All right, so last session of the day, we're going to have a really strong finish here with C.H. Robinson. Really pleased to welcome two relative newcomers, I'd say, to the story and the space. We have, of course, Dave Bozeman, who's the CEO of the company. I still think of you as being relatively new, although you've got at least a year of experience, so no more excuses.
That's right.
Of course, Damon Lee, who still has coverage of being less than a year in the role.
That's right.
We'll be a little bit easier on him, but I'm going to do something a little bit different here. I just want to contextualize the relationship here with C.H. Robinson. This is a company and a stock that I've followed for a long time. I don't know to what extent you all are regular readers of our research, but we recently upgraded C.H. Robinson. I want to say that it's something that we were very thoughtful about doing. Back in 2017, when we first started talking about the digital disruption in the brokerage space, there was a lot of optimism around C.H. Robinson's Navisphere platform and all the data that they had and the ability to really leverage technology to drive operating leverage on the workforce. This wasn't a uniquely C.H.
Robinson thing, but I would say that all the promises around technology back then didn't necessarily come through in the way that we thought over a couple of cycles. So this upgrade of the stock that we recently did not come lightly. There was a lot of consideration there. But that's all to show you that we really think that they've been making some fairly profound changes on the technology side. And that's why I'm very happy to have the team here to tell you a little bit more about that. So plenty of questions on the cycle and pricing and the competitive story. But maybe to jump right into the tech stuff. Tech is a pretty broad term. You all have been doing a lot of very pointed things, taking a lot of very specific actions on that front.
Maybe you want to spend some time telling us about what maybe some of the more impactful changes have been on that technology front, what you see as driving the biggest opportunity here for the rest of the cycle. So I don't know who wants to field that one, but.
I'll jump in, and Damon can jump in as well. Well, first of all, Bruce, thank you for having us. We know that you drive a hard ship, so any upgrade from you is pretty hardcore. So no, we appreciate that. I think in talking about tech, the way we talk in Robinson now in our culture, I actually don't answer that question and just say it's technology. There's a broader thing on a change perspective, and we don't separate the two. It's a culture change, and it's an operating model. And we have technology as part of that operating model to drive it. This is why I'm so kind of bear with me on that.
In the beginning of the year, we deployed our operating model, which is a disciplined cadence-based operating model that has really driven a speed, a decision-making priority, and a number of things within the company as it's driving. That's allowed our technology to flourish even more than just, say, technology alone. You have to have discipline and cadence with that technology. Now, we've gone all in on generative AI and large language models. I'm really, really proud of the team and what they've done. I'm proud of them and how they're handling a lot of the change that we're introducing. Obviously, we're partnering with Microsoft and using Azure, but our own engineers build our large language models, and we think that's a competitive advantage.
If you look at our entire cycle, order to cash, we've gone all in on Generative AI, and it's allowed us to pick off the manual task through that order to cash cycle. And we've used the word game changer. It has been a game changer for us because it's ripped out just a lot of waste. That, in conjunction with a lean operating model that is within the company, has really kind of spearheaded and driven some of the results that you've seen in 2024. And I'll have Damon continue to talk on it a little bit. But to the essence of your question, we're all in on Generative AI, large language models, but it's in conjunction with an operating rhythm that is important to understand. Those two go together.
That's a great lead-in, David. I would just add, we say at C.H. Robinson, look, Generative AI for us isn't a hobby. We're not doing something in theory with the hopes that it produces a result. Every dollar we spend on Generative AI is based on a robust business case with a high ROI that we expect to see almost immediately in our results. And that's the threshold we've set. We've been able to adopt our current set of Gen AI within our current spending profile. So you have not seen a spike in our spending related to Generative AI. We've been able to capture that investment within our run rate spending, which is quite different than most companies. A lot of companies that are saying Generative AI is impactful to their company, their spending profile has gone up exponentially. That is not the case with us.
I think we've got very prudent spending, and we're getting very high-quality results for that spending. Again, based on what we saw and demonstrated in our Investor Day, we showed that we're going to deliver incremental operating income through market outgrowth, through margin expansion, and through cost reduction and cost avoidance. Certainly, on those last two, Generative AI has been an impactful tool for us to get price optimization, to get reduction in cost to carrier cost, and certainly allowed us to automate many of the manual tasks that we had throughout the organization to drive efficiency and drive our cost curve down. So when we say Generative AI has been a game changer for Robinson, you can see it in the results, and we saw it in every quarter in 2024.
