UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report:
August 27, 2008
(Date of earliest event reported)
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its
charter)
Washington
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000-13468
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91-1069248
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(State or other jurisdiction of
incorporation or organization)
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(Commission File No.)
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(IRS Employer Identification Number)
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1015 Third Avenue, 12
th
Floor, Seattle, Washington
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98104
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(Address of principal executive offices)
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(Zip Code)
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(206) 674-3400
(Registrants telephone number, including
area code)
N/A
(Former name or former address, if changed
since last report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
o
Written communications pursuant
to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12
under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o
Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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. Answers to additional inquiries, if any, that
comply with this policy are scheduled to become available on or about September 30,
2008.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain
portions of this document including the answers to questions 3, 4, 5, 6, 7, 9, 10,
11, 12, 13, 14, 16, 18, 19, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 32, 33, 34,
35, 37, 38, 41, 43, 45, 47, 48 and 49 contain forward-looking statements which
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, changes in customer demand
for Expeditors services caused by a general economic slow-down, inventory
build-up, decreased consumer confidence, volatility in equity markets, energy
prices, political changes, or the unpredictable acts of competitors.
SELECTED INQUIRIES
RECEIVED THROUGH AUGUST 8, 2008
1.
I believe that there was supposed to
be an 8-k released shortly after the last quarterly release answering investors
questions, I never saw this published, did I miss it or was there a reason for
it not being released?
You didnt miss it; we didnt
publish it. The relevant responses to
those questions from last quarter, however, are included in this 8-K. There were obviously some reasons why we were
not able to publish an 8-K last quarter, but having taken a few stabs at
explaining them in preparing this response, they came off, on paper anyway, as
sounding more like excuses than reasons.
Accordingly, we offer neither, only our apologies. Weve been asked if our lack of response was
a result of the ongoing Department of Justice (DOJ) investigation. We do not believe that this was the
case. That said, one should not read too
much into the fact that we have not published an 8-K for a while. To paraphrase Freud Sometimes a late 8-K is
just a late 8-K. We suppose, however,
that the argument could be made that much of the time spent dealing with the
critical matters associated with complying with the DOJs subpoena took up much,
if not all, of the normal filler time that we typically used to research and
write these 8-Ks. The additional
pressure has come while we have attempted to keep these issues from diverting
us from doing the day-to-day kinds of things that are required to meet our
customers service requirements.
2.
Could you please provide some color
on the strength of Europe in the 2
nd
Quarter? Was the source of
strength more noticeable from US exports or Asian exports? Several other global
transportation providers noticed a significant slowdown in the month of June in
Europe. Did Expeditors experience similar trends?
As our 2008 2
nd
quarter results showed, Europe and the Middle East (referred to internally as
EMAIR) made a very strong showing as compared with the prior years results.
The strength among our European and Middle East offices was rather
well-balanced, particularly among the major offices in this region. The source
of the strength came from exports in the Indian sub-continent as well as from
stronger imports from Asia and from North America into the other areas. Improvements also came from cost control and
productivity initiatives in Europe. As
for the month of June 2008, as far as European profitability was
concerned, Europe performed just fine for us and we did not note the kind of
significant slowdown apparently experienced by others in our industry. However, based on export volumes from Asia
and the U.S., which we address in our response to question 17, tonnage imports
into Europe could have been down slightly.
2
3.
Why have the year-over-year earnings before income tax (EBIT) growth
trends in your European geography been volatile on a quarterly basis since the
beginning of 2007?
We actually measure
operating income as opposed to EBIT in evaluating operational results. In our case, there is not a big difference
between these two, but, to be completely forthright we feel compelled to
clarify that point. We think the term volatile
used in this context is an interesting choice of words to describe the trend of
our results in Europe over the last two years.
Perhaps a more accurate description would be dynamic. We would counter that our trend, i.e. the
direction, in Europe as a whole, particularly for the last eight years and
superficially for the last three years, has been overwhelmingly positive. That isnt just a subjective counterargument,
it is a very objective measurement.
Since reporting our results for the 2
nd
quarter 2005,
quarterly operating income in our European region is up 137%. Thats a compound annual growth rate of 33%
over the past three years; not a bad record...were basically doubling our
business every 2.2 years. While the
quarter-to-quarter progress in Europe might not have been as linear when
compared with other markets in which we operate, the trend itself is one of
steady growth and solid progress. While weve had more progress in some
quarters than others, we have confidence in our management team and their
focus. To that end, we dont find it
beneficial to pluck the flowers from the flower-bed every quarter to check to
see how the roots are growing.
As for the possible
reasons that things in Europe may not have progressed as linearly as some of
our other areas, we cant point to one overarching factor. Despite the
influences of a shrinking globe driven by more universal communication mediums
like the internet, satellite television and the ever-present cell phone, Europe
remains so enigmatic in so many ways, even to other Europeans of differing
social phylum. There is a mind-boggling
amount of cultural differences driven by linguistic, historical, economical and
political diversity in what realistically is a relatively small amount of the
global land mass. All this diversity creates
an atmosphere of selective co-operation that contrasts somewhat to the more
common cultural elements found in our other major areas of operation. As a result, the cultural buy-in that is so
critical to success in Expeditors offices globally has come a bit more slowly
in Europe than in other areas
but it does come if one is willing to progress
experientially. That means working with
our people and having them be able to see for themselves the benefits of
adopting the Expeditors culture, even at the expense of having them struggle a
little bit as they learn this lesson.
This requires one to be willing to take two steps forward and a half or
full step backwards more often than in our other geographical regions. In addition, because of some of the rather
unique European institutional issues, staffing costs are among the highest, per
head, in the world and the margin of error in recruiting and training new
employees is much smaller than is found in other areas. From our experience, despite its best attempts
to project itself as one homogenous brand labeled the European Union, the
countries in Europe, with all the aforementioned diversity, augmented by
differing taxation policies and somewhat independent budgeting and spending
procedures, even with a large block that uses the same currency, remain much
more distinct, than they do alike. That
all said, when youre returning 33% compound growth rate on your long-term
plan, we think you stay with that plan.
Its working well and were very satisfied with what has been and is
being accomplished.
4.
Have the rising dollar amount of
fuel surcharges and the change to a floating fuel surcharges in ocean changed
how Expeditors approaches its core business transactions with customers? Has Expeditors had any difficulty passing
through the high fuel surcharges in a timely fashion?
We didnt intend this
response to turn into a tribute to George Carlin, the recently deceased
comedian who became famous in the 1970s for his
Seven
Words You Can Never Say on Television routine
. However,
the more we contemplated the question, the more we recognized that there
probably are some similarities between how we feel when talking with some of
our customers about the current fuel and surcharge situation and how Carlin
felt in the 1970s when he was arrested and a broadcaster cited by the Federal
Communications Commission. There are
just some words that are problems and whose usage shocks, offends or angers a
certain percentage of the populace. One difference,
however, is that Carlin said these words not because he had to, but because he
wanted to. We on the other hand end up having discussions not because we want
to, but because we must. Unlike Carlin,
who deliberately looked for reasons to use provocative words to push the
envelope, we would rather not have these discussions. However, because we cannot absorb rising fuel
costs and still provide the level of service our customers have come to expect
or
3
deliver returns to our
employees and our shareholders, we need to have these conversations with the
difficult words included.
So what are our
difficult words? It shouldnt surprise
anyone that the topic of fuel has nearly ascended to the status of becoming
the new F word. Combined with the
issue of surcharges (a very ominous sounding S word), we are constantly
searching for eloquent and socially acceptable ways of dealing with a reality
that will remain a reality as long as carriers continue to impose surcharges to
attempt to compensate for rising fuel costs.
Our core approach to these two topics has not changed. The topic of fuel is obviously sensitive, but
it is, or should be, very real, as anyone who follows the energy markets (or
puts gas in their car every week) should be able to readily attest. It will continue to be a subject for ongoing
discussion and negotiation. Higher
costs, fuel or otherwise, are always a challenging element of our role as a
non-asset integrated supplier of logistics services. Regardless of how you describe it, passing on
these costs, in whatever form you are able, is always a challenge. At the end of the day, however, because
higher fuel costs are in fact a very transparent reality, there is only so much
one can afford to absorb before your own business goes from profitable to
unprofitable. All of our customers are
in business and have the same pressures.
