Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2021 Conference Call. . As a reminder, this conference is being recorded Tuesday, April 27, 2021. I would now like to turn the conference over to Chuck Ives, Director of Investor Relations. Please go ahead..

Thank you, Donna, and good afternoon, everyone. On the call with me today is Bob Biesterfeld, our Chief Executive Officer; and Mike Zechmeister, our Chief Financial Officer. Bob and Mike will provide a summary of our 2021 first quarter results, and we will then open the call up for questions.

This change to live Q&A from our previous practice of responding to pre-submitted questions is in response to valued input from our analysts and shareholders..

Thank you, Chuck, and good afternoon, everyone. We're proud of our first quarter results. As global shipping markets remain disrupted, our team around the globe stayed focused on serving the needs of our customers and delivering innovative solutions to keep global supply chains moving.

During the quarter, we delivered strong financial results while continuing to deliver against many of our initiatives related to growth, productivity and the advancement of our digital strategy. I'll highlight some of these areas of progress as I walk through my prepared comments surrounding our Q1 results.

In the first quarter of 2021, we generated 125% growth in earnings per share due to profit growth in our 2 largest business segments, North American Surface Transportation and Global Forwarding. Our NAST business generated double-digit growth in both adjusted gross profits, or AGP, and operating income in the quarter.

NAST AGP per business day increased 15%, and operating income was up 39% compared to the first quarter of last year.

These results were driven by a 23% improvement in AGP per truckload in our truckload business, coupled with continued strong market share gains in our less than truckload business, where volume per business day increased 17% year-over-year.

Bolstering these results were continued benefits of our technology investments, which continue to unlock productivity gains and deliver customer value in new and exciting ways.

The macro environment in the first quarter continued to be one of tight capacity and increased pricing in the marketplace driven by several supply side constraints, including the ongoing challenges of driver availability, coupled with robust demand.

The weather events in February demonstrated how quickly supply chains can get disrupted in this capacity-constrained environment. For the quarter, our NAST truckload volume was down approximately 6.5% or 5% per business day compared to first quarter of last year.

While our business in the spot market increased significantly, our volume in the contractual business declined as we continued to pursue profitable volume growth by reshaping our portfolio through repricing the book of business with new and existing customers..

Thanks, Bob, and good afternoon, everyone. As Bob mentioned, we delivered solid financial results during the quarter due to strong profit growth in NAST and Global Forwarding despite lower truckload volume in NAST, where we work to improve AGP per load by addressing unprofitable loads in the tight freight market.

Our total company AGP per business day was up 26% compared to Q1 of 2020, driven by performance from our ocean and truckload service teams. As a reminder, our first quarter had 1 less business day compared to Q1 of last year. On a sequential basis, all of our business segments and service lines delivered increased AGP per business day compared to Q4.

Our truckload service line delivered the largest absolute increase on a sequential basis with a 6% increase in AGP per load and a 4% increase in truckload volume per business day.

This sequential volume growth was achieved despite the negative impact of Winter Storm Uri in the U.S., which we estimate had a net decline of 0.5 day of truckload volume and a full day of LTL volume. On a monthly basis compared to 2020, our total company AGP per business day was up 34% in January, up 17% in February and up 26% in March.

Q1 personnel expenses were $360.8 million, up 9.3% versus Q1 of 2020, primarily due to higher incentive compensation costs that are aligned with our expected 2021 results. Q1 average head count declined 2.9% compared to Q1 last year, including the Prime acquisition, which added 1 percentage point.

The Q1 growth in our business with reduced head count shows how our technology and process improvement investments are delivering efficiency to our business model.

We continue to expect our full year 2021 personnel expenses to be approximately $1.4 billion, including the higher incentive compensation, the impact of our ongoing long-term cost savings efforts and the reinstatement of our company match on retirement contributions in the U.S. and Canada, which started on January 1.

Q1 SG&A expenses of $118.2 million were down 7.9% compared to Q1 of 2020, driven by reduced travel and improved credit losses. We continue to forecast 2021 total SG&A expenses to be approximately $0.5 billion, including the expectation that travel expenses will build in the back half of 2021 as the impact of the pandemic subsides.

2021 SG&A is expected to include approximately $85 million to $90 million of depreciation and amortization, which is down from $102 million in 2020, primarily due to the completion of amortization related to a prior acquisition.

Regarding our long-term cost reduction efforts, through Q1, we delivered approximately 90% of the $100 million per year of long-term or permanent cost savings. We expect to deliver the remaining $10 million of long-term savings by the end of Q2.

In the back half of 2021 and beyond, we will continue our long-term cost savings efforts, primarily through process redesign and automation across the enterprise.

