EXPEDITORS INTERNATIONAL OF WASHINGTON INC. Item 7.01. Regulation FD Disclosure
The following information is included in this document as a result of Expeditors' policy regarding public disclosure of corporate information.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this document contain forward-looking statements that
involve risks and uncertainties, including statements such as our expectations
regarding air and ocean supply and demand, port congestion, container shortages,
equipment imbalances, and trade disruptions; or our ability to: continue to
handle unprecedented volumes; add headcount; improve our operating efficiencies
and improve processes; deploy cash in the same manner as we have historically,
including meeting operating requirements, continue to make semi-annual dividend
payments, and to repurchase shares in the open market; purchase necessary air
and ocean capacity; and to anticipate customer demand. All of these statements
are based on certain assumptions and expectations of future events that are
subject to risks and uncertainties. Actual future results and trends may differ
materially from historical results or those projected in any forward-looking
statements depending on a variety of factors including, but not limited to, the
duration and scope of the COVID-19 pandemic and its impact on the demand for our
services as well as its impact on our customers and service providers; the pace
of re-opening and recovery of global economies; and general economic uncertainty
impacting global trade, as well as the other risks and uncertainties that can be
found in our Annual Report on Form 10-K for the fiscal year ended
SELECTED INQUIRIES RECEIVED THROUGH AUGUST 6, 2021 1. You've done a great job growing revenue ahead of costs. Assuming some of that
is from reduced travel and entertainment because of the pandemic, when do costs start to come back? When do you need to start adding headcount?
Our travel and entertainment has been significantly curtailed during the pandemic and is starting to come back on a limited basis. However, we believe it is not likely to return to pre-pandemic levels. While we think there is no substitute for getting out to see customers face-to-face, we also have learned that a great deal of business can take place without travel and that it can be every bit as productive.
In our most recent earnings release we noted that we are busier than ever,
generating growth in revenue, operating income, and earnings that is well ahead
of expenses. In order to continue to handle the unprecedented volumes that we
saw during the first half of 2021, we expect to continue to add headcount. Our
full-time equivalent employees increased 2.5% from the end of 2020 to
2. You used to say that your target for operating margins was 30% and now you're
doing 10% better than that. Is this sustainable? Have you stair-stepped to a higher margin post-pandemic?
We have long believed that 30% is a reasonable target margin of operating income as a percentage of revenues less directly related costs of transportation (defined as Operating Expenses from Airfreight services, Ocean freight and Ocean services, Customs brokerage and other services as shown in our Condensed Consolidated Statements of Earnings). A 40% margin may not be sustainable over the long-term. It would be difficult for us to continue to handle the increase in volumes that we have been experiencing in recent quarters without also increasing headcount. It is also important to note that the expectations of customers, as well as government requirements, will continue to grow. We believe we can and will continue to drive efficiency, but we also know that the additional work that is required limits the pace at which we can optimize our operating income. While we still believe 30% is a reasonable target, we also believe that we are able to make ongoing improvements to our processes and technology that may allow us to make incremental efficiency gains above 30% over time.
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3. You've said that the current extreme supply/demand imbalances and rate
volatility for ocean and air cargo can't last forever. Are there structural changes that are impacting the global forwarding industry? How is Expeditors positioning itself to take advantage of those industry shifts post-pandemic?
We believe that some of the current supply/demand drivers are not cyclical or temporary and that some of them may become permanent. Freight capacity was already out of alignment to handle such a rapid disruption as caused by the pandemic, which further disrupted entire supply chains by creating a spike in demand for certain products that did not necessarily align with where those products and their inputs were manufactured or where those end products ultimately needed to be. The air market, in particular, was severely impacted because so much of the world's passenger flights were suddenly grounded, just as the global demand for certain products peaked. Along similar lines, growth in ocean capacity has been increasingly limited in recent years by consolidation among the carriers. At the same time, because so much consumer purchasing has moved online, supply chains were already struggling to adjust to a new, more rapid pace of delivery not just for their end products, but for parts and components. We believe that many of these changes are not cyclical and could be long-lasting.
