment in September and we expect this to continue in Q4. From an expense standpoint, our total operating expenses excluding a loss on the planned sale of our European surface transportation business and other restructuring charges were down $3.2 million year-over-year. Q3 personnel expenses were $361.6 million, including $2.9 million of restructuring charges related to workforce reductions. Excluding restructuring charges in the current and prior year, our Q3 personnel expenses were $358.6 million, up $18 million or 5.3%. This was driven by an increase in incentive compensation related to improved financial results and was partially offset by our continued productivity and cost optimization efforts. Our average Q3 headcount was down 9.6% compared to Q3 last year. We continue to expect our 2024 personnel expenses excluding restructuring to be below the midpoint of a $1.4 billion to $1.5 billion range. This includes an expectation that headcount will be relatively flat in Q4 compared to the end of Q3. Moving to SG&A, Q3 expenses were $193.6 million, including a $57 million loss on the planned sale of our European Surface Transportation business or EST and $1.5 million of other restructuring charges. Excluding these SG&A expenses were $135 million, down $21.3 million or 13.6% year-over-year. The expense reduction was across several expense categories as we continued to eliminate non-value added spending. We now expect SG&A expenses for the full year excluding the planned sale of EST and restructuring charges to be toward the low-end of the guidance range of $575 million to $625 million. SG&A expenses include depreciation and amortization, which we still expect to be $90 million to $100 million in 2024. Our effective tax rate in Q3 excluding the planned sale of EST and restructuring charges was 24.2%. This results in a year-to-date tax rate of 20.8% and we now expect our 2024 full year effective tax rate to be in the range of 18% to 20%. Our capital expenditures in Q3 were $17.3 million, bringing our year-to-date total to $59.1 million. We now expect 2024 capital expenditures to be $75 million to $85 million compared to the previously provided guidance of toward the lower-end of $85 million to $95 million. From a balance sheet perspective, we ended Q3 with approximately $1 billion of liquidity comprised of $860 million of committed funding under our credit facilities and a cash balance of $132 million. Our financial strength continues to be a key differentiator in our industry as it enables us to continue investing and improving our capabilities even through a prolonged freight recession. As a result, we expect to emerge stronger when the market tightens. Our debt balance at the end of Q3 was $1.56 billion and our net debt-to-EBITDA leverage at the end of Q3 was 2.08 times down from 2.4 times at the end of Q2. This was primarily driven by the performance of the business and the resulting increase in our trailing 12-month EBITDA as well as a decrease in our net debt balance. Overall our Q3 financial results are a testament to our execution with a focus on margin expansion and discipline on how we run the company. I'm optimistic about where we're going and I look forward to meeting many of you at our upcoming Investor Day. With that, I'll turn the call back to Dave for his final comments.

Thanks, Damon. As we strive to get more fit, fast and focus and deliver higher highs and higher lows over the course of market cycles. I'm pleased with our improving execution at the bottom of the free cycle. I want to commend our people for continuing to learn and embrace the changes that the new operating model is driving. We're making better and faster decisions on capturing the right freight at the right price to deliver a higher quality of volume and financial results. As I've mentioned before, all the changes we're making are aimed at our North Star of generating incremental operating income. We will do this by focusing on growing market share and expanding our gross and operating margins. We'll continue to grow market share by reclaiming share in targeted segments by leveraging our robust capabilities to power customer-centric solutions and by expanding our addressable market, through value-added services and solutions for our customers and carriers to drive new volume to our four core modes. We'll also be more intentional with our go-to-market strategy to drive additional synergies and cross-selling across our portfolio. We'll optimize our gross profit by monitoring key input metrics and responding faster to error states and changing market conditions with countermeasures and innovative technology that improves our execution. And we'll expand our operating income margins by embedding lean practices, removing waste and expanding our digital capabilities. This will enable us to strengthen our productivity and optimize our organization structure to be the most efficient operator in addition to the highest value provider. While there's a lot more work to do, I'm pleased with the progress we've made on evolving our strategy and improving our execution by instilling discipline with our new operating model. We're arming our people with better tools and moving with greatest clock speed and urgency to seize opportunities and solve problems in order to win now and to be ready for the eventual freight market rebound. We'll share more about our strategy, how we'll execute that strategy and the resulting financial targets at our upcoming 2024 Investor Day on December 12. This concludes our prepared remarks. I'll turn it back to Donna now for the Q&A portion of the call.