Just to back it up a little bit, when we talk about Generative AI for the laypeople in the room, myself included in that group, what specifically are you talking about? And if it's maybe easier to address it this way, when you think about the specific functions and tasks that you're automating that's allowing you to bring this quote to cash to bear a lot faster and be more competitive in the market, what kinds of things are we talking about here?
So as an example, we'll just take one slice of it. Most people in this room will relate to this. We're in an industry that time is money, in a sense, and how you contract or transact back and forth and the speed that you do that can be a competitive advantage or not. Well, yesterday, first of all, we deal with about 500,000 unstructured kind of data points per day coming in. And what's an unstructured data point? When a shipper or customer sends us a quote to go from, say, Charlotte to Fort Worth, and they want a quote on that, most people right now, we deal with over 85,000 customers. We could talk bot to bot at a very high scale rate between very large customers. That's happening every day, is happening right now.
But then you have customers who come in, and they'll send something in via text, email, scanned-in documents. Yesterday, that was a person that had to take that, make that operational, make it can go into our system, and that we can respond with that quote. And that takes time to do that. Today, we're running large language models or Gen AI on that, and we're doing a quote in less than two minutes, and it's going back to that customer in a conversational manner. And so a smaller customer or a less sophisticated customer is treated like a strategic customer that we're talking bot to bot back. That speed has allowed us to do a couple of things. One, be very competitive because time is money. Two, it's allowed our people to move into more solutioning and essentially has given us more installed capacity because it's really intellectual capacity.
So that's really helpful. And I think that covers a lot of the shipper-facing side. When you think about the other side of the house, if that's the right way to think about it, on the procurement end of things, it strikes me that AI and a lot of these data tools and data science is having a pretty meaningful impact there as well. Can you talk about some of those?
Yeah, I'll have Damon jump in because this one does get into the technology, but it also gets into the model that we're operating every day, and it has a little bit of secret sauce in there, so I will not share that, but we will jump into some of that.
Yeah, and I'll also throw pricing into that same discussion because, look, Robinson's always had one of the best sets of industry data that's existed, right? I mean, due to our scale and just breadth of what we offer the marketplace, our data set's pretty impressive, always has been. The ability to analyze that data quickly and do something with it has always been a challenge. By the time you can spool through hundreds of data points, in many cases, the decision point has already been made. And so what Gen AI has allowed us to do, both on the pricing front as well as the cost of carrier optimization front, it's allowed us to analyze hundreds of data points around the characteristic of what the customer wants, of the carrier's capabilities, of the load dynamics and characteristics.
We can make a much more optimal decision in minutes that would have taken us days before if we ever got to it at all. That's allowed us to optimize pricing. That's allowed us to optimize cost of carrier and ultimately improve our gross margins. If you think about it from a pricing strategy perspective, before we adopted the technology we had today, in many cases, you'd set a pricing strategy at the beginning of the quarter. At the end of the quarter, you'd see how you did. 90-100 days has gone by. Did I win? Did I lose? Today, we're having that evaluation multiple times an hour. We set a pricing strategy at 8:00 A.M. We review it at 8:15 A.M., 8:30 A.M., 8:45 A.M. Do I need to change my strategy? Is it working? Is the win rate what I thought?
Is the margins what I was expecting? Just the ability to run the business with a high degree of frequency and quality of data, we could never do that historically. Gen AI has been a powerful tool that's allowed us to optimize both sides of that equation and then ultimately enhance the margins that you saw in our results in 2024.
So during our lunch presentation, I mentioned that my sell-side monkey brain likes to think about these things in easy kind of margin numbers that I can just plug into my model as an input. And Ashwin Rao mentioned that he thinks that there's 300-500 basis point opportunity maybe over the next couple of years, next few years from a lot of the leverage on this Gen AI stuff. Would you agree with that assessment? Is it maybe a little bit smaller than that? Or how do you think about the long-term opportunity in terms of the operating margin at Robinson?
So I would refer you back to our waterfall chart in Investor Day. So I wouldn't get specific on specific margin enhancement because we didn't disclose that. But what I would tell you is between margin expansion and cost reduction, cost avoidance, we had $180 million of incremental OI in 2025 and 2026. And a substantial amount of that improvement would be on utilizing Gen AI as a tool to drive those efficiencies.
Dave, you brought it up a little bit, but part of the fundamental change in the operating model is also driving accountability and the idea of lean into the model. What were the opportunities that you identified when you came into C.H. Robinson in terms of the fat, so to speak? And maybe you can talk a little bit more about that philosophy. And in terms of, I don't know, to use the baseball analogy, what inning are we in in terms of how much optimization is left? What's your thought there?