That means that usually we can come to a reasonable accommodation that
is an equitable way to allocate price.
These discussions take time, and were not always able to pass these
additional costs on as quickly as wed like, but generally were able to do so.
In conclusion, we have
to observe that the advent of cable television provided George Carlin with the
ability to spout his 7 words that he could not spout during the 1970s on
commercial airwaves. The interesting
corollary here was that the rules for what one can or cannot say on TV dont
appear to have changed all that much
we suspect any one of the 7 banned words
blurted out during commercial prime-time television would earn a call from the
Federal Communications Commission. What changed is new technology deployed in a
new way. Those who pay more for TV can pretty much listen to whatever they
wish. Somehow, we believe that advances
in technology and process will provide the kind of transparency that will make
these kinds of discussions more simple, more direct and more meaningful.
5.
To what extent does Expeditors
participate in the U.S. export market?
What percentage of revenues and volumes are U.S. exports? And what is
the Expeditors mix between air and ocean for exports?
In the airfreight
markets, according to the latest published Cargo Network Services/International
Air Transport Association (CNS/IATA) ranking (for 2006...2007 figures have not
been released), were the second largest export airfreight forwarder in the
United States. While we are still quite
a ways behind the largest, we like our trend.
Although we used to refer to our U.S. export program as anemic, its
been quite a while since weve used that term.
We have experienced air export departments in our branches and we have
very skilled and efficient gateway operations in major cornerstone locations
that provide even our smallest inland offices with the ability to offer
competitive air export capabilities to their customers.
We see air and ocean
export operations more as complementary global products that we can offer our
customers, than we see them as internally competing services pitted against
each other. When customers require their services to be moved by air, we offer
airfreight. If they require ocean
freight, we have that capability as well.
In some cases, they may need both, and we are perfectly suited to handle
both, concurrently if needed.
Accordingly, we dont really know how to answer your question about what
our mix is between air and ocean exports.
6.
In your opinion, did the China
Olympics and Northern China factory shut down change trade patterns to the
benefit or detriment of Expeditors in 2
nd
Quarter of 2008? Will it have
any noticeable impact on supply/demand during the second half or 2008?
We dont believe that
any production curtailments that occurred in association with the Olympics
around Beijing and in Northern China had a detrimental effect on the 2
nd
quarter 2008 figures. Supply and demand
in the second half of the year will be reacting to orders that have already
been
4
made and the amount of
those orders themselves would not seem to us to be impacted by the Olympics. So much of the manufacturing capability in
China is in areas that are far removed from the influence of the Olympics.
Accordingly, it seems unlikely that a material shift in supply and demand would
be caused by the Olympic games.
7.
Could you please discuss the
availability of export boxes in the U.S.? How often do you outright purchase
boxes for one-way moves?
There is a great deal
of work being done to organize box availability for U.S. exports, particularly
from inland locations. If by purchasing,
you mean owning the assets, we do not own any containers, nor is it in our
strategy to do so. We do work with the steamship lines and with our import
customers to be able to position and turn their inbound containers to certain
markets to meet export needs of our ocean export customers. It is a challenge right now, but it remains
manageable.
8.
Could you please provide the
percentages of your customs brokerage business that are associated with
airfreight shipments, ocean freight shipments, and other, respectively?
Our internal studies
have shown that we clear (perform customs clearance formalities for)
approximately 75-80% of the freight that we carry on our house paper. This figure has remained fairly constant over
the years, so we have no reason to believe that this has shifted since the last
time that we looked into it.
9.
Could you please discuss the
industry capacity dynamics for both airfreight and ocean freight? How available is ocean freight capacity? Any concerns regarding the availability of
air cargo capacity given the potential for air cargo providers to pull planes
out of service with rising fuel prices?
Despite the parking in the desert of older, less
fuel-efficient assets on the airfreight side, there does appear to be sufficient
capacity to handle current demand. This statement is reinforced by the fact
that we have not, to date, had to use charters on the transpacific routes. While we have used charters for some other
routes, primarily to guarantee service capability, as of yet, they dont seem
to be making an appearance on the larger volume transpacific routes. We are,
however, watching the East Coast very closely as the majority of regularly
scheduled airline capacity pulled has been to that region.
As for ocean freight, inbound space capacity is
not a problem. Export space capacity is
challenging, but in general we seem to be adequately managing our customers
requirements. We understand that there
are those who are quite challenged in finding export space capacity in selective
markets. In the Midwest, a great deal of
effort is going in to making sure export customers have adequate access to
containers. We also seem to be managing
that fine. There is quite a bit of new
capacity planned to come into the market.
There might be some question about how much of that capacity will be
entered into the market as planned, but
either way, we dont see capacity
emerging as a problem in the ocean freight market in the near future.
10.
Why did legal and associated costs rise so much
from the 1
st
quarter 2008 to the 2
nd
quarter 2008? Please
breakdown the split between legal fees associated with the DoJ investigation,
the civil suit, the U.K. investigation and the non-legal fees related to
additional data tapes and the like. What is a reasonable run rate through the
remainder of the year for legal fees and associated costs ($3.7M in 4Q, $1.6M
in 1Q and $5.3M in 2Q pre-tax)?
Finally, could you please provide
some guidance with the trend you foresee in legal expenses going forward? Are you expecting them to ramp up or stay
within the similar $1-6M/ quarter level? Any thoughts would be helpful.
A reasonable run rate, in our mind, would be
zero. Realistically, zero isnt going
to happen anytime soon. That having been
said, the reason for the spike in amounts spent this quarter has to do with the
amount of work that was done in complying with the terms of the DOJS subpoena
and a conscientious decision to get this information compiled sooner as opposed
to later. Wed like to make some kind of
a definitive statement as to when this will be over, but it is largely out of
our hands. While much of what is being
done currently is directly related to the DOJ investigation, it is important to
understand that there are three separate legal proceedings going on here when
you also
5
consider the European Commission Request for
Information (RFI) and the Class Action Civil Lawsuit. While there is a great deal of cross-over
among the three, the majority of this quarters expenses were related to the
DOJ investigation and the vast majority of those expenses were for our
attorneys
all of which did nothing but create sympathy for the views of
Shakespeares comic villain, Dick the Butcher, from Henry VI (Act IV, Part 2).
As for future trends, a trend
would imply predictability, which does not appear to be a salient
characteristic of the legal profession.
Finally, while there isnt a lot that can be stated publicly about the
DOJ investigation, our desire for it to be completed cant be overstated.
11.
Please provide an update on volume and capacity
trends along the U.S. to Asia, Asia to U.S., Asia to Europe and Intra-Asia
trade lanes.
Globally, volumes remain ahead of last year. While up modestly, our volumes are up on the
majority of our lanes. There are some lanes (Asia to U.S. ocean for example),
where the overall market is down slightly year-over-year, but we seem to be
ahead of the market trend. U.S. exports
to Asia are up in both ocean and airfreight as are U.S. exports to Europe. Asia to Europe is up over last year. Intra-Asia is growing, but perhaps not to the
extent noted in the past several years.
12.
Please directionally discuss your Gross Yield
expectations in the second half of 2008 for Air, Ocean and Customs Brokerage.
Without making predictions, wed point out that
qualitatively, yields typically tighten during the last part of any year. Quantitatively, by how much they will tighten
this year, we would not venture to guess.
That said, we again hasten to point out that yield comparisons, in and
of themselves, usually dont tell the entire story. During times of stable pricing, an analysis
of yields can be enlightening. In a time
of changing prices, an analysis solely limited to a yield comparison can
actually obscure what is important. As
surcharges are applied by the carriers and as these surcharges are passed on,
the net revenue per kilo can stay the same (something that is meaningful to us),
despite the yield dropping, as the net revenue, which remains more or less
constant, becomes a smaller percentage of overall gross revenue.
This dynamic holds true on the ocean side as well,
albeit ocean peaks a little earlier than air and ocean can actually start to
expand somewhat during the 4
th
quarter. Being a regulated market, there tends to be a
little more order in the price movements in the ocean market as compared with
the airfreight markets.