Thank you. [Operator Instructions] Today's first question is coming from Tom Wadewitz of UBS. Please go ahead.

Hi. Yes. Good afternoon. Let's see, and nice to see the strong results. I wanted to see if you could give a little more comment on maybe how we might think about the NAST operating margin and gross margin in 4Q. I think there were – you said maybe stable headcount sequentially and talked about cash freight shipments index, the normal sequential decline. But I just wanted to see if you could give any thoughts on kind of improvement or deterioration sequentially? And then another, I guess, related to those, how do we think about key drivers in 2025 for those two metrics for NAST gross margin and operating margin? Does it become more market-driven or is there still a lot left for C.H. Robinson to do that's truly company-specific? Thank you.

Hey Tom, this is Michael. Thank you very much for the question. I think as we said earlier, we're really proud of the work the team has done to be really disciplined in how we've managed a pretty tough part of this cycle. We continue to believe that our industry-leading costing and pricing engines gives us an opportunity to keep doing the work we're doing and keep that measurement moving forward. As we look in terms of our expectations of operating margin and leverage, really we're going to continue to control what we can control in terms of the marketplace. And from an internal perspective, we have a lot of confidence in the productivity initiatives that we've implemented and really have enacted more of an evergreen mentality that we're going to continue to work and drive for constant improvement. We've set some pretty lofty goals for the last two years in terms of a combined 30% improvement of productivity, and we feel we're on path for that throughout the rest of 2024. And beyond that, certainly, we expect those numbers to slow a bit. You just can't maintain that high level of a drive, but we have expectations of ourselves to get better, whether it's each quarter or into 2025.

Yes. Tom, this is Dave. Just to add on to that, continue to – I like the muscle that we're building and that we're seeing. We're team is getting smarter every day and wiser every day as we continue to deploy the model, problem solving is going throughout the organization. This will help as we continue to prepare ourselves for the rebound. And as Michael said, our mentality is continuous improvement every day and certainly every year, and so it's a never stopped game for us at this point in the cycle, which is a really, really tough cycle. So I'm super proud of the team and how they're standing up on the higher highs, higher lows and certainly the higher lows right now.

Okay. Great. Thank you.

Thank you. The next question is coming from Jon Chappell of Evercore ISI. Please go ahead.

Thank you. Good afternoon. Dave, you said before, the processes are never ending, but you've also mentioned a couple of times that they're non-linear either a point as we get we're looking at SG&A at the low-end of your range with the personnel expenses at the low-end of the range you set out earlier this year. Is there a point where it just becomes more difficult to garner any more productivity and margin expansion without getting some help from a broader market volume tailwind?

Yes, Jon, good to hear from you. No, you're right. This thing continues to go. What we said before is – and again, I can't tell you how proud I am of the team with the 15% last year and exceeding that and then in another 15% from a NAST perspective this year and continue to drive that. But the way we look at it is, even as you go into the out years, there will always be continuous improvement. Now certainly, Jon, we want that market rebound to happen. But the mentality that we have is control which you can control and that's just continuous improvement on processes and things that we do every day. So even in a rebound market, you should still always continually improve with the model that we have and that's some of the tech that we've leaned into. So I'll have Arun jump in here as well, but it's a good question, and it's a different question on how we looked at it yesterday versus how we look today on our mentality of continuous improvement.

Yes. Yes, Jon, to Dave's point, this notion of evergreen improvements, whether it be productivity, gross margin expansion or volume growth. We have a number of strategic initiatives that power all of them. And there's always new technology or new capabilities that power them. So as an example on productivity yes, we made a ton of progress already. However, there's still opportunity with Gen AI and new technologies that come out. So I think that's the way to think about it. Each of these things have additional strategic initiatives and momentum going to 2025 and forward.