Our first quarter adjusted operating margin was 31.8%, an increase of 1,250 basis points compared to Q1 last year, primarily due to the increase in adjusted gross profit and success of our cost savings efforts. The Q1 adjusted operating margin delivered on our 30% long-term enterprise margin expectation.

Our first quarter effective tax rate was 18.3%, up from 17.1% in Q1 last year, due primarily to the higher income this quarter. Recall that our first quarter typically has a lower effective tax rate due to the tax benefits related to the delivery of our annual stock-based compensation in the quarter.

We continue to expect our 2021 effective tax rate to be 20% to 22%, assuming no 2021 impact from changes to U.S., state or international tax laws. Q1 net income was $173.3 million, up 122% compared to Q1 last year. And as Bob highlighted, diluted earnings per share finished at $1.28, up 125% versus Q1 last year. Turning to cash flow.

Q1 cash used by operations was approximately $56.7 million compared to $58.5 million provided by operations in Q1 of 2020.

The $115 million decrease in operational cash flow versus Q1 last year was driven by a $468 million sequential increase in accounts receivable and contract assets compared to Q4, which was partially offset by a $216 million increase in total accounts payable and the $95 million year-over-year increase in net income.

The 17.7% sequential increase in accounts receivable and contract assets was driven primarily by a sequential increase in total revenue that was more concentrated in the last 2 months of Q1 compared to Q4 as well as the mix shift associated with higher total revenue growth in Global Forwarding, where our DSO runs almost double that of our NAST business.

It's important to note that we are not seeing a deterioration in the quality of our receivables. Q1 results included sequential and year-over-year improvements in credit losses and percent of accounts receivable that are past due. Over the long term, we expect working capital to grow at a slower rate than our adjusted gross profit.

Q1 capital expenditures totaled $13.5 million compared to $14.7 million in Q1 last year. We continue to expect our 2021 capital expenditures to be $55 million to $65 million. We are seeing solid results from our investments, and we'll continue to prioritize the highest returning technology initiatives on a risk-adjusted basis.

We remain committed to our $1 billion investment in technology from 2019 to 2023. We returned approximately $221 million of cash to shareholders in Q1 through a combination of $151 million of share repurchases and $70 million of dividends.

That level of cash returned to shareholders represents a 45% increase versus Q1 last year when we paused our share repurchase late in the quarter to assess the impact of the pandemic. During Q1 this year, we repurchased approximately 1.6 million shares at an average price of $92.84 per share.

At the end of Q1, we had approximately 6.4 million shares of capacity remaining on our 15 million share repurchase authorization from May of 2018.

We continue to be committed to disciplined capital stewardship, maintaining an investment-grade credit rating and returning excess cash to shareholders through dividends and opportunistic share repurchases. Now on to highlights from the balance sheet.

We finished Q1 with $218 million of cash and cash equivalents, down $77 million compared to Q1 of 2020. Over the long term, we intend to carry only the cash needed to fund operations and efficiently repatriate excess cash from foreign entities.

We ended Q1 with $968 million of liquidity comprised of $750 million of committed funding under our credit facility, which matures in October of 2023, and our Q1 cash balance. Our debt balance at quarter end was $1.34 billion, up $250 million versus Q1 last year. Our net debt-to-EBITDA leverage at the end of Q1 was 1.3x.

I'll close by saying that I have great confidence in our team and their ability to build on the solid results from Q1 by continuing to execute our plans that generate sustainable long-term growth in our total shareholder returns. Thank you for listening this afternoon, and I'll turn the call back over to Bob now for his final comments..

Great. Thank you, Mike. So as I said in my opening comments, we're proud of the results that we delivered in the first quarter. We delivered record revenues, adjusted gross profits, net income and EPS relative to all past first quarters. We grew adjusted gross profit in the quarter by 24%, while operating expenses increased by less than 5%.

This demonstrated the strength and the earnings power of our non-asset-based business model.

Looking forward, we'll stay the course with our strategy of pursuing market share gains that align with our profitability expectations, and we'll continue to invest back into the business in order to drive innovation and improve service to our customers and to our carriers.

Within our NAST business, based on what we know today, we expect tight market conditions to continue through the balance of the year. But regardless of how cyclical market conditions change and evolve, we'll stay focused on driving growth and expanding our business with customers across our global suite of modes and services.

We're very pleased with the results from Global Forwarding, where we've built sustainable competitive advantages through the structural changes that we've made over the last few years.

Across the board, as one of the world's largest aggregators of this highly fragmented and diverse carrier base on multiple continents, we're committed to creating better outcomes for our customers and carriers by delivering industry-leading technology that's built by and for supply chain experts.

As shippers and carriers continue to increase their adoption of our new digital capabilities, we expect to see continued productivity benefits and to grow market share across our service lines as we create value for customers in new ways.

