羅賓遜全球物流 (CHRW) 2013 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the C.H. Robinson fourth-quarter 2013 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Wednesday, February 5, 2014. I would now like to turn the conference over to Tim Gagnon, the Director of Investor Relations.

Thank you, and good morning, everybody. On our call today will be John Wiehoff, our Chief Executive Officer; and Chad Lindbloom, our Chief Financial Officer. John and Chad will provide some prepared comments on the highlights of our fourth quarter, and we'll follow that with a response to pre-submitted questions that we received after our earnings release yesterday afternoon.

Please note that there are presentation slides that accompany our call to facilitate the discussion. The slides can be accessed in the Investor Relations section of our website, which is located at chrobinson.com. John and Chad will be referring to these slides in their prepared comments.

I'd like to remind you that comments by John, Chad, or others representing C.H. Robinson may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain official information about factors that could cause actual results to differ from managements expectations.

Before I turn it over to John, I'd like to mention that similar to our first three quarters earnings releases, we have provided pro forma financial measures for net revenue and income from operations to provide meaningful insight and an alternative perspective of our results of operations. We believe that these pro forma financial measures reflect an additional way of analyzing aspects of our ongoing operations, that when viewed with our actual results, provides a more complete understanding of the factors and trends affecting our business. A reconciliation of actual results to pro forma numbers is provided in appendix A and B at the end of the slide deck.

With that, I will turn it over to John to begin his prepared comments on slide 3 with a review of our Q4 2013 results.

Thanks, Tim. Thanks for everybody listening into the call. I'm going to start my prepared comments on page 3 of the deck that show our GAAP reported earnings for the year. I don't have a lot of comments on this page because, as Tim said, while the 2013 results are reflective of our ongoing business, the 2012 numbers are not comparable because of the transactions that are reconciled in the appendix.

Looking at page 3, a couple of data points that are relevant is just for the year 2013, our total revenues of $12.7 billion does reflected a 12% increase over the prior year. That increase is about half organic growth and half acquired revenue, largely from the Phoenix International acquisition. And obviously, scale and size do matter in our business, and it is important that we continue to grow that top line and have a stronger presence in the marketplace so that we can take advantage of our scale and size in the marketplace.

If you look at the EPS for quarter of $0.62, again, that's not comparable to the prior year. In our earning release and pro forma information, it shows $0.66 as the pro forma adjusted for the prior year. Obviously, we're not happy with the $0.62 or the $2.65 of EPS for the year.

This 2013 marks the first time in 16 years as a public Company where we were not successful in growing our EPS over the previous year. In addition to the decline because of the gains and the transactions of the previous year, it also is down from the pro forma numbers on the following page that I'll talk to more. So we understand it's a disappointing finish to a challenging year, and we're committed to changing and making sure that we improve that in the future.

Turning then to page 4, this is a page that I'll have most of my comments on. Again, it's reflecting the 2012 numbers adjusted to exclude T-Chek for the entire period and to include Phoenix International's history for the entire period, even though we did not own the business for all of 2012.

Page 4 has most of the key metrics that we look at in terms of evaluating our business and performance, starting with the total revenues that I talked about before. I mentioned that about half of our top-line growth, or 6% of that $12.7 billion, came from organic growth.

So if we're looking at the pro forma information here, that's the 6.2% increase in our total revenues. You can see that was for the year. In the fourth quarter, that slowed to 3.8% in revenue growth.

If you look at the net revenue, an increase of 1.3% for the year, but a decline of 2.1% for the fourth quarter. So both the revenue and net revenue declining more in the fourth quarter or growing less than the year-to-date numbers.

Similarly, when you look at the operating expenses, we have always talked and continue to believe that the appropriate way to look at that is separating personnel and non-personnel or SG&A expenses into the two different categories. You can see the year-to-date increase of 6% of total operating expense, and the fourth quarter increase of 4% for operating expenses. So the expense growth in the fourth quarter, the growth rate did slow, but obviously not fast enough in relation to the net revenue change and how the business is performing.

Income from operations for the quarter, down 11.6% on a pro forma basis. As I mentioned earlier, EPS is not shown on this slide, but that would show for the quarter $0.62 of EPS diluted, compared to the previous year of $0.66, which is about a 6% decline.