Yields on customs brokerage really dont tell us
much, as customs brokerage is a fee-based service. The yields that are shown relate to
components of business that are accessorial in nature and until the SEC
clarified their preference and issued rules to require that they be
reported on a gross basis, they were reported net in our financial
statements. On our internal management
reports, however, our managers still only see the number, as that is the number
that is most meaningful to them and the number they manage to.
13.
How has the large year over year increase in fuel
surcharge revenue during 2
nd
Quarter 2008 impacted your Gross
Yields? Was the impact more pronounced in Air versus Ocean? Excluding fuel
surcharge in both gross and net revenue in both years, would gross yields have
expanded or contracted in the 2
nd
Quarter 2008 relative to 2
nd
Quarter 2007?
In reviewing your question, we would point
out that, although fuel surcharges are added to airfreight revenue, there are
only a passed on reflection of what we record in airfreight consolidation
costs.
As noted in our response to question 12 above, our
overall net revenue per kilo on the airfreight side changed very little between
the two quarters you asked about. We would therefore have to conclude that
higher costs and higher revenues created lower yields
again, something that doesnt
particularly concern us in light of how we got there. The ocean side of our business was also
influenced by fuel increases and, accordingly, our ocean costs rose as well.
6
Finally, had fuel price increases not resulted in
higher surcharges, it looks to us like yields would have been pretty much the
same as last year. Were not sure how
meaningful that observation is, but mathematically it seems to follow sound
logic.
14.
What is the impact to gross yields and EBIT margin
as U.S. imports have weakened and exports strengthened? How does the mix shift
between weaker imports and stronger exports impact how and where revenue is
recognized in your different regional segments? Does this mix shift impact the
margin on your Customs Brokerage business?
Gross revenues and gross costs are always recorded
in the office that processes the ocean or air export shipments, regardless of
where that office is or what the surcharge amount might be. That fact is
axiomatic. The destination office records a fee for providing destination
coordination. The destination fee is a component of the origin offices
costsso we can eliminate these against each other when we consolidate our
numbers each quarter for external financial reporting purposes. As exports weaken, and imports increase, the
shift would reflect less gross revenue volumes, but net revenues would probably
not change that much. If exports are
shrinking because of currency valuation issues, that would imply that there
should be import opportunities in that market that can be, and generally are
being, acquired as customers. The net revenue margin could go down somewhat in
these instances, but the operating margin (operating income divided by net
revenue) should not be all that different. (As noted in our response to
question 3, we focus on operating income, not EBIT, when measuring operational
effectiveness.)
Customs brokerage is not affected except to the
extent that the total amount of consignments falls.
15.
What was the FTE headcount for the 1
st
quarter 2008 and 2
nd
quarter 2008?
1
st
Quarter 2008 v 2007 Expeditors Headcount Figures
|
|
31-Mar-08
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|
31-Mar-07
|
|
Diff
|
|
% Diff
|
|
N. America
|
|
4,474
|
|
4,433
|
|
41
|
|
0.9
|
%
|
Asia
|
|
3,403
|
|
3,095
|
|
308
|
|
10.0
|
%
|
Europe & Africa
|
|
1,967
|
|
1,877
|
|
90
|
|
4.8
|
%
|
Middle East
|
|
1,018
|
|
909
|
|
109
|
|
12.0
|
%
|
S. America
|
|
630
|
|
589
|
|
41
|
|
7.0
|
%
|
Australasia
|
|
217
|
|
213
|
|
4
|
|
1.9
|
%
|
IS
|
|
514
|
|
517
|
|
-3
|
|
5.8
|
%
|
Corporate
|
|
169
|
|
166
|
|
3
|
|
1.8
|
%
|
Total
|
|
12,392
|
|
11,799
|
|
593
|
|
5.3
|
%
|
2
nd
Quarter 2008 v 2007- Expeditors Headcount Figures
|
|
30-Jun-08
|
|
30-Jun-07
|
|
Diff
|
|
% Diff
|
|
N. America
|
|
4,490
|
|
4,391
|
|
99
|
|
1.5
|
%
|
Asia
|
|
3,527
|
|
3,205
|
|
322
|
|
10.0
|
%
|
Europe & Africa
|
|
1,970
|
|
1,879
|
|
91
|
|
4.8
|
%
|
Middle East
|
|
1,045
|
|
930
|
|
115
|
|
12.4
|
%
|
S. America
|
|
643
|
|
608
|
|
35
|
|
5.8
|
%
|
Australasia
|
|
221
|
|
214
|
|
7
|
|
3.3
|
%
|
IS
|
|
539
|
|
541
|
|
-2
|
|
5.7
|
%
|
Corporate
|
|
172
|
|
169
|
|
3
|
|
1.8
|
%
|
Total
|
|
12,607
|
|
11,937
|
|
670
|
|
5.6
|
%
|
16.
Can you provide an update for capex guidance for
C08?
At this stage, we still
think that the $85 million figure reported in our latest 10-Q is as good a
number as any to go with for the time being.
7
17.
Please
provide the year-over-year volume growth trends for airfreight and ocean
freight for February, March, April, May, June, July, and August (if
available).
Here are the
month-over-month volume growth trends for the first 7 months of 2008. August amounts have obviously not been
finalized as of the date of this 8-K.
|
|
Ocean Freight
|
|
Airfreight
|
|
January
|
|
12
|
%
|
12
|
%
|
February
|
|
-2
|
%
|
9
|
%
|
March
|
|
13
|
%
|
4
|
%
|
1
st
Quarter
|
|
8
|
%
|
8
|
%
|
April
|
|
1
|
%
|
10
|
%
|
May
|
|
6
|
%
|
22
|
%
|
June
|
|
3
|
%
|
-5
|
%
|
2
nd
Quarter
|
|
4
|
%
|
3
|
%
|
July
|
|
2
|
%
|
2
|
%
|
18.
For
the past 3 quarters revenue growth in China has slowed, is this region getting
more competitive or is there another reason for the decrease in growth rate?
We think that a combination of
factors, not just any one factor, explains the reason the growth rate in China
may have slowed. We do not believe the
region becoming more competitive is among them:
·
Traffic, both air and ocean ex-China, is down year-over-year for the
market in general. This has more to do with buying patterns, ex-China and the
state of the global economy, than it does with the competitive lay of the
land. Fortunately, we seem to have
bucked the trend.
·
There are a number of things that are going on right now in the global
economy, the convergence of which creates a rather unsettled environment. Fuel costs, bruised consumer confidence
fueled by the subprime mortgage debacle in the United States and its spillover
into Europe, tensions and wars in various countries in the Middle East and
Eastern Europe, all combine to create feelings of insecurity, causing people to
buy less in general, which eventually shows up in how much factories will
produce
and if its not produced it cant be shipped. As orders slow, its only natural that the
country with the most prolific manufacturing growth in the last decade would be
affected first.
·
Widely reported cost increases in Chinas major and entrenched
manufacturing areas is said to have made producing in other areas like India,
Mexico, Indonesia, Thailand or Vietnam more attractive. While this may be true in the short-term,
China has vast, untapped manufacturing potential. We think that a move to underestimate Chinas
potential, or to assume its best manufacturing days are behind it, would be a
serious mistake.
19.
There
was a better than expected ramp in revenue in air freight in the quarter, was
that the case as well in net revenue as well, or was it a factor of higher
prices being passed along to your customers?
Better-than-expected by
whom? We actually expected to have done
a little better in both net revenue and in gross revenue. Our main challenge, DOJ investigation aside,
was to be able to pass through carrier surcharges in some kind of rational
way. We seemed to have accomplished that
fairly well.
8
When we did our internal budgets,
we anticipated slightly more volume, but did not anticipate the increase in
transportation costs to be as high as they were.
20.
Would
you please provide a little more color on freight volume trends and the pricing
environment for both air and ocean freight during the second quarter? Were there any particular end-markets that
showed areas of strength/weakness during the quarter?
Freight volumes, as a
whole, were ahead of last year in both ocean and air (see the response to
question 17 above). Exports from the
U.S. were up. Exports to Europe from the
U.S. and Asia were up. Exports from Asia to North America were down very
slightly for us on the air side, but remained up on the ocean side
in the face
of a market that, on an overall basis, was down from the prior year.