Yeah, that's a fair question. The best way of doing this, I mean, coming in as kind of a Lean practitioner, I look at business as a human body in a sense. I mean, you really don't know how how healthy someone is until you scan it. And so you really have to scan a business and get up under it and understand where is it broken before you can do a treatment. And that's what I did for the first four or five months is diagnose the company very deeply. It was a little uncomfortable for people, the CEO of C.H. Robinson, sitting at the desk for two hours just watching order to cash to understand where were breakpoints, where was waste, and where were things that were going on. That's all part of the diagnosis of the process and going through.
After doing that, I came up with some things that were culturally that we needed to change and execution-wise. One thing about Robinson right now is there's a level of vulnerability that's in the culture that allows us to do what we're doing. I don't have a problem sitting up here sharing some of the things that some people might feel uncomfortable because that's how you innovate and that's how you drive. One of the things I discovered when we were in there is that we had turned into a company of problem admirers and not problem solvers. Quite frankly, a number of companies are, but we admired problems too much. We needed to be problem solvers and not problem admirers. We started to change on that. Our cadence was slow. We were also a company that was output-based versus input-based.
We would look at things at the end of a quarter and then do an autopsy and say, as Damon said, "Let's look at what happened to the patient." Well, the patient's dead at that point. So we had to move into a different model and a different speed that allowed us to, one, look at KPI inputs, put a measure on those, which are red or green. You're either on or you're not. And we also had to change the culture and make it okay for people to understand that we are going to prosecute the business and not the person. That's a big deal. So when I talk about these things, if you don't get this and you don't lead by example in a company, people will not surface issues. And so we are driving where we celebrate the red.
We are red, and so now you have to attack that red and innovate, and you discover a lot more things and don't have people just coming in and doing a shiny presentation on how good things are. That's not how we operate and do that. And so after that diagnosis, I did it under the Four Ps, people, product, process, and portfolio, and went deep on those Four Ps, decided that we needed an operating model, announced that, launched it on January 2nd, and drove that. And it starts with an enterprise strategy map that layers all the way down in the organization. And right now, we're about in the third inning, Bruce, because we still have a lot of work to do.
I spent the last year working on what we call the SLT, the Senior Leadership Team, and making sure that they have to be teachers and they have to understand how to prosecute the business, and it took a while to get them. Now they have to continue to do that all the way down to the desk, and we're working through that. I'm proud of the results we've had in a year, and I think you'll see more of that going forward. It's a lot more to talk about. I know we're on time, but I'm trying to give you a flavor of it's a culture change and a transformation than just a transaction.
Yeah, no, that's great. I appreciate it. And maybe just a two-parter for you here. Technology, obviously, is not just available to the carrier, the service provider. It's also available to the shipper or the customer. And one of the thoughts out there is that with better technology comes better price discovery, which potentially puts some long-term pressure on gross margin. So the two-parter is, number one, would you agree with that assessment? And number two, if you do, presumably there is enough of an operating margin offset to kind of counterbalance that pressure.
Yeah, I'll start and Damon can finish. First of all, the first part of that question is, yes, it's happened in the entire industry. There's been price transparency that's happened not only to Robinson, but into the entire industry and to other industries as well. How many people in here go down to the corner to book a trip over to another country and sit across from someone? Not many. They do it on their phone because that has happened in that industry. Same thing with our industry to do that. But that doesn't mean that you can't drive and be competitive and hit your overall margins that you want, which is why we didn't come off of our margin set on Investor Day. We gave a low cycle, mid-cycle, high cycle margin because we feel pretty confident in our overall model and our technology and what we're driving.
I don't know if you would add to that.
Yeah, I would only add that example I gave around price optimization and cost of carrier optimization. I think that fits right into what you're talking about. So certainly, the industry's already realized price compression. So certainly, we've realized that as part of the industry. But I think what we're doing on the Gen AI side and making sure we get the best use of our data, which we think is a compelling competitive advantage of the industry, is allowing us to stay ahead of that curve. So we're still able to expand margins even though the macro environment is compressing.
So maybe just on that point, and Dave, you and I talked about this a little bit upstairs, is that you managed to accomplish a lot of these changes during one of the most prolonged or protracted freight troughs that we've seen for a very long time, potentially since deregulation. And I'd be remiss if I didn't talk a little bit about the cycle here. So in terms of the outlook, when you talk to your very big pool of customers, what's the consensus in terms of where we are in the cycle and what, call it the next 11, 12 months looks like? When are we expecting a turn in the cycle?