As an organization, we're committed to continuous improvement, driving further efficiencies into the model and leveraging our unmatched combination of experience, scale, technology and information advantage to create better outcomes and to unlock growth.

We're also firmly committed to being a responsible corporate citizen, and we're proud of the tools that we can now offer to advance sustainability across the logistics industry.

Over the past year, all of our lives have been challenged in unforeseen ways, and the priority to build more flexible and adaptable supply chains is a top priority for shippers and receivers globally.

We're uniquely positioned as an organization to offer solutions and to innovate by leveraging our non-asset-based business model, our global suite of services and the most capable team of supply chain experts in the world.

The team at Robinson is excited by the opportunities in front of us and committed to providing solutions to the most difficult challenges facing our industry. Lastly, I'd like to thank the team at Robinson around the world for continuing to drive our company forward and to help us emerge stronger. This concludes our prepared comments.

And with that, I'll turn it back to Donna for the live Q&A portion of the call..

. Our first question is coming from Jack Atkins of Stephens..

I guess, Bob, first question's for you. When I think about the volume decline of 6.5%, I guess it's more like 5%, 5.5% on a per business day within the truckload operations in the quarter. And I understand it's against a more challenging year-over-year comparison in the first quarter.

How do you think about when we're going to see an inflection in volume growth? I mean the productivity gains are there and they're real. We can see them in the slides that you're presenting.

Is it a head count issue? Do you need more folks to be able to attack the volume? I guess one of the biggest pushbacks I get from investors is they're just struggling to understand why such a strong transactional market isn't translating into more robust volume growth for C.H. Robinson.

Can you help explain what's sort of limiting that for you guys over the last several quarters?.

Yes. Thanks, Jack. It's a great question. And your assessment is right. The volume per day was down about 5%. I guess a relatively -- frankly, a really difficult comp. Q1 of '20 was our third highest truckload volume on record.

But let's peel it back a level because if you look at just the spot market business, we had robust growth in the spot market, double-digit growth in that space. But the shift between contractual and spot is an important one that we peel back.

And so I want to talk a little bit about the efforts that we took to reprice our contractual business in the fourth quarter and in the first quarter and frankly, ongoing into the second quarter. I'll start with pricing.

And if we look back to where we were in the back half of 2020, we had negative files at a record level, right? Some 15% of our loads were resulting in a negative outcome. And that cost us somewhere north of $100 million in the back half of last year and negative adjusted gross profit.

So we had to stare that down, first and foremost, and target a yield and an adjusted gross profit for our contractual business that was more sustainable. The second piece of that is that as we thought about where the markets were going to unfold in 2021, we had to take a position.

We had to take a position because by nature, we sell long largely and buy short.

And as I stated in some of my prepared comments, we believe that there's some sustainability to the market that we're in right now, given the driver shortage, given some of the delays on the order to build and the delivery cycle on Class 8s, given the continued inventory restocking, given the upcoming produce season, et cetera.

And so what we saw through our bidding activities in Q4 and into Q1 in the contractual was we took that position believing that to be correct. And that impacted us somewhat negatively in terms of our awards on a year-over-year basis with some of those customers.

So we improved our adjusted gross profit per shipment in Q1, as I think I said in the earlier remarks, about 23%, certainly significantly off the trough of Q3 of last year. And we're back into a more normal range of that adjusted gross profit per load.

What we've seen as the quarter has progressed, Jack, is that the market seems to be coming back a bit to our thesis. And so it now does appear, at least based on where we sit today, that this market does have some legs on it.

We're seeing opportunities come back to us either through the spot market or kind of this gap between what is spot and contractual, where we're able to provide dynamic pricing, and additionally, seeing contractual opportunities come back to us with a more favorable AGP profile that's sustainable for us to help those customers through the course of the next year.

I mean I was involved in a lot of customer conversations, and the point is that we wanted to put pricing in front of our customers that we could stand behind, that were good for us and good for the customer, without transferring the risk at the level that we did in 2020 because that number of negative files and those negative outcomes just simply wasn't sustainable..

Okay. That definitely helps clarify that.

And just I guess for the follow-up, I mean, do you feel like now the market is coming back to you, do you feel like you're at a point now where volume growth can turn positive, and you've eliminated a lot of the issues around these negative files? And as we sort of look prospectively here with the strong freight market at our back, we should be expecting truckload volume growth beginning of the second quarter?.

We absolutely expect truckload volume growth through the balance of this year, Jack. As you know, the comparisons are a little bit wonky, for lack of a better term, as we go through the next few months given the impact of the pandemic last year and the ups and downs associated with the freight market there.