Great. Thanks Arun. Thanks Dave.

Yes. You got it.

Thank you. The next question is coming from Brian Ossenbeck of JPMorgan. Please go ahead.

Good afternoon. Thanks for taking the question. Maybe this one is for Michael, when you look at the market, obviously it was a bit tight in July and then has come back in to really be sub-seasonal and still kind of soft when you look at the broader truckload market. So what are you looking at in terms of conditions and what do we need here to see the market turn? We saw price above cost per mile on a year-over-year basis. I mean in the past, that's meant sort of different things, but as we look forward to an improvement in inflection. What are you looking for? And what's sort of your best guess when we might start to see that? Thank you.

Hey Brian thanks for the question. And I think you're asking the question we're all trying to figure out exactly when that's going to happen. You described the quarter pretty accurately, right? We had some tightness in the market in July. It definitely softened and gave ground throughout the rest of the quarter. And we are continuing to see capacity exit. But as we said earlier, it's not exiting at the rate that's creating an inflection in the marketplace. And if you look back at traditional cycles, and we're not in what I'd call a traditional cycle at this point is far into the low-end of the cycle for this long. You need a demand inflection to truly get the market to repair. I think continued capacity exits will help the market stabilize. And we've been bouncing along the bottom for a while here, but we're still not to a point where I'd say it's stable. Really, for us to see a true market inflection, we're going to need to see more demand – really more reaction from that customer base of longer-term consistent demand increases. And we see small pockets, we feel really good about how we're positioning ourselves with our customers to be ready for that. How we're positioning ourselves with our carriers to be ready for that. And to Dave's point, we think our team has done a really good job managing through this extended freight recession, but we're not seeing right now a whole lot of customer activity that would say this has a shorter end. And so we're really planning to do what David said, which is we're going to deliver higher lows during this part of the cycle, and we think we're in a really good spot to react when that inflection does happen.

All right. Thanks Michael. Appreciate it.

Thank you. The next question is coming from Jeff Kauffman of Vertical Research Partners. Please go ahead.

Thank you very much and congratulations. I know you talked a little bit about the pull forward, but I'd just like to dig a little deeper into that. In that of the revenue growth a pretty extreme revenue growth in 3Q, what's your best guess at how much of that improvement would have represented pull forward? And if we were to try to think about is the market normalizing in the fourth quarter or through the first quarter of the year, what kind of pullback do you think we could see outside the normal season now?

Yes, Jeff, thanks for the question here. Jeff, it's something that we've been examining and talking through. What I would tell you is that the pull through and because, obviously, we have Global Forwarding and NAST, you have to kind of break this down a bit. Number one, we don't – I'm going to tell you, it's not material from a pull-forward perspective. Now the two businesses are a bit different. Like from Global Forwarding, you could say that there was some pull forward that we would have saw in that business. We don't necessarily see that in truckload per se. So it's two different businesses that we look at here. So I'm kind of calling it like nonmaterial and truckload and a bit because of how shippers were looking at it on Global Forwarding, that we had to manage. So you can understand the complexities there, but that's how I would say it. I don't know if, Michael, you would add on to that, but...

No. I would just add, Jeff, this is Damon that Q4 for both businesses is typically a seasonally weaker quarter. And so you'll certainly have that dynamic factor in as well from a sequential basis.

So I guess where I'm going is there was a $300 million sequential revenue pickup on a gross revenue basis, give or take. Could we be looking at the fourth quarter, it looks a lot more like the second quarter. I was just looking for a little guidance in terms of how material of that $300 million jump, what do you think is normalization?

Yes. I don't know that I'd go that far, Jeff and see that. I mean, if you look at, again rates for Global Forwarding, they're going to start slowing down and following into seasonality, as Damon said. So again, we're looking at this every day, and I understand how you're trying to look at modeling it as well. It's just the market that we're in, and we're dealing with that market that we're in and executing to what we can control there. So I wouldn't say, though, that it would follow kind of a 2Q thing.