21.
How
would you characterize the relationship between demand and supply currently for
both air and ocean freight? What were
the pricing dynamics in the 2
nd
quarter 2008? What was your ability to pass along fuel
surcharges and any prices increases during the quarter?
There seems to be
manageable capacity in both ocean and air.
The price of fuel and the grounding of fuel-inefficient planes pushed
airfreight prices up during the 2
nd
quarter 2008. The implementation
of the floating bunker fuel concept also raised ocean prices. In the aggregate, the increases in net
revenue, would indicate that we were successful in adequately reflecting price
increases from our carriers in the sale rates offered to customers.
22.
We
understand you do little in airfreight shipments with U.S. based passenger
airlines. However, what has the impact
of less U.S. carrier belly space had on your business, if any?
We move
approximately 75% of our freight on what we refer to as our elite 19 air
carriers, several of which are U.S. passenger air carriers. While we move the majority of our freight
with non-U.S. air carriers, for the sake of clarity, we have to say that we
move more than a little freight on U.S. carriers. In fact, we think that all the U.S. carriers
with whom we work would say that our volumes with them are substantial.
While there are some
capacity management issues, we havent come across anything that we havent been
able to deal with by arranging some credible alternative, be it in the charter
market in non-transpacific routes, or by seeking alternative means of
transport. That said, these are the
kinds of issues we feel comfortable addressing and resolving for our customers. The reduction of U.S. carrier belly space
here had a more profound impact on domestic airfreight markets
where other
alternate means of transportation exist.
23.
If
industry international freight demand begins to slow, how quickly have net
revenue margins historically be able to star to expand?
That depends on the
time of year that this slowing occurs and what the other factors in the market,
like asset capacity, are doing. To date,
the industry has been taking inefficient and soon to be replaced capacity out
of the market at a rate that must be roughly commensurate with the softness
that people are talking about having experienced.
Were there to be an
unanticipated surge in freight volumes, things could, however tighten very
quickly on a number of critical lanes. By the same token, a drop in freight
volumes could result in lower freight rates in the short-term, but is also
likely to result in the parking of more planes.
24.
Please
provide some color on second quarter net revenue growth and operating profit
margin dynamics on each of your three key regions (Far East, U.S., and Europe)
during the 2
nd
Quarter 2008?
If one limits their
analysis of these 2
nd
quarter results to just a review of the main
markets, it would be very easy to overlook what we think is one of the more
significant stories of resiliency and balance that has become the hallmark of
Expeditors. Just as an example, lets
look a little more closely at the growth in our smaller, but established,
markets. The South Pacific (Australia
and New Zealand) was up 55%, the Middle East and other North America (Mexico
and Canada) were up 28% and 11%, respectively.
Latin America was up nearly 51%.
Operating ratios
(operating income divided by net revenue) were not significantly changed in
North America and in Asia from those noted in the 2
nd
quarter 2007. Operating ratios in Europe in the
9
2
nd
quarter 2008
increased 143 basis points from those recorded in the same period in 2007,
primarily due to productivity initiatives that allowed more new business to be
added without a commensurate increase in staffing costs. The U.S. has continued the trend of strong
export growth it has enjoyed in the past while China, being a big part of the
Asian engine, is actually down modestly on a year-over-year basis in airfreight
export tonnage. The business growth in
other Asian locations (in our business units) compensated for this minor slow
down.
Operating margins in
the South Pacific, Latin America and the Middle East showed significant basis
point increases of 428, 360 and 125, respectively. These increases were also driven by
efficiency objectives that allowed more business to be absorbed across fewer
people, on a unitary basis, than were employed in the 2
nd
quarter 2007.
A cynic might say, So
what! These entities together only represent approximately 15% of your net
revenue and operating income. Those of
us who have been around Expeditors and this industry for a while, see this kind
of quarter-over-quarter growth in these markets as a significant trend. It provided an illustrative example of how
these other geographic locations (that dont get as much of the attention
because of their size related to the U.S., Europe and Asia) can make a real
contribution. On closer scrutiny, one
will note that these other geographical units, in the aggregate, contributed
slightly more than did Europeand Europe had a good 2
nd
quarter
2008. They are important to our network, and they are important to our growth
potential. When they are all pulling the
same direction, as they did this quarter, putting up year-over-year
profitability gains such as these sends a strong motivational message to the
entire Company and is not an insignificant determinant in how well we do.
25.
Could
you please indicate if you have seen a shift from import activity into the U.S.
to export activity? If so, how has this
dynamic affected your business? Are you
as strong on U.S. export freight lanes?
We have seen a
strengthening of exports from the U.S., as one would expect to occur when a
currency weakens relative to other world currencies as much as the U.S. dollar
has weakened over the last several years.
Since we are a full-service logistics Company, we have to have pitch
and catch capabilities in all our offices
one offices export is always another
offices import
two sides of the same two-way mirror as it were. Accordingly, the increase in U.S. exports has
not dynamically affected our business
other than it has resulted in our
processing more export shipments. Since
we already have very robust air export capabilities (see also the response to
question 5), the increase in U.S. exports has been a welcome development to our
air export and air gateway departments.
26.
Is
it still fair to say roughly 60% of your business is on the Asia to U.S.
freight lane? What is the approximate mix between import and export to the U.S.
for Expeditors?
Approximately 59% is
about right for our ocean product, with 95% of that being outbound from Asia
and inbound to North America. Its only
about 30% for airfreight, with 79% of that being outbound from Asia to North
America. This mix between imports and
exports, on a per kilo moved basis, into the U.S. looks to be approximately 4
(imports): 1 (export) for airfreight and probably is 5 (imports): 1 (exports),
or maybe even higher, for ocean.
27.
Could
you please describe what opportunities and growth Expeditors is experiencing
on the Asia to Europe freight lane and Intra-Asia?
The Asia to Europe
freight lane has continued to be very strong throughout this quarter,
particularly on a relative scale to what has happened to that market in
general. Intra-Asia, while not as strong
growth wise as we experienced in 2007, still remains strong for us.
10
28.
We
previously understood DOJ related legal and compliance costs should moderate
the second half of 2008, is this still the trend?
Hope springs eternal!
29.
What,
if any, has the impact of more airline carriers paying fines related to the DOJ
and EU fuel surcharge investigations had in your dealings with the
investigation?
We dont believe that
there has been any direct impact to us from these settlements. There obviously have been a lot of indirect
effects
were actively co-operating with the DOJ to comply with the Federal
Grand Jury subpoena. We can tell you
that the subpoena is very comprehensive and requires a tremendous amount of
information gathering, which is both expensive and time-consuming. At the end
of the day, what else can we do but comply
and were doing our very best to
comply, as our legal expenditures for 2
nd
quarter 2008 should
attest.
30.
Please help me understand more about the Far East
segment. It is your largest segment by gross revenues but slowest growth in 2
nd
Quarter 2008 (just 4% net revenue growth, 2% profit growth). Does this reflect
the weakness of demand from the Asian-North America trade lane, or weakness
intra-Asia, or even Asia-Europe, or all of the above? Any thoughts you have on
prospects for this segment would be appreciated, as it relates to your exposure
to Asian demand, or whether OECD import demand is more relevant.
One thing that people fail to
comprehend as they work on understanding Expeditors (and probably non-asset
based logistics providers in general)
business model
is just how truly symbiotic and dependent we are among our regions and our
other offices. It is very difficult, in
fact it may be impossible, to mathematically excise a geographic segment of
Expeditors, subject that geographic segment to unilateral and one-dimensional
analysis and actually draw any cogent conclusions as to what a true stand
alone scenario would look like. When you say weakness, however, you must put
that in some sort of context. Yes, wed
like more business
everyone would. The fact that things are not growing as fast
as the prior year does not, in and of itself, constitute weakness. There is still a tremendous amount of
business out there. While we seemed to
buck the trends generally speaking, Asia
to North America probably has the lowest growth rate (in fact it was negative
growth for the quarter), Inter-Asia is probably next from a slower growth
scenario, while Asia-Europe appears to be the strongest growth rate of the
three.
31.