Chad will make some comments about share repurchases and the change in the capital structure. That part of the strategy is working, in terms of the decline in earnings being less at the EPS level than it is that income from operations line.

A couple of other metrics on this page that are important, we always talk about our operating income to net revenue relationship. You can see for the year, 39.9% dropping to 37.2% for the year to date.

As a refresher, for those of you who have followed the story, when we went public 16 years ago, that was at 28%. It got up to around 42% at the peak in 2008 and 2009, and over the last four or five years, as we've had a more challenging environment, it's work its way back down to 37.2% for the year.

In that operating income to net relationship there are some mix issues. Obviously, we've talked a lot about Global Forwarding and the fact that it is a global, more overhead-intensive business that changes some of the mix.

You see some of the acquisition amortization up above that changes the benchmarks or components of that operating income to net revenue. And then the acknowledgment of reduced profitability over the last five years, all having an impact on that relationship.

It is important to look at the year-to-date stuff because a lot of our costs are annual in terms of annual incentive contracts and a lot of different operating expenses that will get trued up on annual basis. However, the current quarter showing 38.7% down to 34.9% does reflect what I mentioned earlier, that with a decline in net revenue and increase in operating expenses, that obviously puts downward pressure on that ratio, and that happened more in the fourth quarter than it did on a year-to-date basis.

But that operating income to net revenue is a key metric that we continue to look at, and the deterioration of it is being driven by topics that we've talked about at length over the last four or five years, primarily truckload margin compression. More than half of our revenue comes from truckload services, and we'll talk more about it, but that's obviously the lead driver in this quarter. There was some lost business in our Sourcing service line that also had a pretty significant contribution to it.

Last comment I'll make on this page is that when you look at operating expenses -- and we will talk in this call about how we intend to manage differently and approach the expenses differently. But if you look at a 6% year-to-date operating expense increase and personnel expenses of 4.8% increase, elsewhere in the deck it shows that we had about a 7% headcount increase. For a number of years, now, we've been talking about investing in our network and investing in our personnel to go after market share.

And part of what I think is important to understand is that we do have a very high pay-for-performance culture at Robinson. And everyone of us that's making those decisions around the balance of hiring and market share goals and gains versus the profitability of the Corporation, the pay-for-performance has driven a significant reduction in realized pay over the last five years.

Again, while we are adding people to the network, the personnel costs are not growing at the same percentage as the level of heads that we're adding, primarily because of a reduction in variable pay programs that impact all of us at Robinson in terms of the performance. So, we do feel that that is a strength of the model. It's part of what aligns our decision making with our shareholders, and it is something that we will talk or about as I talk through the remainder of the deck.

Turning then to page 5, on the total transportation results, the schedule really highlights some of the challenges that I've already referenced in terms of our margin contraction and our performance. If you look at the total net revenue growth of 1.7% for the quarter and 11% for the year, again, the year was driven primarily around some of the acquired net revenues.

I think it's helpful to look at the longer-term trends on the net revenue margins. So we have this longer-term graph that we've been referencing for the last several years. If you look on the year-to-date, down in the lower right-hand portion of that chart that shows 2009 to 2013 total transportation net revenue margin percentages, you see it moving from 20.2% in 2009 to 15.3% in 2013.

Over the last four years, we've talked at length, and a lot of the questions and comments today get back to these same topics. But really, if you look at the economic recession and the change that happened 4.5 years ago, probably the dominant topics that have been affecting all of the transportation results and margins, but especially the North American Truckload, are in addition to the cyclical fluctuations that we always have had and will have that showed some of the peak in 2009. I would say the other categories of environmental changes are just around changing supply chains and how shippers are focusing on efficiency rather than growth.

On the Truckload side, you have the cost changes, the regulatory changes, CSA hours of service, all those things that have changed the landscape of the cost of capacity and the Truckload component of the cost equation in our business. A lot of changes around technology, both shipper investments as well as 3PL and competitor investments in technology and the transparency and the changes around pricing that it's leading in all the different services. And then just the escalation of competition and the changes in the competitive landscape, especially in the truck brokerage world and a third-party landscape.

So you see all those factors over the last five years we've been trying to ourselves, as well as responding to questions, to try to understand the components of that and what is driving it. But obviously, over the last 5 years since the recession, the combination of all of that has put downward pressure on our margins that has impacted our results.