I agree.

Thank you.

You're welcome.

Thank you. The next question is coming from Ken Hoexter of Bank of America. Please go ahead.

Hey good afternoon and great job in benefiting from the ocean and forwarding rate inflection. I guess my question would be on if we get inflection in spot, not when we get, but when I guess, when it approaches, how do you think that impacts the business in the new operating model? Does it make you more fluid? Should we expect your ability to fluctuate with spot rates to be a bit quicker – and then I guess to follow on that, are you seeing any of those signs in the firming between the rates and costs at this point or not yet?

Hey Ken, thank you for the question. This is Michael. I think the first – I'll break it down into both sides. So on the first side, I think the new operating model will do all the things you asked, which is, will it give us better capabilities, information and speed in which we act 100%, right? And that's really what we're working with the team on is how do we take our industry-leading data and information set and get it into their hands faster and more effectively. And I think we're doing that better than we ever have. That's positioning us to be ready for that market inflection and more importantly, to be having those conversations with our customers, in advance of the market inflection around how we want to handle that. We do scenario planning both on the capacity and customer side throughout to understand the best way to handle what an inflection could look like, whether it's a quick spike or more of a long drawn-out increase, and we feel we're really ready for either scenario. In terms of the second question, are we seeing signs of that? The short answer is no. We're seeing good activity from our teams; building good relationships; feel we're winning in the contractual space, picking up wallet share. But the truth is route guides are performing incredibly well. There's not a lot of freight that's flowing out of that into the transactional spot market. And in that spot market, it's incredibly competitive. And I think we're doing the right job to be disciplined in that space to win the right freight for us and for our customers that we service it correctly, really proud of our NPS scores are the highest we've seen in years, and I think that's a reflection of the team's work and making sure that we – the freight we do land, we execute, we deliver when and how our customers want to. But the truth is, is that there's not been a whole lot of market activity that would say there's a whole lot of inflection and certainly not in Q3 and really we're not expecting much in Q4.

And you've given a, oh go ahead, sorry, Dave, yes.

Yes, Ken, I wanted to pile on a little bit there what Michael said. But really going back to the beginning of your question, I just want to – and I don't – I'm sure you meant it this way as well. I mean, one, the – we did benefit from rates in Global Forwarding because that's the market. But it's really important to understand and break that apart. Super proud of that team because this operating model isn't just a NAST operating model or a particular division, it's a company operating model. And so the work that's going on in our business within Global Forwarding, just like NAST, is one where we're working to decouple headcount growth and volume growth. So there is a level of discipline that I would say that's there today that we benefited from and grown from and how we run that business, that's efficiency in evergreen that – and I'm sure you've seen that. I just want to call that out. And then secondly, for the NAST team, these guys were extremely hard in a super, super tough market. And the discipline that Michael was talking about and the operating model principles that these guys are running on daily from speed of decision to daily execution and discipline of what they take really does speak of forward-looking and that discipline won't go away when the market starts to inflect as well. So hats off to both operating divisions just from a disciplined perspective. I just wanted to make that clear that is just not maybe all rate in GF and is certainly discipline in execution in NAST that sets us up for where this market decides to go.

Thank you Dave. Appreciate it. Thanks guys.

Thank you. The next question is coming from Scott Group of Wolfe Research. Please go ahead.

Hey. Thanks. Good afternoon. So when I look at your – the chart with truckload pricing and cost, right, pricing has turned a little positive year-over-year, cost still a little negative. And if I think back on prior cycles, I feel like it's usually where the cost goes positive first and you get squeezed a little bit and then eventually catch up. So I guess I'm wondering; why do you think it's a little different this time? And does this mean in your mind, when we get that eventual inflection, we won't get squeezed. And so if you’re right, that costs are up, spot costs up 9% next year, do you think you would outpace that with price?

