羅賓遜全球物流 (CHRW) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CH Robinson fourth quarter 2012 conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today, Tuesday, February 5, 2013. I would like to turn the conference over to Tim Gagnon, Director of Investor Relations. Please go ahead, sir.

Thank you. On our call today will be John Wiehoff, Chief Executive Officer, and Chad Lindbloom, Chief Financial Officer. Chad and John will provide some prepared comments on the highlights of our fourth quarter and full year performance, and we will follow that with a question and answer session. We are asking that callers limit themselves to two questions so that we can accommodate as many people as possible.

Please note that there are presentation slides that accompany our call to facilitate our discussion. The slides can be accessed in the investor relations section of our website which is located at chrobinson.com. Chad and John will be referring to these slides in their prepared comments. Finally, I'd like to remind you that comments made by Chad, John, or others representing CH Robinson may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.

With that, I'll turn the call over to Chad.

Thanks, Tim and thank all of you for taking the time to listen to our fourth quarter earnings call. We released our earnings after market today. Our release contains adjusted numbers and provides a reconciliation of these numbers to GAAP. On today's call we are going to focus on these adjusted numbers so we thought we should start with an explanation of the adjustments.

Slides 3 shows our fourth quarter and year actual GAAP results, then a column showing the non-recurring transaction amounts and finally, the third column for each of those time periods is the adjusted amounts, which we will be focusing today's conversations on. Moving to explain each of the adjustments. The $34.6 million adjustment to personnel expense is made up primarily of $33 million of incremental vesting expense of our equity awards triggered by the gain on the sale of T-Chek. The majority of our equity expense is based on the average of operating income growth and earnings per share growth. The gain had a significant impact to earnings per share as shown in our GAAP financial statements. The balance of the non-recurring personnel expense is made up entirely of transaction related bonuses, primarily made to T-Chek employees.

The adjustments to other operating expenses are made up entirely of fees paid to third parties. These fees covered the investment banking fees related to the acquisition of T-Chek, external legal and accounting fees related to acquisitions of Phoenix -- sorry, investment banking fees were related to the acquisition of Phoenix. The external legal and accounting fees were related to the acquisitions of Phoenix, Apreo, and the divestiture of T-Chek. The adjustments to investment and other income is the gain from the divestiture of T-Chek.

When comparing Q4 2012 adjusted to Q4 2011, the results still are not entirely comparable. Quarter 4 of 2012 includes 16 days of T-Chek's operations and 2 months of Phoenix operations. Quarter 4 of 2011 includes T-Chek operations for the full quarter and obviously no Phoenix activity.

With that explanation of the adjusted results, I will turn it over to John to review the results of the service lines for the quarter.

Thank you, Chad. So my prepared comments will start on page 4 and as Chad indicated, I will be comparing last year to our adjusted numbers for 2012. Start by pointing out that our total revenues for the quarter grew 15.7% and the consolidated net revenues grew 10.8% for the quarter. Similar to the past several quarters, the difference between that gross revenue and net revenues was driven by net revenue margin compression. Our income from operations grew 3.3% for the quarter. As Chad mentioned, some of the unusual factors to reconcile to that, and he will comment again later on some of the impacts to income from operations in our SG&A analysis.

From an overall results standpoint, I want to highlight a few of the enterprise metrics that we focus on since a key part of our growth story and strategy is to continue to take market share. The fact that our full year 2012 truckload volume growth was 10% is meaningful to us and does reflect our belief that we continue to take market share. We also track the scope of our relationships in terms of the active number of customers, which you see increased to 42,000, and the active number of carriers and suppliers that we engaged with during the year that increased to 56,000.

Chad commented on the fact that there still, in the adjusted numbers, is some variances in the comparisons, largely due to Phoenix and T-Chek, leading Phoenix in the 2012 numbers as an ongoing operations. If you did exclude T-Chek from both 2011 and '12 numbers, those adjusted net revenue numbers would have grown net revenues by 14% for the quarter year over year and it would have grown income from operations at 6.5%. There are a lot of different ways to analyze our results for the quarters given the transactions that we have, but we think those are the relevant ways to think about it.

I do have some prepared comments by each of the service lines that I will share but before I go into that, on page 5 of the deck there is just a handful of bullet points kind of recapping what we think the highlights of 2012 were to call to your attention. The first series of bullets there in the aggregate we refer to as the strategic realignment, I think were very important to us this year because we had separate conversations around each of them at the time of the transactions. I'm not going to spend a lot of time on them.

But to generalize or to summarize each of them, the Phoenix International acquisition was an investment in global forwarding, a business that we've been offering for about 20 years but realize that scale is very important and we think it's going to allow us to be much more competitive. We're 90 days into our Phoenix integration. When I get into air and ocean service lines I'll make some more comments on that but overall, we were attracted to the cultural fit of the company and feel very good about that 90 days into the transaction. The T-Chek divestiture, we talked about the consolidation and the payment services industry that's occurring and why we chose not to continue to invest capital and our time and resources in that business. Lastly we talked throughout 2012 about our commitment to Europe. Despite an overall difficult environment in Europe, we do have very high expectations for the long term about what our presence can be there and replicating a lot of our services.