But we do expect to deliver truckload volume growth through the balance of the year..

Our next question is coming from Todd Fowler of KeyBanc Capital Markets..

Thanks for going back to the live format. Bob, just piggybacking on Jack's question. I think coming into the first quarter, you talked about $1.6 billion of the book being up to reprice.

Can you talk about how much of that progress you had made in 1Q and also where you're seeing contract pricing come in at? And is it at a level right now where it's exceeding where the spot market is?.

Yes. Thanks, Todd. It's good to be back in the live Q&A format. So if I think about the -- whether it's the $1.6 billion or whatnot -- maybe I'll phrase it a little bit differently. And we think about the contractual market that we have or our book of business.

We believe that we have priced and implemented about half of our contractual business in what I'll call current pricing or pricing that was delivered in either fourth quarter or first quarter of this year. We've priced more that hasn't quite gone live yet, and we'll continue to price more in the second quarter.

Based on our forecast run rate right now, by the end of the second quarter, we'll have about 75% to 80% of our contractual book repriced in either the fourth, first or second quarter. So for all practical purposes, we'll call that current truckload market pricing..

Okay. Got it. That helps. And then that's at a level that's exceeding where the spot market is right now or at least it's more current with where kind of industry pricing is..

I would call it more current with our thesis of where we see the market going and where we see the market today. The spot market does continue to pull the contractual market up and not necessarily down.

It's our expectation that over time, as routing guides continue to perform a bit better given the increase in pricing that perhaps that spot market does drop below the contractual market. But we -- that's yet to be seen..

Okay. Understood. And then just for my follow-up, the slides are helpful on the productivity gains.

Do you think that NAST is at the point where volume growth can permanently outgrow head count growth? And what are your expectations for NAST head count for the remainder of the year?.

Yes. Thanks, Todd. And I'm going to tie back to your question and to Jack's. We do think that over time that NAST volume in aggregate will grow at a pace above head count growth.

I do think though there may be times where we need to add some head count to fuel the fire perhaps just in certain pockets of the business to unlock opportunity, and that's not a forecast that there's going to be a significant head count add. But there could be quarters or periods where those 2 things come closer together and move further apart.

But over time, that long-range goal of growing volume out ahead of head count is applicable for NAST as well as forwarding..

Great. And then just any thoughts on the remainder of the year at this point for NAST..

We would anticipate head count being relatively flat in NAST for the balance of this year..

Our next question is coming from Thomas Wadewitz of UBS..

I wanted to, I guess, get your thoughts on kind of the progression in NAST. I guess if I go back to 2018, and I know it's not a perfect analogy, but I think it's kind of the best prior cycle year I think of. I think you tended to build stronger net revenue growth as you price up more of the contract business.

I think since the challenges of third quarter last year, you have been building momentum in terms of, I think, gross profit per load you're talking about.

But how do we think about that in, say, second quarter, third quarter? Would you expect further momentum in terms of net revenue growth in NAST driven by stronger -- higher contract rates or other factors? Or how would you look at the next couple of quarters?.

Well, I think the comparison to, call it, late '17 into '18 is an important one, and I agree with kind of the two cycles that we can refer to. If I think about kind of the -- I'm not going to call it peak to peak, but let's go back to Q1 of '18 compared to Q1 of '21.

And in aggregate, what we've seen over that time period for us is customer pricing's up about 12%, carrier cost is up about 15%, right? So let's call it, on average, 5% here on the cost side and 4% a year on the customer side.

So while that's a bit higher than the trailing 5- or 10-year run rate on change in rate and cost, it doesn't necessarily feel to us, Tom, that that's necessarily like a bubble in terms of where the pricing is.

If you go back to our results in '18, where our adjusted gross profit per load is today is probably much more reflective of the back half of '17. And you did see that build through that cycle as we saw pricing of -- the cost of purchased transportation start to drop in the back half of '18 and the first half of '19.

I'm nervous about trying to draw too many parallels between '18 and today because it does feel like there are some things today that are structurally very different than what was happening in '18.

It felt like in 2017 and '18, there were -- a lot of that was built on buying the news around electronic logging devices and the potential disruption in the marketplace and how that was going to have some artificial constraints around capacity.

And today, this does feel much more driven by supply chain dislocation, driven by inventory restocking, driven by a real sustained pressure on hiring and maintaining drivers. And so I'm not in a position where I feel comfortable kind of calling the ball on how long the cycle is going to go or in what direction.

But those would be maybe the parallels I'd draw between the two periods..

Okay. So it's a reasonable parallel, but maybe not perfect tracking. My second question would just be how you think about sustainability of the really high level of performance in forwarding. Obviously, you're just doing -- executing well and the market is giving you a lot of opportunity in forwarding.