Yes, Scott, thanks for the question. I think on the short term, minor moves in our overall costing are driven by a lot of factors, but I do think we’re making good decisions on how we price freight both in the contractual and spot markets that we’re pricing it more intelligently, more specifically to the characteristics of the customer, the characteristics of the load. And I think it’s more reflective of a better and more intelligent pricing process. As we think about going forward, listen, any change in the market will still feel a squeeze. The key for us is to do it better and get through it faster than we have in the past. And so we’re anticipating that when that change happens. And certainly, we’re hoping it happens as much as anybody, right? The idea, though, is that our team is better planned better situated to have intelligent conversations with our customers and really plan out what is a solution that gets them to where they need to be to manage their supply chains. This is obviously an extremely long elongated freight recession. And so it makes those conversations a bit more unique. We’re now into our second and sometimes third contractual pricing period in this low end of the cycle, which is usually not the case. And so that changes those conversations with customers. And we feel really good that the team is having intelligent conversations. But as we mentioned before, we have the optionality to handle this in a couple of different ways. And we’re constantly testing how to do that, both in the current market and where the market will go. And I’ve been here almost 27 years. And I can tell you, I think we’re putting the best information in our people’s hands than we ever have. And I think they’re in the best position they’ve ever been so that when this market inflects, sure, we’re going to feel it like anybody would. But I think we’re going to get through those conversations more intelligently and quicker than we have in the past.

Makes sense. Thank you guys.

You're welcome. Thank you.

Thank you. The next question is coming from Daniel Imbro of Stephens Inc. Please go ahead.

Good evening, guys. Thanks for taking our questions. Dave, maybe one on the personnel cost side. I think on the quarter, head count was down 1% sequentially, but adjusted personnel costs were still up about 2% sequentially and then back to growing year-over-year. I guess the question is this a new model where it’s fewer heads, but it’s higher comp per head. And so we’re past the period of personnel cost declining – and should we expect total personnel exit to continue increasing in the coming quarters, especially if we do any market tightness and you have to add back people? Thanks.

Thanks for the question, Daniel. So certainly, we’re not in a situation where cost per head is going up versus historical trends. The dynamic you’re seeing in Q3 is related to variable compensation. So as our financial results improve, the variable compensation goes along with that. So the trend that we’ve illustrated and talked about around evergreen productivity and decoupling headcount from volume is still very much in place. And the volatility you saw in Q3 is purely related to variable compensation.

Is variable compensation per broker out there that are going to continue? So if we have periods of strong profitability, there will always be a higher incentive compensation, so total comp per head still goes up?

I think it’s relative to the sequential comps and I think it’s relative to our own expectation of performance.

Got it. Excellent.

Thank you. The next question is coming from Chris Wetherbee of Wells Fargo. Please go ahead.

Hey, thanks. Good afternoon, guys. I wanted to ask on NAST head specifically. So I think we’ve seen kind of eight or nine quarters in a row of sequential declines there. And maybe the guidance is kind of flattening out for the fourth quarter. I guess as we think about it, conceptually, are we getting to the point where you now feel like with the technology, you’ve enabled the productivity initiatives? We’re at the right kind of equilibrium between the freight market and where you sit from a resource perspective. I don’t know if that’s too presumptions. But want to get a sense of kind of how you think about it? Or can there be incremental legs lower in terms of maybe broadly resources if the freight market doesn’t kind of respond positively as we move into 2025?

Yes. Thank you, Chris. This is Michael. I think what you’re seeing with us is the continued work we’ve had as we’ve enacted the productivity work. We’ve implemented technology improvements and system improvements, whether it’s a combination of Gen AI or just process improvement through our teams getting better at what they do. I think we’re past maybe the historical headcount declines because of the market declines. We’re in headcount workforce planning because we’re getting better at what we’re doing. And the operating model is allowing us to really look at our business differently. And so I would say we have an expectation that we are going to decouple headcount from volume growth as we go forward. And as the market continues or changes, we expect ourselves to drive continuous productivity improvements. And certainly, I don’t think that’s linear. I think as we’ve seen with technology, Gen AI, as an example for us this year has really been an unlock that a year ago when we were planning this year, we weren’t – we probably weren’t counting on at the level that it’s impacted us. And so I think the team is going to continue to identify opportunities, attack those opportunities that bring the biggest return. And so we’ll see – I think we’ll see continuous improvement in our productivity, and I’ll probably let headcount be what it needs in terms of how we’re handling the volume of the current part of the cycle. And so – but I wouldn’t say that we’ve hit a floor, but I’d also say we’re going to continue to make sure we do it under the eye of smart discipline within our operating model and doing it with an eye on a continuous improvement mentality within productivity.