During 2012 we made some leadership investments by placing some of our key people over there to continue to drive our growth, as well as making the Apreo acquisition in Poland. Together, those three transactions helped reposition us in a way that we believe will allow us to focus on integrated transportation and logistics offering in a more narrow way with some greater scale and concentration in some of our key service offerings. In terms of other highlights or challenges for 2012, I would also share what I said earlier that we continue to grow our market share in most everything that we do and felt good about that. We continue to aggressively sell and develop our relationships and apply the account management practices that we think are really important to our long term success.

Lastly, on the challenges, we talk about continued truckload margin compression and really it is more transportation margin compression, which is probably a fairly simple term of outcome for a lot of interrelated topics. In each of the service line sections I'll make some comments and refer back to it again. But in terms of growing our revenues and market presence at a greater rate than we've been able to grow our earnings the last couple of years, net revenue margin compression continues to be the core topic that we're challenged with.

Moving onto page 6 on the deck, commenting about our overall transportation results, one of the things that we have added the last couple of years to try to put things into context is that 10 year net revenue margin percentage for transportation. So you can see that our net revenue margin comparison for the fourth quarter of 2012 and for the year, again represented net revenue margin compression for us. Volumes were up in nearly all of our services in Q4. There was some meaningful mix shift due to the transactions that we talked about with regards to air and ocean growing faster in the quarter.

Moving onto page 7, the truck results that include truckload and less-than-truckload, our North American truckload volume increased 8% in the fourth quarter. Because of the acquisition of Apreo and high volumes of shorter haul truckload transactions, our overall truckload volume growth in the fourth quarter was 12%. And as I mentioned earlier, 10% volume growth year to date which is a key metric for us. On the truckload part of the net revenue margin compression, similar to some past quarters, we have revenue increases from our customers, exclusive of fuel, around 1% and our cost of hire increased something closer to 2%. Our less-than-truckload volume continued to increase at a nice percentage of 16%. We had some modest net revenue margin compression in the LTL area as well.

Moving to page 8, similar story to some past quarters. We're evolving, transforming that business. We, like the industry, has moved to a much more dedicated large customer business with less transactional pricing, so our volume was up again for the quarter but pretty meaningful net revenue decline due to the transformation of the business to a higher percentage of business with large customers at lesser margins.

Moving to page 9, for the ocean and air results, is where you begin to see some of the impact of the Phoenix acquisition that we have referenced several times. I'll talk a little bit about how we're approaching that and the impacts that you'll see. I think one of the things that's very important to understand about our approach to the Phoenix acquisition and our integration strategy is that we are moving fairly quickly to combine the operations. If you look at for the two months of 2012, we were able to get a reasonable approximation of how the legacy CH Robinson global forwarding offices would have performed, which is the up 3% for ocean services and approximately 19% for air services. This is the last quarter that we anticipate being able to even estimate that number.

If you look at what we've accomplished in the first 90 days of our integration, already some of the metrics are being blurred as we are managing our global forwarding business through one network. Things like rerouting and combining freight that is handled by our agents, we've already begun to consolidate and co-load freight in some locations. There have been a few office combinations already, with a few more planned. We've combined our service contract and routing activities, and that will continue to accelerate in March and April with new contracts and some modest account realignment that will continue through our enterprise account management practices as well, too. So we believe we're off to a good start with the integration of that acquisition and, going forward, it really will be a combined air and ocean activity with hopefully meaningful increases in the net revenue for both of them throughout 2013.

Moving to page 10, the other logistics services. You see there, that also includes some of the customs brokerage activity that was acquired. But separate from that, we have the core transportation management, customs and small parcel services that have been a high growth part of our business for a number of years. And those increased about 15% during the quarter. We continue to believe that as we sell integrated services and of all the scope and complexity of what we offer to our customers, that there is a lot of good growth opportunity in this area and that we hope to be able to continue to expand and grow these services.

Lastly, with regards to our sourcing business, you see net revenue for the quarter up 11.3%. Most of that net revenue growth came from volume growth with large customers. We haven't discussed a lot about our sourcing business in the past couple of years but we do continue to stay very excited about some of the opportunities to innovate and add products and services in the sourcing area. That business today continues to principally constitute perishable fresh fruits and vegetables.

Examples during the quarter where we had some meaningful growth through new ideas and innovation came from melon varieties that we helped introduce, as well as a couple of different packaging alternatives around bins for marketing and crating for corn. A lot of these produce commodity and sourcing transactions are integrated in with our temperature controlled transportation that gets reported on by the type of transportation service that is combined with it. But similar to our transportation services, the integrated offerings and the combined account management strategies are an important part of our future.