Do you think we can stay at the kind of level of gross profit and operating income you produced in first quarter? Can you stay at that level throughout 2021? Or do you think that that's unrealistic? And I mean I wouldn't think you have much visibility on '22.

But just how do you think about the forward looking in forwarding given how strong the results are?.

Tom, part of why we don't give guidance is because of the challenges of forecasting, just those exact things that you're asking. We're committed to delivering industry-leading operating margins in our forwarding business.

We've been on record several times in that we think a sustainable 30% operating margin is really within our reach in forwarding, and we can get there over time. Clearly, the market has been a tailwind for us on a lot of these parts of forwarding.

But I do really want to hammer home the fact that Mike Short and his forwarding leadership team has just done amazing work over the course of the last few years around process standardization, about leveraging technology, around the centralization of pricing, strengthening the relationships with the steamship lines and the airlines that we really do think that we've unlocked something pretty special here ahead of where we probably thought that we could..

Our next question is coming from Scott Group of Wolfe Research..

So can you give us the monthly net revenue trends for NAST? And then when I look at NAST's gross revenue, it's up 14%. But truckload pricing's up 33%. LTL volume's up 17%. I know truckload volume's down 6%. But I guess I'm struggling with why the gross revenue's not up more..

Sorry, Scott, I'm looking for the monthly here real quick. So let me see if I can get that..

I can ask another -- I can ask my second one if you want to come back to that -- to the....

Yes. Why don't you go ahead? And Mike, if you could find that monthly, that would be great..

Okay. And just on the productivity slide, it's helpful. Is there any way to think about shipment per person at LTL versus truckload? Is there a big difference there? Because clearly, we're seeing a lot more LTL growth than truckload growth. So I'm just trying to understand if that's having an impact on some of the overall productivity metrics..

Yes. So clearly, the outsized growth in LTL is having an impact on that blended metric of shipments per person per day. But I think it's also just net of the LTL, we removed about 900 to 1,000 heads from NAST over the course of the last couple of years.

And so that in itself, I mean, taking head count down by about 12% has had an impact there against both the truckload and the LTL. But no question, the growth in LTL has helped to improve that metric..

And what we provide is our company AGP per business day. And there, we're up 34% in January, up 17% in February and up 26% in March year-over-year..

Our next question is coming from Jason Seidl of Cowen..

A couple of quick questions. One, on the NAST side, how should we think about your 3Q comparison in terms of your gross margins? Because if I recall, last third quarter, just the pace that spot moved up was just something that I have never seen before. And so I would imagine that would have impacted your ability to adapt in the marketplace.

So if we just assume spot continues to remain strong but doesn't move up as much as it did last year, should we expect more improvement in your gross margins in 3Q on a year-over-year basis?.

Yes. I mean 3Q for us last year was the trough in terms of our truckload earnings from an adjusted gross profit per load. I mean that was the absolute low point in, frankly, the last decade. And so it would be likely that we would expect improved operating margins relative to that..

Okay. I want to switch over a little bit now on your forwarding side and talk a little bit about any ocean business you may have. It seems like some of the ocean shipping lines are actually changing the length of some of the contracts that they're giving to some of their customers.

How does that impact the business, if at all, going forward?.

Our ocean procurement strategy is really a blend of long-term and shorter-term commitments. And so we haven't seen any noticeable impact from some of the stated changes around length and terms of contracts.

One of the things that I think we've seen as a byproduct of the way that some of the ship -- the carriers have been managing pricing is a greater demand for the need for NVOs like us because of the complexity, because of the changes in the environment.

We're seeing larger shippers, larger BCOs come to us to help them navigate the ever-changing global ocean landscape, which is we've seen that's driven up our average award sizes, that's driven up the average size of our customers. So that's been a nice win for us there..

That's good color.

So in terms of your overall length of your contracts and the blend, you haven't really seen any change in that?.

We really have not..

Our next question is coming from Chris Wetherbee of Citi..

I guess I wanted to come back to NAST and maybe ask a sort of market dynamic question. Truckload volume was down. Your margins were impacted presumably by sort of the move in spot rates that we saw intra-quarter.

I guess you guys are obviously talking about sort of reducing some of the negative loads, but it feels like the combination of loads and margins doesn't necessarily square as well as maybe you would have thought if you were sort of preserving price and not necessarily seeding share.

So I guess I just wanted to maybe understand what you see as the competitive market dynamic in the brokerage market right now specifically as it pertains to truckload because we are seeing some management of margins and some volume gains coming from admittedly your smaller carrier competitors.

But I guess I just wanted to make sure I understood sort of where you see yourself in the market and maybe how you think you can kind of grow into this market..