Yes. Chris, this is Dave. Just to add on there, Michael and team are doing a nice job at continuing to grow the model. I mean this is what happens as we continue to scale our model throughout our organization and scaling left and right and down. And it really allows the teams to discover, inspect and it allows our people to really start to do what we’re known for, and that’s spending that time with the customer solving problems, right? And taking away those medial tasks – and so the point here is from the conversation earlier, there’s going to always be improvement in discovery and productivity in our mindset and in our culture now. And how we manage headcount is just like Michael said. So what you’re hearing is a change in the way that we operate the company. And that’s why it’s so important to understand the model and how we operate that every day. So I just wanted to jump in there.

Got it. Appreciate the time. Thanks very much.

Yes, thank you.

Thank you. The next question is coming from Ari Rosa of Citi. Please go ahead.

Hi, good evening. I was hoping you guys could address some of the changing competitive dynamics in your industry. We’ve seen, obviously, this quarter brought a merger or an acquisition, if you will, between two top 10 brokers, I wanted to get your thoughts on how that might impact the industry? And then also, we’ve heard some of the truckload carriers talk about a shift in business away from brokers and towards asset-based carriers. I’m curious if you’re seeing that, if you could corroborate that and just your thoughts on if that continues and what that looks like if the freight cycle tightens? Thank you.

Yes, Ari, good. Thanks for the question. I think we’ll break this down a little bit. Obviously, what you’re seeing in the market and some of the moves you’re probably talking about with – RXO and Coyote, listen, that’s something that’s going to happen within the market. I think as you – as we continue to go in this market, there’s going to be puts and takes, and you’ve seen that here in the last several months. For us, it’s about making sure we’re controlling what we can control in that marketplace. And I feel like we’re on the right path to do that. Driving the fit, fast focus for Robinson at our scale still being in the pole position within the industry. I think we’re taking the right path on doing that. But I think as we look forward, I’m going to have Michael jump in on the second part of your question because we do need to kind of break that down, hopefully, so.

Yes. Thanks, Ari. The second part in terms of are we seeing a shift towards asset versus broker for hire in the for-hire space. Traditionally, you see movement in the low end of the cycle towards the asset. But we feel really good about how we’re competing in the marketplace. We feel really strong about the wallet share gains we’re making in the contractual space. I think we’ve been pretty honest about how we’re attacking the transactional space and being disciplined and making sure that we serve our customers by hauling the right freight that fits for them and our carriers. And so while I think that’s a normal part of the cycle, we’re not seeing that, that is a competitive disadvantage right now. As I mentioned earlier, our drop program, which is something we’ve been talking about more is almost $1 billion and something we believe allows us to behave as an asset in an asset-light manner but in a space that’s traditionally an asset space, and we feel really good about our ability to keep bringing those solutions to customers. We’re also really confident that supply chains are not getting less complex. They’re getting more complex. And so customers are looking for companies that can flex, can move, can react and really meet them where they need to be met. And I feel really good about our team being able to deliver that every day. And that will be in the form of whatever it takes, whether it’s truckload, LTL, drop, you name it. And so good question, but I feel – this is not an abnormal thing in this part of the cycle, but we feel really good about our ability to compete in this space.

Yes. Ari, just to put a period on that when we look at our four walls, I mean, there’s just a number of ROI, high ROI opportunities that we can go attack and that’s what we’re doing. And I think that’s really where you have to focus before tackle the organic before you really have to get the inorganic there. So that’s how we’re looking at it. We feel pretty good about it.