Why is the segments net revenue margin so low
(14%), and the operating margin so high relative to all other geographic
regions? Is that operating margin sustainable (I get a45% operating margin
using profit/net revenue, down 1% year over year)?
The comparative differences in the net revenue mix
is a function of our product mix. Asia
has a much more export focus than does North America. Because of the way that revenue is booked in
this business (all costs and all revenues recorded at origin) and because of
the way profits are split between origin and destination offices (a fee
recorded at destination as commission or profit share revenue that is recorded
at origin as a component of origin consolidation costs), net revenue margins
can vary widely. These variations are
based significantly on the offices product focus. For instance, since Asia, generally, is more
export than import oriented, it will have a rather low net revenue
margin
because it has revenues and it has costs that need to be deducted to
derived net revenue. In North America, for
instance, where they are much more import oriented, their profits from inbound
airfreight is only recorded as a fee-based component of gross revenue
but there
is no offsetting costs against it
its just a fee
which means an net revenue
margin of 100% on this business. So
where you have a larger percentage of business that is fee-based, you will have
a higher operating margin.
As to the second part of your question, operating
margins, as opposed to net revenue margins discussed in the previous paragraph,
are a function not of product mix, but of the relative ratio of overhead costs
to deliver the services to the net revenue derived from the services. Asia typically has much lower labor costs
a
fact that is reflected in their 45% operating margin compared with the U.S.
operating margin of 22%, which, as you know, has much higher operating
costs. Were very happy with both of
these ratios in these specific markets.
If you look at our history, youll note that as a Company, our operating
margins are among the highest in the industry and, except for this
11
quarter, have actually expanded quite strongly
over the past 10 years. Not to engage
too much in what we call the IF Game(1) but IF you were to have added
back the effect of the $5.3 million in legal fees to our reported 2
nd
quarter 2008 statement of earnings, we would have shown an increased operating
margin then as well. Since we are so
interconnected and symbiotic, the fact that operating margins might flop around
1% or so in the various geographical reporting areas doesnt concern us if the
Company is advancing or maintaining its operating margin in its entirety.
32.
Can you give some more insight into the $5.3m in
legal expenses incurred in the quarter?
I understand that it is related to the ongoing DOJ inquiry, but it seems
to be a fairly large increase from last quarter.
We think
we have explained this enough and refer you to our response in question
10. Yes it was large.
33.
What is your outlook on capacity additions for both
air and ocean over the next 2-3 years?
Can you also discuss your volume trends through 2
nd
Quarter
2008 and so far in July and August?
We think that weve addressed the
historical volume trend question readily enough. The capacity trends over the next two or
three years are really anyones guess right now. There is a tremendous amount of new hardware
scheduled to come on line over the next 2-3 years
both airplanes and
ships. This has been pretty well
documented in the trade press and even in the some of what has come to be
referred to a the main stream media, if such a thing still exists.
The great unknown is really what
air carriers and steamship lines will do with the existing capacity. That old temptation to convert old passenger
aircraft to dedicated freighters is not an option. Before fuel costs shot into the stratosphere
and the audit crunch descended upon us, a couple unemployed freight forwarders
or air cargo salesman with a few business cards from a couple myopic bankers
(or a tame leasing company) assisted by a bookkeeper masquerading as a
accountant could pull that trick off with regularity. Today,
some of these older planes are so fuel inefficient that at these fuel
price levels and rates in the markets, they cant even cover variable operating
costs
i.e. the more you fly, the more you lose.
To an extent, the same kind of issues effect ocean freight capacity as
newer, larger, faster and more fuel efficient ships replace the old ships.
34.
We have heard that air carriers increased base rates during 2007s
fourth quarter in order to offset rising fuel costs, which is a departure from
simply adjusting the fuel surcharges.
Has this trend continued? Apparently it is much easier for forwarders to
pass-on fuel surcharges than to pass on an increase in the base rate. Is this
correct and if so is this an issue of timing or have the carriers and the
shippers pushed back on forwarders simultaneously? Any color on pricing in
particular Trans-Pacific Air would be helpful.
The short
answer is that we did not experience what you apparently heard had occurred
during the 4
th
quarter 2007
and for the 1
st
quarter 2008. Towards the end of the 2
nd
quarter
2008, we did see some upward movement of base rates and surcharges by several
carriers
not
involved
with the main transpacific Asia-Europe
routes. What we did experience though, and what we typically experience during
the peak airfreight season (generally September through December [that
would be our 4
th
quarter], but it can and has started earlier than October and
extended beyond December well into January, as it did this year), was what
is called a PSAF (the acronym for
P
eak
S
eason
A
djustment
F
actor) increase. This was not
imposed, as you suggest, to offset rising fuel costs. Rather, it was done, for the reasons that it
is always done, and that is in recognition of the fact that peak seasons create
situations where more freight is moving by air than there is space available on
the airlines to move it. In essence, it
becomes an air carriers sellers market.
It is important to
(1) In polite parlance one version of the If Game goes If the dog hadnt stopped at
the fire hydrant, he would have caught the rabbit.
12
understand
that the PSAF is not a surcharge that is added on top of the existing
airfreight rate, it is a percentage by which rates are temporarily
increased. By adding a PSAF to the
(ostensibly) non-peak airfreight rates, carriers maximize their profit
potential and manage their space allocations by inviting Adam Smiths invisible
hand to provide a rationing mechanism for airfreight shippers. It also ostensibly provides transparency to
how much the increase is so that when the peak season is over, one can see it
return to whatever pre-peak season rate was in place. The PSAF factor can differ from carrier to
carrier, both in magnitude and also as to when it starts and when it stops. Nothing says that there always will be a PSAF
every year. However, particularly
recently, it is more usual than unusual to have a PSAF imposed at some point
during the last several months of any calendar year.
As for
the rest of your question, it is our observation that in your quest for
content, your question lacks a certain amount of congruence. You begin asking about carrier activity
then make a statement about surcharges apparently being easier for forwarders
to pass-on as compared to increases in base rates. This left us wondering if you understood the
difference between carriers and forwarders.
Not being a carrier, we can only speculate as to why carriers, several
years ago, elected to initiate price increases via a fuel surcharge mechanism
rather than a series of general rate increases. A surcharge implies that if and when fuel
costs abate, in whole or in part, some mechanism already exists for the fuel
surcharge to be adjusted downward. It
is the carriers, however, not the forwarders who elected to use this
methodology. We buy our space from
carriers (and pay that surcharge by the way) and accordingly we need to recover
those costs from our customersor it will erode or own margins. Given the magnitude of the fuel surcharge
increases, it would be economic suicide for us to absorb them. Because the air carriers elected to utilize a
surcharge mechanism, market-place expectations that rate increases or decreases
can occur only in reaction to increases or decreases in fuel cost surcharges
became a fact of life, almost to the exclusion of any other factors. Customers became increasingly suspicious of
fuel surcharges, of any kind, and particularly in the case of fuel surcharges,
have demanded some kind of objective proof that fuel charge increases were in
fact tied to some kind of carrier announced surcharge philosophy or program or
index. The reality of those expectations
makes it difficult to ignore the role those surcharge mechanisms play in
overall pricing negotiations with customers.
The carriers didnt consult with us concerning our preferences. They were primarily interested in making sure
that they could recover the costs of increased fuel costs and that increases
enacted charged to their customers (and that would be us by the way) and not be
eroded unless fuel prices fell in a commensurate amount. Had there been some kind of a public forum to
debate the matter, (and wed been allowed to participate) we would have stated
our opposition to this kind of a mechanism.
We would have preferred the carriers to have simply raised their rates,
to whatever level the market would bear. It might well have been a harder sell,
but it is our belief much of what the carriers have been through the last two
years came about as a result of having chosen to use an index-based
fuel-surcharge mechanism.
To us,
simply raising the rates seems to be a much more logical approach than does the
tip-toe-through-the-tulips surcharge strategy. No one likes higher prices. Trying to finesse people into a way to feel
better about something they dont want to pay and/or wont like, rarely
worksin theory or in practice. Focusing
on the reality of the alternative is ultimately the only way to gain
acceptance. Take a trip to the dentist
for instance
at its very best, even if you receive a clean bill of oral health,
it still results in an hour spent lying on your back with a bright light being
shined in your eyes. As if this werent
difficult enough, you have to endure having a series of people shove
instruments and fingers into your mouth. To further exacerbate the discomfort,
they typically torment you by asking questions to which you have no ability to
answer, between gags
even if you were so inclined to do so---and again, thats
the good part, if you have no cavities.