Yes. So again, I'll start with the comparison as a point here. In first quarter last year, I think our truckload volume was up about 7.5% against -- we've used the industry dynamic of Cass being down about 9%.

And we were very counter to the rest of the industry or too much of the industry in first quarter last year in terms of that metric, and so we've got a little bit of a different starting place.

Our primary focus has been on profitable market share gains, right, and again, evaluating that portfolio getting the adjusted gross profit back into a normal range. Through the quarter here, in Q1, we saw positive volume growth in January.

And then as we implemented some of these newer bids, that started to turn negative in February and March, which landed us at that 5% down per business day.

But like I said earlier, we do expect to be able to drive volume growth throughout the balance of this year at much more appropriate adjusted gross profit per shipment, which we think is the right decision to make for our customers because it allows us to be more sustainable for them where and when they need us.

And we also think it's the right decision for our shareholders. Eliminating -- taking swings at that $100 million of negative files that occurred in the second half of last year, we think, is in the best interest of everybody because it's just not sustainable..

Okay. Okay. That's helpful.

And when you think about that sort of approach, particularly as you think about the book of business that maybe wasn't profitable, how much do you think that actually can come back on to your network? Or does that mostly get seeded out to other people who are willing to maybe take a little bit of a lower margin for it? Is it the kind of business that can ultimately come back to Robinson to drive volume growth in the future for you?.

Yes. There's not an easy answer to that just given the number of customers that we work with and the different customers, the way that they approach the market.

I would tell you that there are a number -- I've had some really good conversations with customers where the conversation has simply been, look, we may just disagree at this point in time about the direction that the market is moving. And if our award has to be cut back because of that, that's fine.

We'll figure out the way to best serve that customer, and that may not end up being primarily in the contractual marketplace.

That's where we've got the benefit of pivoting and saying, if you've got somebody that you believe can move that freight for less at the same service level for some period of time, that's the customer's prerogative to certainly make that choice. But if that doesn't work out, then we're there to step in on the backside.

And that's what's driven a lot of the spot market growth over the course of the first quarter here as well. And we would expect that to continue..

Our next question is coming from Bascome Majors of Susquehanna..

Earlier, you talked about the gross profit per load in truckload today looking more like the second half of '17 than 2018 in a cyclical context.

Can you let us know how far below sort of the peak profit period in second half '18, 1 half '19 we're tracking now? And is there a potential path back to that level if the cycle and the execution conspire in your favor over the next few quarters?.

We're kind of within mid-single digits, mid- to high single digits of what I call that trailing average right now, Bascome, right? Now that's -- if you throw out Q3 '18, Q4 '18, Q1, Q2 '19, kind of that 4-quarter period, those are really the outliers.

I mean if you look at our business over the course of the last 15 years, those 4 quarters were absolute outliers in terms of the adjusted gross profit per shipment. And I don't know that there's a path back to those numbers in the immediate future. And I think we found that the market conditions were very unique there.

I mean literally, the costs absolutely fell out of the market for whatever reason and that we've seen now this incredibly violent whip back over the course of the last 4 quarters.

And so I don't know that we get back to those numbers, but we want to get back closer to that average and kind of play in what is typically a much more tightly bound range of our margins -- our net revenue dollars -- or sorry, adjusted gross profit dollars, kind of flexing up 10% one direction or down 10% the other direction and trying to eliminate some of those peaks and valleys..

And to an earlier comment as a follow-up on the contractual business and some of your comments that you made previously and today about contract duration maybe getting a little shorter in some cases to clear those discussions.

Can you talk about how much of your contractual business is on a 2-, 3-, 6-month, whatever that number is, contract versus your traditional 1 year and how that could impact some of the cyclical volatility in your margins?.

I don't have an exact percent right now, Bascome, but I would tell you that it's a much higher percent than we've had at any point in the past. I mean the proliferation of mini-bids and short-term, 2 and 3 month kind of bridge pricing commitments, we've seen that more frequently here as of late than at any point that I can recall.

And I think that's been a good thing for both shippers and transportation service providers such as us to try to derisk in the short term in order to get to a better long-term commitment that works for both parties. I'd be guessing to give you a number there, and I just don't want to -- I don't want to go on record with that..

Our next question is coming from Bruce Chan of Stifel..

Bob, maybe the first one here for you. You talked a little bit earlier about fully digital bookings in NAST and uptake on the TPE engine. And I'm wondering how you think about freight forwarding in that context.

Is there a goal or even the ability to digitize ocean, for example, to that same extent? And if so, how far behind is forwarding from NAST?.

It's a really good question, and it's one -- and my short answer is yes. We believe that there is an opportunity there to introduce more digital capabilities between the customer and Robinson on the forwarding side. We have not invested significantly in that space up to this point.