Wonderful. Thank you for the color.

Thank you. The next question is coming from Jason Seidl of Cowen. Please go ahead.

Thank you, operator. Dave, Michael, team, congrats on the good quarter. Wanted to go back to your comments about algorithmic pricing, and it sounds like you guys are using it selectively. I wanted to get a sense of what we should expect going forward? And how does the freight through that algorithmic pricing look from AGP margin perspective compared to your legacy business?

Yes. So good question, Jason. Our algorithmic pricing, everything we do, whether it’s algorithmic pricing or not anchors back to our revenue management goals and our overall strategy. So we have a certain gross margin percentage of strategy across our different modes and channels, it doesn’t really matter. Ultimately, we’re kind of optimizing to our overall strategic goals. Having said that, there’s obviously greater opportunity on the algorithmic side on both things like price discovery and cost discovery and more real-time signals and supply and demand. So there’s greater opportunity there in terms of sort of market pricing and so on. However, everything still kind of ties back to a disciplined approach anchored on our operating model to our revenue management strategy.

Jason, the only thing I’d probably add from my perspective is that the nature of the industry requires us to have a pricing engine to meet customers because so much of our pricing is digitally connected, and it’s not possible for humans to react in the right amount of time to make sure we’re getting as many quotes out to customers as we need. But all of our pricing, even our algorithmic pricing really feeds into that human in the loop mentality that we’ve built in. And so pricing the load is the first step – and then it really flows into our teams, our systems, our operating model, our ability to serve customers. And so I think it gives us a really good starting point for how we began a transaction with the customer, but then it really becomes a tool for our team to deliver industry-leading service and capabilities. And so – but you can’t operate in today’s scaled freight environment without a pricing engine that is driven by hopefully the best algorithms in the industry, and we feel pretty good about what we have.

Fair enough. Appreciate the time, guys.

Yes, thanks.

Thank you. The next question is coming from Stephanie Moore of Jefferies. Please go ahead.

Hi, good afternoon. Thank you. I wanted to – I actually think you brought up a good point earlier, your color around needing to see a demand inflection for the freight market to truly repair and maybe just a lack of underlying momentum in the market is actually a really fair assessment. So – if this is what continues and we don’t, in fact, see this demand inflection next year or for a lot of next year – what is your playbook? What are the next steps or levers that can be pulled to continue the current momentum and then drive growth? Thanks.

Yes. Thanks, Stephanie. I’ll speak for the NAST part of it, and then maybe Dave wants to speak for the enterprise overall. I think the playbook is pretty simple, which is we’re going to control we can control. We’re going to run our operating model. We’ve got really good pricing discipline – like I’ve mentioned a couple of times, we’re putting those tools and capabilities into the best people in the industry. And we feel we can deliver results in this market or in a different type market. We have growth opportunities ahead of us. We believe we can continue to take share and outperform the market. And whether or not that comes from continued elongation of the current situation or a market inflection. I’m not lowering the expectation of what our team accomplishes we continue to expect ourselves to move up the value stack with our customers. We’re going to recapture business in the transactional space and really continue to win business in key verticals. And so I feel what I think myself, the team and probably everybody here want a market inflection just because I think it’s a lot more energetic market to do business in, sure. But we feel pretty good about our ability to deliver results. And as Dave has mentioned, continue to deliver higher lows in a tough market and get ready for higher highs in the future.

Yes, Stephanie, just I don’t know we’re at time. I’ll just put period on that. And that is, listen, this is why Robinson is in the pole position. I think with our balance sheet and the ability to invest in a tough market and continue to invest like we’ve done. It gives us the strength. We’ve got the biggest data set and a number of things that if this is a prolonged market. We’re going to continue to improve with our operating discipline. We’re going to continue to have a positive balance sheet that allows us to invest and then get ourselves set for when this thing starts to inflect. So thanks for the question. And again, we feel really good about where we are.

All right. That does conclude today’s earnings call. Thank you for joining us today, and we look forward to talking to you again. Have a great evening.