Expeditors' perspective is that we do not care where or how cargo moves because we most likely already have a presence in those markets. Whether products reach the end customer via traditional brick and mortar stores or through an online marketplace, we still believe that the most cost-effective way to move freight is to consolidate it and move it in bulk from origin to destination. That is what we do best and we do not see that changing. Freight will still need to move and we will be there to handle it.
4. Is most of the freight coming through the congested west coast ports due to
inventory restocking, or is it all just related to growth in demand?
While we are not in a position to know how much of the demand at the west coast ports is being driven by restocking, we do know that it is robust and has led to significant congestion. That congestion is not entirely the result of demand. There are many other factors driving port congestion, including reduced capacity as a result of various carrier mergers, COVID-related and other labor issues at the ports, equipment issues with availability of chassis, and a limited number of trucks and drivers that are available to pick up cargo. Adding to this is the ever-changing schedules that require skipping ports in an effort to try to get vessels back on schedule. All of this ultimately leads to less capacity in an already over-subscribed market. We believe these issues, along with the ongoing supply/demand imbalance, will likely continue to have an outsized impact on the west coast ports, as well as create issues for the gulf and east coast ports for at least the remainder of 2021.
5. Looking forward over the next few years, what does normalized growth for
airfreight tonnage look like? And when conditions eventually loosen, what's the impact on your business?
We do not know and are not in a position to comment on what "normalized" growth
in airfreight tonnage might look like. The supply side of airfreight (access to
aircraft/capacity) has been under tremendous pressure due to the removal of many
passenger flights. A small portion of that domestic passenger belly space
capacity has, at least as of now, returned. Also, where possible, some capacity
has been inserted back into the market through the use of chartered aircraft.
The data that we have access to shows that most of the chartered aircraft have
been supporting the transpacific (
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6. How much of the rate imbalance is because of the ocean container shortage and
when do you expect this constraint will start to ease?
We are not be able to answer that question with any specificity, given all of the issues currently impacting the ocean market. From what we understand, there is an all-out effort in the container industry to bring more boxes online, which may eventually resolve this shortage constraint. However, we do not know if and when that might occur. Given the ongoing supply/demand imbalance, along with port congestion, equipment imbalances, and trade disruptions, we are unable to predict when the container constraint may start to ease.
7. How have your strategic initiatives changed since you first outlined them out
a few years? How are your strategic priorities over the next five years different now?
We completed a very thorough review of our strategy at the end of 2020. This review included gathering our thoughts on the industry, as well as working with third parties to collect and compare their thoughts. After countless hours of review of information and many additional hours of discussion, we found that many of our existing strategic efforts are still the right areas of focus going forward.
We still believe that geographic balance of our business, particularly growth in
We have also noted that many countries within
8. What new areas are you exploring for profitable growth?
Our major focus continues to be growing the core of our business, and we believe many opportunities continue to exist in this area. With that said, we also have an obligation to think about how our industry continues to evolve, find where there are new opportunities today and where new opportunities will exist in the future.
To support this we have our forward-looking strategy team that is working on new
opportunities and have an internal team doing the same with areas of our core
business. Additionally, we have created a senior vice president role for Digital
Solutions and moved one of our most tenured executives,
Our approach has been focused around the concept of "jobs to be done." This is based on the idea that there are many things being done today for which a comprehensive solution does not exist. Our model is to identify opportunities for profitable growth, as we believe that effort directs our focus on untapped market opportunities for products and services that companies are willing to pay for. However, we consider the specific projects that we are working on to be confidential and we believe that talking about them restricts our ability to be first to market with these concepts and ideas.
9. Since the start of the pandemic, you have continued to add cash to the balance
sheet. Have your thoughts on capital allocation changed?
Our capital allocation process has not changed because of the pandemic. First
and foremost, we invest in our people, processes and technology. We also look
for other opportunities to invest in our growth strategies. We then look to
continue growing our dividends to shareholders. On
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2020 and represents the 28th year in a row that we have increased our dividend. We also routinely review our global working capital needs, cash flow expectations, and market conditions to determine if there is an opportunity to repurchase shares issued to employees and Directors as equity compensation and to further reduce the total outstanding shares.
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