So with those prepared comments, I will now turn it back to Chad for some more statements on the financials.

Okay. Thank you, John. Slide 12 is a summarized income statement comparing adjusted 2012 to 2011. For the fourth quarter, as John covered, our total net revenues grew 10.8%. Our adjusted personnel expense grew faster than net revenues and increased as a percentage of net revenues. We estimate that Phoenix increased our consolidated personnel to net revenue by approximately 1% for the quarter. As discussed last year, Quarter 4 had unusually low personnel expense to net revenue due to slowing earnings growth during 2011. This slow down in growth drove significant reductions in certain expenses in the fourth quarter, resulting in a very low personnel as a percentage of net revenue. Other operating expenses increased primarily due to amortization of Phoenix. Our annual amortization expense is going to be approximately $16.3 million for eight years for the identifiable and tangible assets acquired during the Phoenix acquisition.

Moving onto slide 13, our income from operations increased approximately 3.1% on an adjusted basis but our net income was down slightly. Our adjusted investment and other income was impacted by a lower average cash balance due to the acquisition, as well as some debt for the last two months, which created interest expense related to borrowings to partially finance the Phoenix acquisition. Our effective tax rate for the fourth quarter of 2011 was unusually low due to a favorable resolution of an uncertain tax position during the quarter, which reduced our tax contingency reserve requirements. Our effective rate for the fourth quarter of 2012 was slightly above our new expected rate of 38% to 38.75%. This unusually high amount was due partially to a loss in a particular country where we were not able to book a tax benefit.

Moving onto slide 14, we continue to have a strong balance sheet with approximately $210 million of cash and $254 million of debt. As I mentioned earlier, the debt was incurred to finance a portion of the Phoenix purchase price and this debt was obtained under our previously announced revolving debt facility. Our net CapEx for the quarter was approximately $12 million. We expect our 2013 CapEx to be approximately $55 million. Also during the fourth quarter of 2012, we repurchased approximately 1.453 million shares at an average price of $61.92.

We're now going to move onto a discussion of some of our pro forma condensed combined financial information. On January 14, we filed an 8-K which represents historic performer results of CH Robinson and Phoenix combined. We received many questions about these pro formas, so we thought it would be a good idea to cover them on this call. We have slightly reformatted these income statements from the 8-K to a format similar to those presented in this earnings release. While these historic results and ratios may or may not be a good indicator of future results, we do believe they provide a good point of reference. As you can see, Phoenix had a higher net revenue margin than CHR. Theirs was about 20% for the periods presented compared to the mid teens for CH Robinson. This would have had a combined impact of 30 to 40 basis points compared to historic CH Robinson transportation revenue net margins. It is common for international boarding services, including ours and others in the marketplace, to have a higher net revenue market than CH Robinson's business mix as a whole.

Moving onto slide 16, which shows some of the operating expense and operating income impacts of the combined financials. Had we owned Phoenix in the periods presented and the business performed how they did, our operating income as a percent of net revenues would have been lower. As you can see, the annual amortization expense based on our purchase accounting is $16.3 million per year, or about 1% of the combined net revenues for the periods presented. Phoenix had operating income as a percentage of net revenue excluding this amortization of approximately 30%. CHRW's was a little over 40%. Both their personnel and other operating expenses were a greater percentage of net revenues than CH Robinson's. Like with the discussions about net revenues on the previous slides, these historic results are not meant to be a prediction of the future, but again, we do believe they provide valuable information.

With that recap of the historic combined pro forma financial statements, I will turn it back to John for a look ahead to 2013.

Okay. So on our last slide, page 17 in the deck, there are a handful of bullets for your consideration about forward looking thinking and talking about 2013. For the past couple of years on these conference calls, for most of them, we have been able to provide some current period data points around truckload volumes or daily net revenue growth to help you understand the trends or current changes in the business. With the changes in our business mix and integration activity that's going on, we do not have complete real time data on any of those metrics, and we also have some meaningful mix shifts going on that were discussed throughout our fourth quarter results here. Given all that, we do not have January's books closed, and we feel it would be more prudent to keep our comments to the directional insights of what we see happening in the business. As we integrate and get back to more real time information, we'll continue to reassess what we can share in the future.

From a directional standpoint, the North American truckload business is what we have the best visibility to on a daily basis. During the fourth quarter of 2012, October growth was our best. December finished very poorly, and January of 2013 began very weak as well from both a volume and margin standpoint. The month of January in 2013 for North American only full truckload did finish with volume growth comparable to our 2012 results. Unfortunately though, we did continue to have year-over-year margin compression during that period as well.