A couple of things, Bruce. On this one, everyone in here, if I went around, would have a different answer to that question, so we just look at it differently now at Robinson, and the facts are this on the macro. We know that carrier capacity needs to come down. That's coming down. That was burning down at about a 4% rate. Now it's burning down at a 6% rate. By physics, that will right itself over time here. We see that starting to come down at a pretty good rate. There's a demand side. When you look at the economy, the economy seems to be doing okay, but that's really boosted by services. For people in this room, we're really driving on the goods part. That's manufacturing, retail, housing. Those are the things that we really drive.
And when you look at all three of those, they were somewhat muted in this past peak season and now. I don't think that that's going to stay. I think that's going to change. What I can't tell you is, is that going to be longer, or is that going to be a heavy V? We don't know that. So we've taken an approach in C.H. Robinson to say, it doesn't matter. You have to win at the low, and you got to win at the high. So it's the higher highs and higher lows, and we just attack it for where we are in the marketplace. I will tell you that we're very much ready. If this is an aggressive V recovery, we're going to win. If it's a slow recovery, we have a balance sheet that's positive.
We're still investing through the 36-month freight recession and that we would win in a long recovery as well. So that's how we're trying to look at it. We're just going to play the cards we've dealt with, and when this thing starts to go back, we're going to engage and we'll win as the market shifts.
And let's just flesh that out a little bit because at this point in the cycle, you are at a pretty significant sort of bias towards contract versus spot right now. That's not, I'd say, unique to Robinson. I think most people are in that situation. So it seems like the positioning is for that slower recovery. How do you position if things move faster, or is there even a need to? Because maybe with some of these Gen AI changes, there is a lot more virtual capacity to absorb some of that spot if you do see the V-shaped recovery. But I guess the question is, if we see a sharper recovery, how does that change the tactical positioning at Robinson?
Yeah, you want to?
Yeah, so I would say we've already got a really good proof case that's already happened. So we talk in theory a lot, and we're trying to prove out what's different for Robinson. If you take our Global Forwarding business in 2024, it's not a business that gets as much attention as NAST, but one that Dave and I are passionate about. That business performed exceptionally well in 2024. It had growth every quarter, year over year, while driving 15% productivity and reducing headcount 10%.
Can we stop right there for a minute? That's really, really important because the bear case on Robinson was, hey, you guys cannot separate out headcount growth from volume growth. And what we're saying as a canary in a coal mine, we have an operating rhythm and an operating model with a business that is already showing you that we are separating out headcount growth from volume growth. And when that happens in NAST, we feel it'll be even more extreme because we have a deeper technology stack. So that's really important. This is different from ocean rates that are transitory. Set those aside. We grew while headcount went down and costs were reduced. That is a debunking of a theory that we can't separate those out. And I would ask everyone to really, really look into that because that transfers over to NAST.
We just haven't seen a recovery on truckload. But when that happens, I think you'll get the same effect. Go ahead.
Just last statement, I'd say what Dave said is exactly right. The same operating model is run at the enterprise level. So the same operating benefits that allowed Global Forwarding to generate that performance in 2024, it's the same operating model we use for NAST. We use for all the businesses within Robinson. So we have a high degree of confidence that what we've seen in Global Forwarding, in fact, in reality, in fact, we commented on it in Q4 earnings, high degree of confidence that will show up as substantial operating leverage for NAST when the truckload market recovers. And as Dave mentioned, I would even say we expect a bigger improvement because our tech stack and our investment in technology has been greater in NAST than it's been in Global Forwarding. So that's why we have such confidence in our ability to perform going forward.
Let's take it down to brass tacks a little bit because I know investors always love that. You all have given some targets and projections in terms of how you see contract pricing and spot pricing shaping up this year. Maybe you want to remind the audience what those look like and what the assumptions are that underpin them, and maybe given that we're not very far away from your Investor Day, but we've had some time, are you seeing those expectations come through the way you thought they would?
Yeah, so I'll just reiterate, and again, December was our Investor Day. We feel very confident in not only the targets that we set for Investor Day, but also the path in which we get there. And Dave mentioned earlier, look, we have no intention of trying to guess the market. We gave a range in operating income improvement, $350 million-$450 million, with $350 million having no market recovery contribution whatsoever and $450 million being 5%. And then, of course, the $400 million being in the middle of 2.5% market growth contribution across our enterprise. Very confident that we've got a great path to deliver those results in 2026. As it relates to spot rates, we've already seen a recovery in spot rates. And we expect that recovery to continue throughout 2025 with the majority of that momentum to be Q2 through Q4.