If you are unfortunate enough to have the dentist discover a cavity, the
entire experience just goes downhill from there. Yet, we, or at least most of us, willingly
subject ourselves to this ritual on some kind of a timely basis (usually every
6 months if you take your dentists advice).
We do this because the alternative image of spending the rest of our
lives sucking some kind of a grain-based gruel through a
13
straw
because we have no teeth with which to chew anything solid is a vivid and
understandable-enough reality, that well gladly sign up for a semi-annual oral
inquisition. We suspect that no one,
however, would completely stop going to the dentist if the cost of a dental
appointments rose sharply. They might
go less often, but bringing this back to a fuel perspective, a future with no
air carriers would be rather bleak. From
an ability to make money moving airfreight, carriers, particularly those
providing the critical all-cargo freighter service, must be able to raise their
rates to cover critical operating costs, like fuel, in order to make
profits. It shouldnt take a Nobel
laureate in economics to figure out that without profits, they cannot be
expected to continue to provide the service.
The cost
of fuel is a serious issue.
Historically, fuel has been 15% of carrier operating costs. Today, it is
estimated to be substantially over 40%.
The carriers all have a very strong motivation to increase their charges
and increase their profitability
like wanting to avoid bankruptcy and stay in
business. As we write this, despite
being entreated by some customers to do so, were not even sure how wed push
back on the carriers on this surcharge issue.
We suspect asking the carriers, who are already struggling in most
cases, to adjust their surcharges downward, or to not charge their fuel
surcharge altogether, would meet with very stiff resistance for all the reasons
noted. What voluntary acquiescence is to
timely and periodic teeth cleaning is to the sustainability of a mouth full of
teeth into your old age, paying market based rate for fuel is to ensure future
air carrier capacity. If push back is
occurring from the shippers, and it certainly has to some degree, it is a
predictable reaction to higher costs in an environment where lowering costs
every year has become the expectation
and in a lot of a cases, a prerequisite
to survival. However, even if you buy
into the fact that you need to get your teeth cleaned on a timely basis, there
may be justifiable reasons in your life that would encourage you to skip a
treatment now and then
as in when the price for the cleaning continues to
escalate to the point that your dental plan no longer covers the costs of the
cleaning.
If the rates you pay for
airfreight services arent sufficiently valued by the market to allow carriers
to operate at a profit, it doesnt take a very long time before there are no
carriers in the market place to carry airfreight. To create an even
sharper focus on the urgency of air carriers to cover runaway fuel costs with
these higher surcharges (which were much higher than most anyone had dared to
predict), the IATA said on the 25
th
of August that, according to
their predictions, the airline industry could generate aggregate losses in
excess of $6 billion for the year 2008. This contrasts with the optimism
with which this year began when air carriers actually anticipated a second
consecutive profitable year of operations. Coming on the heels of 6
consecutive years (2001-2006) of losses, this recent turn of fortunes has
understandably caused a great deal of consternation.
But, at
some point in time, you must accept the reality that, regardless of how
expensive or how unpleasant routine teeth cleaning is, it will always be less
expensive then reconstructive dental procedures
or the alternative cost of a
life spent without teeth. The same holds
true for paying for dedicated airfreight services. In short, this has all the potential to be an
economic knife-fight among the three interested parties (air carriers, shippers
and forwarders). The part that makes it
a potentially nasty knife fight is that all the parties feel that they are
fighting for their own well-being, if not their survival.
As for
pricing on the transpacific, basic airfreight sell rates are still very
comparable (within 10 cents in a lot of cases) of what they were running nearly
10 years ago. Fuel surcharges, on the
other hand, which didnt exist 10 years ago, are running at nearly $1.50 per
kilo from some of the larger Asian origins.
Perhaps a quick and dirty analysis might give us some additional
perspective. If one were to go back 10
years, oil was selling for $15 per barrel, compared with $114 per barrel
currently (an increase of 660%)
and jet fuel was selling for $.47 per gallon,
as compared with approximately $3.20 per gallon this week (an increase of
580%). When one includes (properly we
would add) the $1.50 per kilo fuel surcharge on top of the current base
airfreight sell rates on the transpacific routes, airfreight rates per kilo
actually paid by our customers have risen only about 70% during this 10-year
period. Based on those figures, we think
it is very difficult for someone to make the argument that increased airfreight
rates, even with the surcharges affixed, are not reflective of the reality of
what is going on with the increases in prices of oil and oil-based derivative
products in the energy markets. In fact,
while
no one seems to be comforted by this piece of information, with respect to the
relative price of fuel over the last 10 years, the increase in airfreight rates
during that time, even with surcharges in place, is only a fraction of what the
increase in jet fuel or oil has been and the commensurate increases in carrier
operating costs.
Oil rates
have fallen over the last several weeks.
As the prices fall, these lower costs are rippling through the economy
and eventually will result in lower rates
but how low is still not
determinable
and smarter minds than ours spend a lot of time worrying about
this
and they get it wrong more often than not.
In final
summation, the one thing we should all be able to agree upon is that neither
the carriers, nor the shippers, nor the forwarders can set todays global price
for oil. The global market place does
that for us and how we engage the realities of the market place is the primary
determinate of our
14
destiny. Too often the focus on the cost of fuel is
relegated to passionate, albeit sterile, debates focused on who should pay for
it, as opposed to the real substantial dialogues we should be having about what
we can realistically do about operating in an environment of rising energy
costs.
35.
I am a current shareholder. More
importantly, my mother is a current shareholder based upon my recommendation. I
recognized that you, for good reasons, may not think much of analysts but I
have several questions based on the Qualitative Risk Assessment I happened to
read in the S&P report on you I accessed through my TD Ameritrade account.
Our risk assessment reflects
that EXPD operates in a highly cyclical industry and is exposed to currency and
global economic risk. We see its communication style as an additional risk.
However, we think EXPD has a diversified stream of air, ocean, and customs
business, and we also believe the balance sheet is strong, with no debt and a
relatively large amount of cash. As a result they conclude that Expeditors is
a medium risk even though it is rated at A+ under the S&P quality ranking.
We feel the need to clarify your
point that we may not think much of analysts.
There are a number of analysts of whom we think quite highly. The issues upon which we have taken public
exception with an analyst or two have been limited to those instances where we
felt broad sweeping generalizations or outright misstatements of facts (either
intentional or unintentional) were made in a manner that were, in our opinion,
potentially misleading to our shareholders, to our employees and/or to our
customers. In those instances,
regardless of perceived motivations behind the generalizations or
misstatements, we have reserved the right to set the record straight
and in
some of these instances, if we see no reason to wear kid gloves, we may have
resorted to some verbal bare knuckles.
When it comes to someone else trying to define who we are, we view
investor relations responsibly, as a hockey match
sometimes at the end of the
day, the gloves come off
you spend some time in the penalty box, and then back
on the ice...and hopefully after the match everyone realizes that we all have a
job to do and these things shouldnt be taken personally. That is one reason we do not publish names of
those who submit questions.
1) If your industry is so
cyclical why do your earnings keep growing rather than going up and down?
There are two ways we can answer
this question. The first is to assume that the author who wrote this S&P
Qualitative Risk Assessment (QRA)
report (weve not seen it
by the way) didnt entirely know what they were talking about. The second is to assume that whoever wrote
the S&P report only thought they knew what they were talking about, but
were wrong. We grant you, that is a
subtle distinction on the face of it, but answering the question from these two
different frames of reference gives the reader a little more insight as to how
we see the issue of cyclicality.
Let us first address your
question from the vantage point that that the author of the
QRA
report only thought they knew what they were talking
about. From our perspective, our
business is no more cyclical than is the general economy, in fact, we think
some elements may actually be less so.