We've shared this before, but when you look at normal truckload activity for the first quarter of the year, it is a very common pattern that January has the lowest per day volume and the highest margins. And throughout the quarter, it will generally trend down with March being the busiest month per day, as well as typically declining margins as the market will start to tighten up. Whether or not our truckload margins will drop in that pattern or drop steeper still remains unknown so while we did get off to a slow start in January, the most important part of the quarter for that component of our net revenues remains to be seen.

I referenced earlier the strategic alignment and the focus on the air and ocean and global forwarding business, elimination of our payment services. Because of the financial reporting treatment that those transactions generated, we will continue to see T-Chek historical numbers in the prior year period for all of 2013. So as you look ahead and think about how our business will perform in the future, we will continue to see comparisons impacted by payment services throughout 2013. Chad referenced the over $16 million of amortization that will come in. And I spoke earlier about the integration approach to Phoenix.

One of the things that's probably important to expand on that, if you look at how we're managing one network and what some of the key integration objectives are, at the core of it is the IT and systems integration where we are taking our proprietary system and modifying it to close the gaps and make it workable for the entire network. While it's a pretty significant activity for us, it's all internal costs that are being reprioritized and reassigned. And it will be impossible for us to create quantified measurement for that. But there is no question that we will be continuing to exert a lot of significant focus and cost towards the integration of Phoenix.

When we close that deal and everyday since, we have continued to talk about this being a growth opportunity. That our focus, while we will try to create cost synergies and make our business more efficient over time, we are very focused today on keeping our customers, continuing to serve them at a very high level, and looking for the types of improvements that I referenced earlier around opportunities to put the networks together. So all that said, with the growth part of it and the integration cost, we are very focused on the top line and growing our business and serving our customers on a global forwarding business in 2013.

Talked a couple of times now about net revenue margin compressions and the fact that we've had that for three years in a row now based on our transportation summary that we put out there. It's the thought that I'd like to share around that. As I said earlier, it's very difficult to predict what's going to happen in the market and what's going to happen with those net revenue margins. But one of the things that I think is important, if you look at how we've responded to these changes over the last three years and how we expect to continue to respond to the net revenue margin opportunities, is that we are very focused on taking market share and growing our business.

When we think about all of the factors that come into the net revenue margin compression around a very balanced market for a sustained period of time, the mix shifts in the business to more dedicated, more intermodal, more static route guides with a lot of the shippers. When you look at the competitive factors and all of the technology changes that have occurred with shippers and electronic bids, we have received a lot of questions over the last couple of years about the impacts of all of those on our net revenue margins.

While it's very difficult or impossible to isolate or quantify the specific impact of any of those, we have made the clear choice that we are going to continue to grow our business. And if the market continues to be difficult and generate net revenue margin compression for us, our strategy is to accept the productivity challenges that come with that and continue to invest in our technology and our account management and business process opportunities to make our model more effective and more competitive going forward. So it's a difficult thing to predict. I know it's been a recurring topic for the last couple of years and probably won't go away soon. But it is something that we feel like we're reacting to and that we have a plan to adjust our business and grow, and hopefully we'll see some market changes that will help it in the future.

Last couple of bullet points. We still see ourselves as the core competencies in a service organization driven by people in technology. We have plans to continue to invest aggressively in both of those in 2013. We're continuing to take a long term approach towards recruiting the right type of people and training them, and investing in the industry knowledge and competitive differences that we think will make a long term difference. So we're going to continue do that. We have some very exciting technology releases on our Navisphere platform and really converting, not only combining the global forwarding services, but all of our service offerings in a way that we think is pretty neat.

The last point that I'll touch on is that throughout these transactions, we've talked about our capital structure and the long time philosophy of no debt and we shared on the last call and wanted to reiterate again, Chad referenced the continued share repurchase activity in the quarter. We also announced a pretty meaningful dividend increase since our last conference call. And we do intend to continue to increase our dividends and accelerate or continue our share repurchase programs, and we're continuing to look for acquisition and investment opportunities. The net of which, while we haven't really defined any specific parameters, we do intend to move forward with a slightly more aggressive capital structure that will use our balance sheet a little bit to help our growth and help our diversification throughout these market changes.

That culminates our prepared comments for the fourth quarter. With that, we will open it up for Q&A.

Thank you, Mr. Wiehoff. Ladies and gentlemen, at this time we will begin the question and answer session.

(Operator Instructions)

Nate Brochmann, William Blair.

Good evening everyone. Obviously you gave a lot of nice color around some of the pressures on the gross margins, but I wanted to talk a little bit more specifically on the fourth quarter and into what you've seen so far in January where it seems like truckload pricing's kind of down a little bit. I am just wondering what you think currently is kind of causing that additional pressure and maybe whether that's some of your larger or longer term customers are trying to lock in rates ahead of any potential capacity squeezes.