When you look at the transportation business as a whole for 2013, it was somewhere around $11 billion of total transportation services, and then you look down below and factor in conservatively a 4% to 5% margin compression, that margin table down below also has some favorable mix shift to higher margin businesses, primarily Global Forwarding and Management Services, when you look at the longer-term transportation. So if you look at a business of around $11 billion of transportation with conservatively 4% to 5% margin compression over that period of time, well, somewhere around $400 million to $500 million of margin opportunity or margin comparison on that $11 billion of freight over that 5-year period of time, we have been able to modestly grow our operating income to somewhere around $100 million or, I think, a low-single-digit percent.

So it is important to understand that if you look at the scale of the business and how we've gone after market share, that while we have been under margin pressure and we have been under a lot of competitive stress, that we have done a lot with our variable pay, and we have done a lot in the scope of our network and productivity to try to manage our results and get through this in a more favorable way.

Moving then to page 6, some comments then on each of the different transportation services. Obviously, starting with Truckload, it is more than half of the net revenue of the business.

We did see some very meaningful tightening of our North American Truckload market in December and January. I've shared in the past the types of metrics that we look at to gauge that market dynamics around demand and supply, one of the primary ones being the route guide performance and route guide deterioration to look at if freight as moving as planned or if there is a lot of change or disruption.

For us, I know in the industry, there's been a lot of discussion about improved environment and changes. What we did see in December and January is some pretty meaningful movement in the deterioration of those route guides and some tightening in a lot of different areas of capacity that has continued to lead to some disruption and price increases.

In the past several quarters, when we've talked about customer pricing increasing in a 2% to 3% range and carrier cost increasing more than that, what you see for the fourth quarter of 2013 is that our customer pricing, on average for the quarter, up 3.5% for a mile, but the carrier cost increasing at around 5%. So both of those numbers moved up fairly aggressively during the quarter, moved up even more aggressively end of December and January. We'll come back to that topic more in the 2014 and some of the Q&A.

But in one of the things that a lot of the themes around the questionings, is how we are debt and to pricing? How we are adapting to the changing market? We are moving. Pricing moved in the fourth quarter. Pricing is moving in January.

It really is more a function of the fact that as we've talked about the last four years in this balanced environment, we have moved to a much more committed relationship with the vast majority of our customers to take market share and to grow in a balanced environment, which was required during that period of time. We've talked about the fact that when the market turns, and depending upon how quickly and aggressively it turns, it can take time to reprice business and to go after transactional opportunities that result as a byproduct of that.

And to a large degree, what you're seeing in December and January is that period of time where things can get worse before they get better from a pricing and margin standpoint. We have seen some pretty significant change in the North American Truckload market conditions in the last 60 days.

Again, I will come back to some more comments around pricing in our Truckload services, but one of the things that I think is relevant when you look at our 5.6% decline for the quarter, we've asked ourselves around it, how long does it take to reposition the pricing? How long does it take to get after some of that transactional opportunity?

One of the things that we believe is unique or different this time versus other inflections point that are similar to this that we've had in the market, is for all the reasons that we've talked about the last 4 years around the capacity shortage and some of the truckload challenges of driver shortage and the absence of new equipment coming into the marketplace, when you add onto that some of the weather challenges and the December and January period that we do believe the contribution of tightness from the reduction in supply was probably more unique this time around than just a simple growth in the freight side of it. While there's clearly is some demand increase as well, too, and those are all the factors that we have to manage through, we do think that the dynamics around what's causing the tightness and what's the most appropriate way to manage through the transition in the marketplace does have some unique elements to it this time around.

Moving then to page 7, our LTL results, 3.2% net revenue increase for the quarter. Both costs and price moving up, as we've said multiple times in the past, because we use a variety of tariffs and different pricing things, it's how to quantify apples to apples exactly around what types of price increases are there. There's no question that pricing is moving up both in the quarter and year to date with some more modest net revenue margin compression, so a 4% volume increase translating into a 3.2% net revenue increase.