Being labeled as cyclical when you are not, is somewhat like being
misdiagnosed as having been afflicted, albeit erroneously, with some kind of a
loath social disease. The unfortunate
part of this kind of a misdiagnosis is that the speculation and curiosity over
how you could have been so afflicted far overshadows, and will be more damaging
than will the reality of, any physical effects that might occur. From Econ 101 we learned (or should have
learned) that the general economy does not grow linearly, but rather through a
series of expansions and contractions.
Since on a grand scale, the entire economy is cyclical
it would only
stand to reason that those enterprises which compete in that economy are also
somewhat affected by these cycles.
So
cyclicality is probably unavoidable
and what should properly be
assessed is just how sensitive to cycles a particular entity might be. When we assess our own cyclicality in light
of the experiences
15
weve had here during the last 30
years, we would note that growth has been stronger when the economy has been
stronger, but growth has generally only been in the sub-10% range when someone
decided to have a war somewhere on the planet or some kind of external
influence affected us. In fact, even
despite those economic downturns, we seem to have done better than the economy
in general
so, we renounce the cyclical moniker, even when bestowed by some
ghost writer of some
QRA
literature
for the S&P 500.
We would also throw in here
that, as we have expanded our global network over that past, nearly 30 years,
we have increased our exposure to the global economy. We believe that
this increased global exposure somewhat reduces the cyclicality to which we may
have been exposed by creating what, for lack of a better term, wed label a
portfolio effect. For example, when the local currency weakens in a
market that we have traditionally been more focused on providing import
services, export opportunities typically emerge that will at least partially
compensate for any slowing of import business. Having offices in major
and minor markets globally allows us to insulate the Company, to some degree,
from the economic concerns of any one country.
Let us now address your question
from the vantage point that the author of this report didnt entirely know what
they were talking about. The distinction
between these two answers, being that
,
in the response above, they were
mistaken in their general assumption that we are cyclical. It might
well be, however, that since were answering this part of the
question from a vantage point that whoever
wrote this report didnt actually know what they were talking about, you
could come to the conclusion that they merely misapplied some terminology (i.e.
cyclical versus seasonal). In other words, what has been stated as cyclical
might in actuality have intended to be written as seasonal. We would not quibble with being described as
seasonal
we are
again, as is the economy in general.
2) What is wrong with your
communication style? Do you think they are just referring to the way you answer
questions like mine rather than speaking directly to analysts? Or is it
something completely different like using Microsoft Outlook for your
intra-office e-mail?
First off, we dont use Microsoft
Outlook as our intra-office (or extra-office for that matter) e-mail solution. For better or for worse, were a Lotus Notes
shop. While again we have no way of
knowing precisely what the
Shakespeare of S&P
meant when he or she penned the additional risk comment relating to our
communication style, we suspect they were referring to our use of this 8-K
forum to respond to investor queries. We
would speculate that on the planet of S&P preferred prose, the ability to
blandly say nothing in an appropriately sterile telephonic conference call is
perceived as a lower-risk form of communication than is our style of
communicating via an 8-K.
Not surprisingly, we
disagree. If our communication style is
considered by some S&P analysts to be high-risk for being as frank and
direct as possible in responding to shareholder queries, then we have to wonder
what the ideal standard for shareholder communications is supposed to be. It may be perceived as high-risk for the
company, but it would seem to us to be lower-risk for the shareholders to
actually be able to ask a question they are concerned about and receive an
answer that addresses their question, not blandly satisfies some corporate
titans penchant for safety.
3) Finally, a non-S&P related
question: Has anything interesting and entertaining happened recently that
would make a good story for us? If so, please tell us the story.
This
business is always interesting, but were not sure that we see what goes on as
entertaining, per se. Given that one of
our core values is sense of humor there is no end of things that make us smile. That said, entertainment is not what we
do. As they say, truth is stranger than
fiction. We merely attempt to tell the
truth about situations as we experience them...and if that is entertaining to
the beholder, then so be it. The
difference between a good story and a personal catastrophe is often a matter
of perspective, and in the final analysis, there is never anything funny about
a customer not getting what they need, when they need it, regardless of the
circumstances.
36.
Could you please tell me the year that KPMG was first engaged as your
outside auditors?
KPMG and KPMGs predecessor firm
(Peat Marwick Mitchell & Co.) began serving as our independent
accountants in 1982
we thinkit is possible that they provided some
consultation
16
before that, but since not a lot
was going on before 1981, there arent a lot of records around to support
that. They were definitely our
independent auditors for our IPO in September 1984 and have been with us
ever since. Somewhere in the late 1980s,
as part of the global amalgamation of international accounting firms, Peat
Marwick Mitchell & Co. tied up with another firm called Klynveld &
Goerdler and the resulting firm became known as KPMG
and has been KPMG ever
since.
37.
Has the
high price of jet and bunker fuel caused some of your airfreight and ocean
freight suppliers to cancel or alter routes to conserve fuel? If so, has that significantly altered the
capacity landscape or is there still enough capacity in the market that there
hasnt been a noticeable impact?
Carriers have always managed to their
capacity. They seem to be doing so right
now, and doing it very skillfully.
Currently, there seems to be enough capacity in the market, but we dont
think anyone would say that there is an overabundance of that capacity. Much of what is being squeezed out is the
idle capacity
old planes and routes with inconsistent traffic
and that promotes
efficiency
even if reducing selection.
The fact of the matter that people need to understand is that airlines
are a business, and businesses need to turn a profit
without profits, they cant
exist. While it seems rather simplistic
to say, selling customers rates for less than your costs doesnt create
profits
it creates losses
and when you are generating losses, you have to
accept the fact that somehow either the market value of your service is not
profitable and you need to get out of the business altogether
or you have to
raise your prices.
38.
At $3.00+ gallon jet fuel, its our understanding
that many of the wide-body freighter planes (the747-200F, for example) are
operating at a loss. Have you seen any
capacity leave the market?
Carriers are being very judicious in how they commit their assets in
the current chaos of the logistics market. Some carriers have been very public in
announcing that they will park and/or re-deploy assets in response to higher
fuel prices and/or shifting levels of demand.
If one thinks about it, the fact that air carriers would try to maximize
overall operating income by trying to optimize asset utilization shouldnt be
surprising. Airlines arent a charity
and it is somewhat myopic to think that they would continue to provide
uninterrupted services to a variety of markets while generating operating
losses.
The increase in fuel costs has placed many carriers in a position where
they need to evaluate, very carefully, whether or not the potential for profit
will mitigate their operating losses or merely increase them. At some point, when variable costs exceed
potential revenue, it is more prudent to
park the plane and absorb the fixed financing and depreciation costs as a known
loss than it is run the risk of increasing the operating losses by operating
aircraft in an environment of rising costs and declining, or at least stagnant,
revenues. It doesnt take real
sophisticated econometric forecasts to project what happens when the music
stops and youre two chairs short of having places for everyone to sit. Airlines arent going to play in a game of
musical chairs where the odds of finding a place to sit are nil.
39.
I first purchased Expeditors shares in July of
2005. I continue to purchase shares in
Expeditors on a regular basis. However,
I was unable to attend the companys annual meeting on May 7. Could you please provide a summary of: the
commentary made, the questions asked, and the answers given at the meeting?
Sure. Basically the meeting was called to order by
Peter Rose, our Chairman and Chief Executive Officer. After some introductions
of newly promoted employees and the Board of Directors, the business of the
meeting was transacted. Results of the
shareholder votes on the 2008 Proxy proposals can be found in Item 4.
Submission of Matters to a Vote of Security Holders of our Form 10-Q for
the 2
nd
quarter of 2008 which can be accessed on the Securities and
Exchange Commission (SEC) site at www.sec.gov.
17
Once the formal business of
the meeting was over, a video produced by our Atlanta branch, who won the 2008
Global Branch of the Year Award, was shown.
We should explain why this was noteworthy. Every year, a Branch of the Year
competition is conducted among the branches at Expeditors. Senior management of the Company nominate
three branches from each of our major regions (Asia, Americas, EMAIR, and South
Pacific) according to a set of fairly rigid criteria
all intended to reinforce
branch progress against Expeditors mission statement, which is:
To set
the standard for excellence in global logistics through total commitment to
quality in people and customer service, with superior financial results.
After the video, Mr. Rose
took questions from those in attendance.