Specifically what's happened in pricing in January, that's the sort of metric that we don't have scrubbed yet until we really close the books. But I would say just anecdotally from interacting with our people, I haven't seen or heard any significant changes in the pricing approach. What I can share though is that one of the things we've talked about a lot internally is it just feels like in our customer base there were a lot of examples of customers that did fairly meaningful year end plant shut down and inventory management and slower ramp ups into the current year. So our hope is that, that was a big part of what we were seeing is just diminished year end activity that carried over into January. Things did change as the month went on, and I don't feel like there is -- I am not aware of any material shifts or changes in the bidding activity or pricing activity in our business.

Okay. Great. Then just a second question regarding Phoenix. I know it's really early. You're only two months into it. There is a lot of transitions taking place but so far, could you talk about the general customer acceptance and whether you have seen already any significant opportunities on the cross selling side? Thanks.

Customer activity, I would say customer reception, has been very positive by our judgment. Both -- Phoenix has a very diverse customer base so they don't have any large customers that constitute a heavy percentage of their business. But at the same time, we and they are not aware of any significant losses from a customer or people standpoint. All of the Robinson global forwarding offices continue to sell and there have been some wins. It probably would be unfair to say that there has been any known wins due to the combination or synergies.

I think both teams have good momentum and are continuing to sell. Most of the shorter term wins have been on realignment of the network with agents or offices, or service contracts, or the procurement side of it. So we feel very positive about the cultural fit. I think the teams are working together very well. There have been some tangible wins on the cost side that maybe didn't benefit the fourth quarter that much, but we feel pretty good about benefiting 2013.

In terms of cross selling, integrating, sharing account management practices, a lot of that needs to be facilitated by some of the IT integration that's going to take a little bit longer for us to get into. So hopefully as 2013 wears on we'll feel more confident about our go to market benefits from the acquisition but at least to date, we feel very good about the absence of any disruption.

Great. Thanks, John.

Tom Wadewitz, JPMorgan.

Good evening. Question on the cost side. I think, John, you just mentioned that you had some wins on the cost side. I was wondering, in fourth quarter, was there anything on the amortization that was unusual? You didn't mention that. But then looking at cost side in 2013 can you give any kind of framework for what these cost wins would be that you're talking about, how substantial they might be?

Yes. This is Chad. To start with the amortization, the only piece that would be unusual in the fourth quarter is that it only had two months. We only owned those companies starting November 1.

So as far as the class wins on synergies, I think there will well be some cost of hires, we leverage freight and look at look at each other, like John was mentioning, each other's freight rate with different service providers and leverage each other's contracts with both air and ocean business, as well as we have always talked about we don't expect any immediate cost synergies in the deal. It is all going to be about integrating and doing the best of both. From any significant perspective, we will be growing. Hopefully be able to, once the significant acquisition integration efforts are done, continue to leverage the overhead rather than looking for significant changes in the overhead structure.

Okay. But you're not talking about a significant headcount reduction or something along those lines in terms of the cost wins?

No. What our plan is for the Phoenix integration is that we believe in the short term that by carrying all of the people from both organizations we have the incremental resources to focus on integration and all the change management stuff that we need do. And as that occurs and as our system gets more efficient, when it comes time that we could get by more efficiently on fewer resources, our hope is to have grown the business to keep jobs for everybody. So that the long range plan is that it's a growth strategy and if we're successful, we would hope that for the next three to five years we can grow our net revenues much faster than we would grow our operating expenses.

But that was a part of what I was trying to share in our 2013 outlook that I think the history of global forwarding mergers and acquisitions is that everybody who has gone after cost synergies too aggressively has disrupted their customer relationships and services to the point where it has helped to turn out to be a bad deal. We are taking a very long term approach around the continuity to our relationships and our service and trying to create the synergies in the deal over a little bit longer period of time through a growth platform.

Okay. Then just a short follow up. I might have missed this. But you said the loads in North American truck up about 10% in January best you can tell. Is there any sense of net revenue in North American truck in January? Is it flat?

I did not say 10% in January. I said the volume growth approximated what it was. Again, with all the mix shifts that we've had, we want to be more comfortable closing the books before we say precisely what it would be. But we did have meaningful margin compression year-over-year in January as well that reduced our net revenue growth from the volume similar to the last couple of years.

Okay. Thank you.

Chris Wetherbee, Citi.

Thanks. Good afternoon. Just a question to be sure I understand. From a fourth quarter perspective, if you were to back out the Phoenix acquisition when you think about transportation margin, is it fair to use that 30 to 40 basis points you highlighted kind of on a broader basis? Historically is that about the impact that you think you saw?

Yes, in that range.

Okay.

Maybe slightly less. I am going by memory right now but I think the forwarding net revenue margin was a little lower than 20%.

And one of the challenges is that the pro forma stuff is annualized and margins can change a lot from quarter to quarter with tapering off at the end of the year. So it's really going to take a year or so to make sure that we get the seasonality and fluctuations of the buy, sell margins understood.