So we do believe healthy spot rate improvement in 2025.
And Dave, you talked about portfolio being one of the components of the four P's here. We spent a lot of time on NAST, but obviously, there are other pieces of the puzzle here. One of the panelists on the logistics panel talked about freight forwarding as being a little bit behind the curve in terms of technology and optimization and maybe lean and trimming the fat. Do you find that to be true in your case? What's the opportunity ahead for Global Forwarding?
It's a huge opportunity for Global Forwarding. I mean, as we go in, we laid out a strategy to win. The way we look at strategy within Robinson now is different. We look at it in horizons. Horizons one, two, and three, horizons one being one to three years, horizon two being three to seven, and horizons three being seven and beyond. We look at megatrends and then try to discount those megatrends back to the present and make decisions for those megatrends. We are starting to go deep into Global Forwarding with the strategy work that we've done in NAST. We feel really good about that and that business as we go forward.
Damon, the opportunity has long been to sort of close the margin gap between the Global Forwarding business and what you see from some of the best-in-class peers in that industry, which, to be quite frank, are very impressive. What do you see as the timeline in closing that gap? Are you more confident in that today, less confident? Maybe some color there.
Yeah, so I think we've got a good start on improving the profitability of our Global Forwarding business. Certainly, of that $180 million of OI improvement, Global Forwarding is part of that equation as well as we deliver our 2026 goals. Certainly, scale plays into that math as well, but as Dave mentioned, I think what we're focused on is the operating rhythm we have in place, the discipline around cost control, the discipline around optimizing pricing. I think that will continue to drive our profitability in Global Forwarding. And as Dave mentioned, it was a concerted effort that we didn't want to have parallel paths going on between technology stacks and Global Forwarding technology stacks and NAST. And so we've learned a lot on the NAST side that now will be a quick adopter on the Global Forwarding side.
Whereas if we'd have ran them in kind of independent parallel paths on technology, we could have been stuck in a redo loop or had wasted capital on that approach. So it was a concerted effort to index more to NAST on the technology stack side, but now we can do a faster follow on the Global Forwarding side and yield more benefit on the efficiency side.
All right, great. Well, we've got about a minute left. If there are any questions in the audience, I'm sure we'd be happy to field them. Otherwise, I've got like 30 other questions. Well, as promised here. So I want to kind of focus in on your Global Forwarding concentration, which is obviously that Asia to US trade lane. I believe you're the largest LCL consolidator, if not in North America, maybe in the industry, but certainly in North America. A lot of conversation about tariffs, particularly around China, maybe some pressure on yields. I would imagine there's some increasing competition on that trade lane. So thinking through the competitive dynamic, some of what we're hearing in the geopolitical sphere, do you think that's going to be a headwind for the business?
No, I think on tariffs, we start by saying this. Disruption for us is part of our value proposition in C.H. Robinson. So it's really disruption around the world and dealing with customers is a proposition for us and something that we somewhat thrive in. I always tell people there's two different pieces of the conversation. One, if there's a conversation that says that goods will not move at all within the world, well, then we got a problem. but everyone else does too. and I don't think that that's going to happen. Goods are going to always move. and when goods move, we're going to be a main player in moving them. Now, we see customers that may go from China and start an origin in Vietnam and Vietnam into the US. well, we're in that trade lane.
We diversified our overall trade lanes in the Indian Subcontinent, in Southeast Asia. We did that purposely because when those starting points are there, we're going to be there. It's coming up from Mexico to the U.S. One in 10 of those shipments we move. And so cross-border is huge for us. We've been working with our customers for years now. And a lot of people have to realize supply chains have gotten really, really complex. And shippers and customers now want resiliency in their supply chains. It's not just about cost. They want to make sure that the pandemic really hit them in the face. How do we make this really resilient? So we've been working with customers about bolstering up their supply chain, really placing things where they need to be. Should they be out of West Coast, East Coast? So we work with all of that.
And then there are shippers who say, hey, I got a problem. I need to move fast. We can handle that, but for a price.
Great. Well, unfortunately, that is all the time we have. I don't want to keep you from cocktail hour, which starts in about 20 minutes.
I don't want to keep them from cocktail hour.
Exactly. So I want to give a big thanks to our panelists. Great to have you here. And thank you to all of you for your attention.