In contrast to prior years, there werent too many questions
none of
which were new
basically questions about office openings (30-50 over the next
5 years) and what shareholders can expect from for Expeditors in the future (more
of the same).
We know
that this may not sound very glamorous or exciting, but being consistently
boring or boringly consistent has always been our goal.
40.
This has been explained in an 8-k in years past,
but would you please explain again the dynamic of how revenue and net revenue
gets booked/allocated to a particular branch/region?
Rather than rehash this here, why dont
you refer to response #7 on our 8-K dated, 04/16/01. It can be found on our public disclosures
archives at www.investor.expeditors.com (click on SEC Filings).
41.
In the 1
st
Quarter 2008 press release you mentioned
$1.6M in legal costs related to the DOJ investigation and class action law
suit. Does this amount represent a reasonable quarterly run rate through the
remainder of the year? Were the
non-legal fees you had described previously included in the $1.6M (e.g. data
tapes, DOJ compliance-related consultancy fees, etc.)? Is there any update on
the investigation? Are these costs
likely to diminish after the initial stages of the investigation have passed?
Please
refer to our response to question 10, our optimistic response to question 28
and our short response to question 32, which all address this question.
42.
Rent and Occupancy Cost on an absolute basis rose
nearly $2M from 4
th
quarter 2007 to 1
st
quarter 2008,
what is this attributable to?
This is a combination of having leases with
escalation clauses in them,
having more offices with rent and increases in property taxes. You
will note, however, that both the 1
st
quarter and the 2
nd
quarter of 2008 amounts are very
comparable.
43.
One of your international forwarding peers has
noted their expectation for Air and ocean freight yield growth during 2008,
does this conform with your expectations?
Sounds like a prediction
we dont typically do
those
and we definitely dont do them for a year in advance. If our peers want to predict yield growth in
an environment
like we are now working in, then more power to them. Theyll either be wrong or right.
44.
On a regional basis, gross yields in the Far East
and Australia/New Zealand declined notably on a year over year basis despite
the fairly easy comparisons, what was this attributable to?
Were not precisely sure what youre asking. If by gross yields you mean net revenue
divided by gross revenue, then were not sure their decisions concern us at this
moment. The Far East is explainable by
the increased commission amounts paid to destination offices on the Far Easts gross
revenue, which includes higher surcharges as a component of that gross
revenue. With Australia/New Zealand, we
dont think the yield variance matters in light of the favorable growth in
operating income as a percentage of net revenue.
18
45.
Could you provide the reason for the slowing EBIT
growth in the Asia region?
As for slowing EBIT (again, as noted in our responses to questions 3
and 14, we use operating income as opposed to EBIT to measure operational
efficiency) growth in Asia, this is primarily a function of two things, last
years victory becoming this years hurdle
and, on the airfreight side, the way
we share commissions with the destination offices. Air and ocean tonnage ex-China is down in the
general market. And while weve bucked
the trends, growth isnt as strong as prior years.
46.
Your cash balance jumped materially higher in the
2008 1
st
Quarter. Was this a
function of timing or is there another explanation?
And that was a bad thing? The 1
st
quarter typically has very
strong cash flow, as seasonally, the volumes of business drop off from what is
the highest levels of activity, into a period of the lowest. The result is that much more cash is
collected than is paid out, and when that happens, the money piles up. We kind of like the fact that it does
we saw
nothing historically aberrational at all in the 1
st
quarter
numbers. We did think it odd we werent
asked about the 2
nd
quarter Statement of Cash Flows. Because of changes in the rules surrounding
the calculation of and payment of Federal estimated tax payments, we will be
making those payments throughout the year, more ratably than we had under the rules that
were previously in place. That resulted
in our paying out nearly $24 million more in estimated tax payments the 2
nd
quarter of 2008 as compared with the same period in 2007.
47.
Effective September 1st, Air France and KLM Cargo will begin using
a mileage-based fuel surcharge mechanism. How does a mileage-based rather than
weight-based surcharge from your air carriers change how you pass through
surcharges to customers? Do you anticipate charging your clients in those cases
per mile?
The mechanics of the way this surcharge will be
applied will have the surcharge factored on a per mile basis. It is our understanding that there will be a
standard surcharge that will be discounted based on the length of the
flight. That surcharge, after having
been appropriately adjusted for the length of the flight, will still be applied
on a per kilo basis. Given that we are
using KLM-Air France in the long-haul market, this change is not expected to
impact our buy-rates significantly, if at all.
Accordingly, Expeditors will not be modifying how we bill customers at
this point in time except in those few instances where we have sold dedicated
KLM-Air France services. In those
instances, we will bill the surcharges in the same manner that they are charged
should the customer agree to implement this method.
48.
We have noticed that anytime any other company in
your sector announces poor results, or issues a statement concerning problems,
youre stock immediately takes a commensurate
and sometimes more than
commensurate beating than the company making the announcement
without any
information or press releases having been released by Expeditors. Would you
please share managements perspective on this phenomenon or should I not be
noticing what I think Im noticing?
Thank you for asking this question.
We too have noticed the same trend, or at least we think we have, but
dont really like to talk about it, as it could be perceived as whining. But since you asked, let us start with the
premise that the stock market is an enigma to most people, particularly in the
short-term, and we are no exception.
Some of the movements and gyrations that occur in our stock price from
time to time are lost on us as well.
There are several possible theories (and we emphasize the word
theories) for our stock reacting negatively when competitors, or companies that
some analysts perceive as being competitors report information that is
perceived negatively by the market (i.e. what we call throwing up on their
shares). We are highly institutionally
held, which is typically a good thing in our mind, but can be a bad thing when
we are a small holding of a big institution and that institution doesnt totally
understand what they own. They may, in
these instances, rely on short cuts to keep abreast of developments in the
market. One way that this plays out is
that some investors will have us categorized as part of
19
a particular index, either one to which we are generally assigned (as
the Dow Jones Transportation Index) or to one they make up themselves. Typically these indices will include our
peers or other industries (like airlines) upon whom we are dependent to provide
our service. When there is bad news by
one company in that sector, if investors dont know what they own, they may decide
to just sell off portions of their index to reduce their exposure to certain
sectors. Another theory could be that weve
had a pretty good history of earnings and increase in stock value and some
people have a lot of unrealized profits built up in our stock
in many cases above
and beyond the profits theyve made investing in some of our peers. As they get nervous about news in the economy
and problems in particular sectors are bantered about, they decide to cover
their bets and take some profits. An
additional factor may be attributed to this being an election year. One
candidate has publicly stated that he may increase capital gains taxes up to
28%, almost doubling the current rate.
Since there is a disproportionate amount of unrealized profits in our
stock floating around out there held by our shareholders as compared with a lot
of other stocks, it is not a far-fetched theory that some investors have
decided to just take their money, or at least part of it, off the table for the
time being.
This isnt the first time weve had our stock treated this way. If you
go back to 1997, when the Asian Tiger economies collapsed, anyone who could
spell ASIA was punished
and we were as well.
We just kept doing what we do best
good customer service, employee
development and biding our time. After a
while, despite our having told people in the investment community from the get
go that we werent exposed to the devaluation of the currencies in these
countries, Wall Street had an epiphany and decided, surprise surprise, that
maybe we werent exposed after all and our stock advanced over several quarters
based on strong earnings.
However, after having written all that, we still have to go back to how
we started this response
which is the stock market is an enigma to most people. Most people who get in trouble, get in
trouble trying to explain what they cant; and we certainly dont want to be
included as part of that group. Hence
anything we said above are our private musings and we have no intention of
providing anyone with investment advice.
What we do believe, however, is that, in the long run, good companies
are
good investments.
49.
Given a greater cash balance than past cycles and a
recent ten year low in the stocks valuation, would you consider a more
aggressive share repurchase than recent years?
Yes.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
August 27, 2008
|
/s/ PETER J. ROSE
|
|
Peter J. Rose, Chairman and Chief Executive Officer
|
|
|
|
|
August 27, 2008
|
/s/ R. JORDAN GATES
|
|
R. Jordan Gates, President and Chief Operating Officer
|
|
(Principal Financial and Accounting Officer)
|
21
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