Okay. So that would kind of imply that you had either flat or maybe a slight deceleration or a decrease in the margin on a sequential basis. I just wanted to get maybe a little bit of color around how you're thinking about was that really the impact of December that you talked about as far as maybe plant and customer shut downs? Or was it just a tighter and tougher market for you in the fourth quarter? I just want to get a better understanding of that.

I think the margin compression was comparable to the previous quarters. It just wasn't -- it started out looking better in October and softened near the end.

Okay. My follow up would just be on the air side. Just want to get a rough sense. We've heard from a few other players that maybe it was a little bit tighter in the air than maybe what your results would suggest. I think you saw some margin expansion there. I wanted to get a sense of your view on the fourth quarter from an air perspective was.

I think the primary thing, a significant percentage of the air freight is co-loaded with multiple customers and we were very small in the air services business. And Phoenix too is larger in the ocean than in the air. So that's one of the examples of where just the combined volumes pretty quickly lead to some opportunities for co-loading to make to improve things. That's probably the most short term specific example of cost synergies that we could give just because in that business it's so much about consolidation dynamics that if you double the volumes, it's almost certain to be a pretty good thing.

I would add even excluding folding the two companies freight together, CH Robinson's, air volume's, or our density in certain lanes were getting better which were driving to much better net revenue margins compared to a year ago.

Okay. That's helpful. Thank you for the time.

Jason Seidl, Dahlman Rose.

Good evening guys. If I could go on the net margins there. You mentioned that January had some continued pressure and I think you said significant. Am I to interpret that January's net revenue margins are going to be more significantly under pressure than December's were?

No. I think John's comment on under the pressure is compared to last year's January, not sequential comparisons.

Correct.

So sequentially how did they look?

They were about the same. They were within 20 or so basis points sequentially.

Remember, by the time we report the first quarter, December and January are the least significant of the fourth and first quarter. I'm not sure that -- especially when you look at the holiday seasons and the time of where the holidays fall within the business week, those cut offs can be a little deceptive, so I am not sure how helpful the sequential net revenue margin activity is in our business.

Okay. Fair enough. My follow up question here. When you're looking at the LTL growth, it continued to out pace truckload throughout the year. Do you expect that to continue in 2013 here?

We definitely have better momentum in that business. I'm not aware of anything that would change that. So our hope would be that we would continue to see significant growth on that, yes.

Okay. Thank you, gentlemen, for the time as always.

Thank you.

Scott Group, Wolfe Trahan.

Hi, thanks. Good afternoon, guys. I want to take another stab at the question on the margins. If we can try and focus just on the North America, the truck business, how are gross margins in fourth quarter year-over-year compared with third quarter year-over-year? And in terms of your comment on January, is January, on a year-over-year basis, better or worse than what fourth quarter was? Just trying to get a sense if the year-over-year compression is getting less, worse or if it's getting worse when we think about the core truck business in North America.

We never release our truckload net revenue margins and we're not going to start to now. If you go to total transportation net revenue margins, which obviously truck is the biggest driver of it, you can see that 2011's third quarter was 16.4. 2012 was 15.6. In quarter four, it was 16.3% for 2011 and 15.8. Maybe that 15.8 is the equivalent of 15.5 or 15.6 if you back out the estimated impacts of Phoenix. Besides that, that's about as far as we'll go.

You have any thoughts on January if it's getting less worse?

I think the primary thought that we discussed in our internal review was what I already shared, that December ended very softly and January began very softly. I think month over month it feels fairly consistent but it's really difficult to tell one month into the quarter, particularly with December and January that are the lesser of the months.

And maybe just with that, do you think that the January compression, is that another step down in yields or is that more a continuation of what you saw in 2012? Meaning, if I remember correctly that January '12 actually was off to a decent start from a yield perspective and the margins got worse throughout the year, so is this just we haven't grand fathered or lapped the comp or is it taking another step down? I'm just trying to understand.

As I said earlier, it's a common seasonal pattern for us that margins expand during January as the month goes on and then contracts as the spring activity starts to pick up. So it is the case that January margins started out good last year relative, which would always be the case. So I think our overall message sort of stands that there is nothing really unique or different that we're aware of about January versus the fourth quarter but unfortunately, there continues to be year-over-year net revenue margin compression in our truckload services.

Okay. Then just last thing if I can, you've talked about last year getting to a mid to upper 40s net operating margin. With Phoenix and being a lower margin business, is that still the goal or is that tougher to get to now?

I would say as freight forwarding in general, Phoenix or otherwise, if that continues to become a bigger percentage of the business it would be more difficult to get there. The highest operating net -- operating income to net revenue ratios I've seen for a quarter are 31%, 32%. Our forwarding business was nowhere close to that, but Phoenix's was. They were already at 30% for the historic information that we presented. So will it make it harder if it becomes a bigger percentage of the total of business? Yes, it would make harder to get operating income and net revenue on a consolidated basis to 45%.