And it's an area where we continue to discuss how and where to prioritize that given the kind of the process that we go through in terms of prioritizing our technology investments where they can have the greatest impact. We think that there's a there, there.

We haven't gotten too far down that path as of yet would be the best way that I'd characterize that..

Okay. That's fair. And then maybe my related follow-up here. You gave a head count outlook for NAST as roughly flat for the balance of the year.

What is that for Global Forwarding this year? And then maybe just in general, where does that number go long term in Global Forwarding versus NAST?.

Yes. If you look at our forwarding business, as it relates to head count, we tend to spend most of our time talking about head count in NAST, where NAST's head count has been down, I think, 7 quarters in a row. But looking at forwarding, they have been down slightly in each of the past 5 quarters as well.

And against that, we're delivering double-digit growth in ocean and -- over the past couple of quarters and now strong ocean air growth this quarter. Enterprise-wide really, Bruce, we're pretty focused on trying to keep that head count level kind of flattish this year. I think that that's in the playbook for forwarding as well.

You've seen forwarding even through their acquisitions, they've still been able to keep relatively flat head count. So I think that speaks to some of the progress that they're making around operational uniformity and using technology internally to deliver better outcomes. But flat is kind of the general tone..

Okay. So maybe if I could just sneak in one more follow-up there. I guess the expectation would be that you'd be keeping revenues at an elevated level on top of that flattish base of head count in order to kind of maintain these target margin levels.

Is that fair?.

Yes. I certainly think that the revenue run rate will kind of play out over the course of the next couple of quarters. But we have given guidance, if we'd call it guidance, around our personnel expense and our SG&A that we've provided in past quarters of personnel around 0.5 billion -- or personnel around $1.4 billion and SG&A around $500 million.

We still think that holds together as we look at our forecast through the balance of the year. And that's obviously an enterprise number. Yes. And maybe just one other point that I'd make. We've talked a lot about flat head count, but I really want to go back again to the thesis that it's about growing volume ahead of head count.

We're not afraid to add head count. We're not holding back on adding head count. It's just a matter of making that commitment that we believe that we can deliver volume growth in excess of whatever that head count add is..

Our next question is coming from Ken Hoexter of Bank of America..

Again, I agree, thanks for returning to the live Q&A. And congrats on solid results. Just to clarify, Bob, your comments on pricing and spot.

Are you suggesting that we're at or near a peak? Or I just want to -- because it sounded like you were going back and forth that this may be as good as it gets or -- but then you also threw in it's going to hold out a couple more quarters. So just maybe thoughts on that.

And then the question I want to ask was your percent of transactions that are now fully digital on the NAST side.

Can you maybe give us a little more detail on that?.

Yes. I'm not forecasting whether we're at a peak or not at a peak. I mean everything that we see today in our model is that spot market pricing is still elevated relative to contractual pricing. And in my experience, spot always tends to lead contract.

And so that would tell me that there's potentially still some room to run on the upside on the contractual pricing. So to me, peak is maybe defined when that spot starts falling beneath the contract. But anyway, that's kind of my opinion on where we're at there and realizing I'm not a very good prognosticator at where these markets go.

In terms of the fully automated or fully digital, it's a difficult question to answer, and I'm not trying to be elusive just because there is no universal definition of what a fully automated shipment looks like.

And I could give you statistics on the customer side that say everything on the customer side is fully automated, and then out of carrier side, things are fully automated, and those 2 lines may not cross perfectly. We've made significant increases if I just talk about the carrier side and the fully digital bookings.

I think the run rate was 50% more carriers participate in kind of the auto booking functionality in Navisphere Driver and Navisphere Carrier this quarter than we did last quarter. Every week, it seems as though we're taking -- we're making a step change in terms of the amount of our business that is moving in a fully digital manner.

If I were to put an estimate against it, I'd say we're still probably sub-20% of our total truckload volume that's moving in a fully automated manner with our carriers. And that could be the automated booking, auto tenders. There's multiple ways in which we automate that with carriers, but that would be my estimate of where we sit today..

That's great. And then just a follow-up then on your thoughts on the progress.

If we're going to stay tight for a couple more quarters in this market, and it doesn't seem to be letting up in the near term, how do you think about NAST margins as you progress through that?.

Yes. We've repriced 50% of our contractual business by the end of second quarter and implemented that pricing. We'll be at 75% to 80% by the end of third quarter -- or second quarter rather. And that's age-old pricing, right, that we're replacing. That was quoted middle of last year in very different market conditions.

So as we reprice that, that should deliver an uplift in AGP per load. I think one of the things that we saw in February, Ken, was the impact of the Winter Storm Uri and how dislocating that was for the marketplace.

I think as we look through the second quarter and we think about the CBSA road check and the impacts of that on carrier costs, as we think about Mother's Day rush, as we think about the produce season and how that unwraps, I think we'll all learn a lot about the fragility or the stability of this market as some of these things roll in, and we'll see how able the capacity network is to respond to those in kind.

And so I think that will set the tone for the balance of the year..

We're showing time for one last question today. Our final question will be coming from Amit Mehrotra of Deutsche Bank..

Bob, just a quick question about the weather in the quarter. Just wondering if the weather, particularly in Texas, allowed you guys to maybe pull forward some contract repricing. It seemed like a pretty real force majeure event. I'm just not sure if that gave you guys the opportunity to revisit contracts earlier.

And if I think about shipper behavior during kind of a crazy period like this, are you seeing shippers kind of move more towards -- or gravitate towards carriers with actual assets given kind of the deeper -- the depth of the routing guide and maybe that may explain some of the market share shifts? If you could just talk a little bit about that..

Yes. So the -- related to the storm in February, I think what that really did was it took a period of time that was normally kind of a cooling off period in the market and it just drove it right out of town, right? And it eliminated that time when rates typically come back a bit in the spot. It didn't cause us to call force majeure with any contracts.

It certainly influenced some of the conversations on the other side of that.

If there was wide gaps between when pricing was submitted, say, in late fourth quarter, early first quarter and wasn't being implemented until later in the quarter, it brought to life some conversations there about where we saw the market going, and that certainly influenced some of our thoughts on where we saw the market going.

The impact of the business, though, we believe we lost about a day of revenue in LTL and about 0.5 day of revenue in truckload, net-net. Once we figured out 1 day of LTL, 0.5 day of truckload, net-net, once we kind of figured out the pull forward and the lost shipping. So that's kind of what I'd comment about that.

In terms of the thesis that the market is shifting more towards asset-based players, we've certainly not seen that in any way. I mean there -- the demand for our services has been robust. I can't think of many instances where we've been excluded from a large bid. It's quite the opposite of that, I would say..

Okay. That's helpful. And just as a follow-up. We talked a lot about technology and digital freight matching. You guys obviously have a platform that can match demand and supply, a digital platform. But just wondering how you guys measure how well you're buying capacity programmatically.

If you can help us think about that in terms of maybe identifying backhaul capacity or just however you look at it that maybe can programmatically drive down the buy rates and improve the margins..

Yes. We continue to monitor the buy rates that we achieve in the marketplace against a couple of different publicly available indices, and we look at how that moves, both on our digital bookings, our manual bookings, and we continue to tune our engines to try to keep those things in line.

We know that given our size, given the density of our freight network that we historically do purchase transportation at less than those publicly available benchmarks are, mostly because we're eliminating so many empty miles for these carriers that net-net, it's better for the carrier and better for our customers as well..

And last follow-up here, if I could.

Do you think that this volatility over the last 6 months or so, really over the last year, has made shippers embrace digital marketplaces a little bit more wholeheartedly? And just related to that, like what is your assessment of where you think take rates or gross margins are going to evolve kind of 5 years from now as some of these digital-only platforms kind of continue to grow in scale? I mean that would be really helpful because I think we're all trying to figure out where the terminal value of this is.

And it would be helpful if you had a sense -- or if you could offer a sense of where you think that -- where net revenue margins kind of play out over time..

Yes. So like I've stated a couple of times, I talked to a lot of our customers. And I don't know that any of the customers that I talk to think that the future of surface-based transportation is a 100% digital-only play.

I think quite the opposite, the volatility of the course of the last year has shown the importance of having really, really good people, coupled with really, really good technology and a really, really big base of carriers that allows you to converge those things together because ultimately, our customers -- first and foremost, we're an execution company, right? Our customers come to us to execute really difficult, challenging things for them in their supply chain where nobody else can or is either willing or able to do those things.

And we do that through digital, but we also do that through old school, rolling up the sleeves and making sure that the promises that we make are promises delivered for our customers. So there's a value to that. And I don't think the terminal value of that is 5% margins 5 years from now.

I think that the value that we create is very unique, and we'll continue to make that more digital.

But digital is just part of the story, right? Our rush is to provide the best service we can for customers at a fair value that helps them to derisk their supply chain without us taking all that risk on ourselves and doing that in a more efficient and more effective way through great people, great technology and evolving digital experience, but not a digital-only experience..

Thank you. At this time, I'd like to turn the floor back over to Mr. Ives for closing comments..

Yes. Thanks, everybody. That concludes today's earnings call. Thank you, everyone, for joining us today, and we look forward to talking to you again. Have a good evening..

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and have a wonderful day..