Okay. All right. Thanks guys.

Chris Ceraso, Credit Suisse.

Thanks. Good evening. How much of the compression that you've seen in gross margin over the past several quarters is just the function of the TL industry and the fact that it's been balanced, et cetera, as you mentioned, versus how much do you think is a function of your efforts to gain share and maybe some price concessions you've had to make to do that?

I think that's one of the core questions that we and all of you have been struggling with for the last couple of years. I feel like the outcome of net revenue margin compression over the last couple years, one of the reasons why I highlighted the 10 year trend is that if you go back 4 years to late 2008 early 2009 and you see our all time highs and 10 year highs on that net revenue margin, we were saying then and it was not at all surprising to us that those margins would cycle back to more longer term averages.

Now the fact that they've cycled down for all of three years and have cycled to lows and all the questions around secular impacts versus cyclical and kind of sorting out how much of it's the balanced market, how much of it is competition, how much of it is mixed shift, how much of it is change in shippers' attitude. Those are all real factors that we've acknowledged before. I think they all play into the mix in one variety or another.

Part of the prepared comments was really saying because you can't sort them out, we have to make the choice of how we want to respond to the environment and aggregate. And our choice is clearly that in this balanced market, we want to stay near the top of the route guide. We want to have committed relationships to our customers and go after that market share. So again, it's just impossible to isolate the impact from any one of those variables. It's a combination of all those market factors.

Okay. Then as a follow up, you mentioned at the end of your closing comments, John, about productivity being a critical factor. How do you measure that and what are the benchmarks and the targets you are looking at? We can't really use the historical metrics for Robinson now with the acquisition, those numbers get kind of thrown off. So what should we look at to gauge your performance in terms of productivity?

Good question. That's why we added the pro forma slides around the comparisons. We have pages of productivity metrics but the most visible and simplest one is operating income as a percentage of net revenue. We look at that by branch, by customer, whatever we can to understand our profitability.

So one of the things that we feel strong about in our business model is that we have lower net revenue margin freight that we think is some of the best freight that we have. If it's highly automated, repetitive, dedicated freight that we can be very efficient with, the ultimate measurement of the freight or evaluation of the freight desirability and our productivity gets down to the profitability per shipment or that operating income per branch, per customer, per person, however we want to look at it.

If in fact the combination of market forces, balanced market, competitive factors, evolution of technology does have a cumulative compression impact on our net revenue margins, that puts pressure on all of us to use technology and use process improvement to be more productive and make sure that we're hopefully generating the same kind of operating income or operating margins per shipment that we go after. So in my prepared comments, that's precisely the point I was trying to emphasize, that while we can't isolate the variables, our management strategy in response to the cumulative effect of all of them has been consistent and I don't see us changing that.

I would just add as the mix of business continues to shift from here, if it does continue to shift with the benchmark of somewhere around just in round numbers low 40% operating income net revenue for CH Robinson non-freight forward international forwarding and hopeful of benchmark to maintain and grow some of our freight forwarding operating income as a percent of net revenue up closer to the Phoenix benchmark of 30. As those two -- if you looked at those two separately, and it's impossible to measure it precisely but if you looked at those two separately, that shift of mix will continue to have an impact on those ratios as you pointed out. In all the other ones too, net revenue per person, personnel expense per person, all those different things will be shifting because of the change in business.

Right. Okay. Thank you.

Thomas Kim, Goldman Sachs.

Thanks very much. To what extent can you quantify the magnitude of growth from the share gains versus the organic growth? And then if you might be able just to highlight which areas within trucking, is it LTL or GL where you might be gaining more share? Thank you.

We gave the truckload volume separate to be 10% for the full year, 12% for the quarter, but 8% for North America because of the incomparable volume growth because of the Apreo acquisition with all that short haul freight. And then we gave a volume growth for LTL as well of 16%.

So there are various industry benchmarks on shipment growth, but our best estimate would be low single digit growth in terms of DDP type growth in the shipment activity. So if we have double digit volume activity, that's what would lead us to believe that we did gain market share in both of those services. Probably more effectively in LTL as I think our value proposition and market conditions are a little bit more stable there today, so a lot of the changes that we've been discussing about the balanced market and those are kind of specific more to the truckload dynamics.

Great. Then if I could just add onto that, where do you think your market share is today? Where would you like it to be? Basically at what point do you feel like that is the number where you're comfortable with your relative market positioning? Thank you.

Market share on truckload is a tough calculation. I think there is kind of two primary ways to look at it. One would be the percentage of the total truckload universe which we believe by that calculation we have a very small percentage, probably somewhere around 3 of the total North American truckload market. Another way to look at it is of the percentage of the truckload market that runs through some sort of 3PL or broker, again analysts estimates would be that, that's maybe 15% to 20% of the total market, and then our share of that market would be something more approaching 8% or 10%. As high as 15% maybe, Chad is saying.

When we think about market share gains, those are both important calculations because one, we believe that the third party industry is taking share within the total truckload sector and that is an important secular trend that we've been benefiting from for the last couple of decades and we believe there are a lot of good reasons why that hopefully will continue. We also believe that by being the largest and in many ways we hope the most capable, that we've been able to take share within that third party market as well too. So when we think about taking share, it's both about outperforming our direct competitors as well as us all collectively hopefully continuing to be a better service and value and price proposition for the shipper so that we collectively can penetrate the truckload market.

I appreciate all that. I'm just trying to get a gauge as to at what point does the Company believe it would have reached that point where it's quite comfortable? And obviously a lot of these numbers are quite tricky and I can appreciate the challenges of trying to get to a proper or exact precise market share number. But if it's not necessarily a percentage, is it a time film that we should be looking at?

I think today, if you look at -- I think our decision, if you are challenging saying when would we change our thought process about taking market share -- I would say that today, while our margins are compressing, we still feel very comfortable about the profitability of our entire portfolio. And so as long as we feel that we can grow our business and grow our profitability and the incremental freight is profitable in creating value, we'd continue do what we're doing.

We do know that we have more competitors that are focused on taking market share and probably less concerned about profitability than we are. And if we sensed that the market was stagnating and that competitive factors were such that many people were buying market share or going after freight that they could not be profitable at, at some point we would back off in terms of our growth aspirations if we were not able to be profitable on the incremental growth that we're going after. But today we feel very comfortable with that. It may not be as profitable as it was the year before but we still feel like it's adding a lot of value.

Thanks very much.

William Greene, Morgan Stanley.

Hi there. Good evening. John, one of the things you've said in the past is that over long periods of time you've tended toward a top and bottom line growth rate of around 15% and you didn't sort of reiterate that comment in some of your outlook here, and I'm just curious if that was a change that you intended to convey or am I reading way too much into sort of the lack of comment?

The way I feel about that topic is when we've referenced it in the past we've always referenced it from deregulation in 1980 up until the current. We're talking about it in terms of decades. I don't believe we've ever felt that during periods of recession or more difficult economic growth, we've always acknowledged those growth rates were going to fluctuate and be much more difficult to achieve.

I'm not sure if we're in a decade of slower growth where that's going to be a more extended period of time where it's going to be difficult or impossible to achieve that growth rate, but I do know that most people who interact with us don't really care about the next 10 years. They only care about a shorter horizon than that. It doesn't feel relevant to talk about it now. We haven't given up on the fact that over decades and long periods of time we still think there is tremendous opportunity to take share and grow our business.

Of course. You're right, the folks on this call probably care a little bit shorter time than 10 years. The second question is just on -- you know about all this. I am sure you read about it in the press this whole near sourcing of manufacturing and what not in the US. You guys have gone and made a great forwarding acquisition, which presumably will tap into some of the global freight flows, but can you talk a little bit about your capabilities to benefit from any near sourcing or is that something that you don't really have enough presence in Mexico or maybe Phoenix got that for you or what not? Maybe just talk a little bit about how that could play out. Thanks.

I think that's a good question. When we talk about mix shift, for a long time we were talking about extended supply chains and extended lengths of haul, particularly within truckload. Probably from some of the inter modal competitive factors, as well as changes in shipper supply change strategies, we do think there has been some shortening of the supply chain over the last couple of years. Whether that will continue or not remains to be seen.

We have been very successful in Mexico the past couple of decades. When we talk about North American transportation that includes a meaningful business in Mexico that we feel we have great competencies with. So the significant increases in manufacturers who are moving to Mexico, that's something we feel we have and can continue to benefit from them. I think the increase in LTL is probably also something that with those shorter supply chains comes more frequent smaller shipments generally as well, too.

So the fact that we're integrating our services, focusing more on things like network analysis, management services technology, greater concentration of LTL shipments, all of those are ways that we can interact with a shipper to evolve to a new environment where they're going to need a different mix of services but we feel well positioned to continue to evolve with them. When you take away some of that traditional long haul truckload freight, that doesn't help the margins in our traditional North American truckload business but it's probably -- that whole story is maybe a good example of why we still feel good about our long term value proposition, even though the market forces may be contributing to some truckload net revenue compression.

Okay. That's great. Thank you for the time.

Unfortunately, we're out of time. So that will have to be our last question. We apologize that we could not get to all the questions today. Thank you for participating in our fourth quarter 2012 conference call.

This call will be available for replay in the investor relations section of the CH Robinson website at www.chrobinson.com. It will also be available by dialing 800-406-7325 and entering the pass code 4594691 pound. The replay will be available at approximately 7.00 PM Eastern time today. If you have additional questions, please call me, Tim Gagnon, at 952-683-5007. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and you may now disconnect.