As we comment down below, while all of our transportation services and the 3PL market is more competitive than it was several years ago in the LTL arena, it does feel as though it's maybe even more competitive, simply because of the fact that the capacity side is a more constant in the marketplace in terms of access to it. And things like technology are more important around the automation of the process, so it allows for more aggressive market share goals by us and competition to go after greater volumes of freight.

On page 8, in our Intermodal results, what you see for the quarter, a 9.4% net revenue increase, less volume but improved pricing and net revenue margin. We've talked over the last several years about our Intermodal business and how it consists of more transactional and truckload conversion opportunities that we feel we are very capable of and do a good job of bringing our customers intermodal solutions where they pertain in the marketplace.

It has been our challenge, and continues to be, to build out our capabilities on the higher volume, more dense Intermodal opportunities. Those are generally served more effectively with dedicated container and dedicated (inaudible) solutions that contribute to efficiencies based on the volume.

So while we've made some minor investments there, we do need to continue to work on our operating structure and the capital commitments that it takes to serve the larger, more dedicated Intermodal opportunities and grow that portion of our business in a more sustainable way. So while we're happy with a 9% net revenue increase for the quarter, it really is more reflective of just the ongoing repricing and shift of mix in the business rather than a trend that will sustain itself in the next couple of quarters.

Moving to page 9 then, talking about our Global Forwarding, Air, Ocean, and Customs business. Page 9 reflects the GAAP numbers again. So what these numbers reflect around those net revenue increases of 37% for Ocean and 12.8% for Air, 36.7% for Customs reflects a partial quarter of Phoenix activity rolling into our Global Forwarding results.

Probably the most important point by our view on page 9 is the bottom message that for the year, and again in the quarter, based on TEU ship rankings, we were the number-one NVOCC in volume from China, Eastbound. That was one of the strategic goals as we've talked about, with both Phoenix and C.H. Robinson having focused largely in that corridor in the past to really retains and grow that volume in a way that creates a competitive advantage. So that was probably one of the most positive strategic achievements.

Moving on to page 10, where the information that we presented in the past is in a more comparable format for our Phoenix integration update. I'm not going to go into the same level of detail as I have into the past around the two-year integration plan, but from a year-one standpoint, the second bullet on this slide highlights some of the key things that we really did focus on in year one around office combinations, agent rationalization, gateway, and operational processes, and feel pretty good about how all that went and where we are in -- at the end of year one of our plan.

If you look at, on pro forma basis on the deck up above, an 8.5% net revenue increase for the quarter was our best increase of the year in terms of pro forma activity. You see 4.6% for the year on this pro forma basis. So what we have left is the more aggressive ramp up of cross selling and integrating some of the account management and growth opportunities, as well as technology and driving further operating efficiencies in the Global Forwarding business during year two and beyond with that.

Slide 11, the Other Logistics Services reflects the continued efforts to diversify our business and focus on other than transportation solutions. You see a 14% net revenue growth in the quarter. We continue to feel positive about the pipeline and the growth opportunities in here.

And again, I say it pretty much every quarter, that while this is only 3.5% of the net revenue of the Corporation of $67.9 million, for the year 2013, that the customers that represent this service line also include significant transportation customers, so that when we think about it from a market share gain and account management standpoint, our capabilities to integrate with our customers in a more comprehensive way and drive value in solutions in the supply chain that go beyond transportation are an important part of the future and how we're trying to position ourselves from a strategic standpoint.

Moving then to my last slide on that the service lines before I turn it over to Chad, on page 12, our Sourcing results. What you see for the quarter is a 15% net revenue decline in our Sourcing business and a 7% decline for the year. We've talked about the lost business in our Sourcing division in our last call as well as our Investor Day comments.

Just a quick refresher on a couple of data points. In our Sourcing business, it's where we're buying and selling, disturbing fresh fruits and vegetables, produce, predominantly to large retailers and food service businesses.

The Sourcing business at Robinson is more concentrated. There about 20 accounts that make up well over half of the business, and it's predominantly the large retailers that have consolidated, very similar to how the produce industry has consolidated.

The way we earn business in that division is generally by innovating and helping those buyers and sellers of fresh fruits and vegetables to bring new ideas to the market. There might be a product from a part of the world to create year-round supply. It might be packaging innovation.

It might be a promotional opportunity to expose new categories. Oftentimes, when we earn those businesses, we get to serve them for an extended period of time around maybe even managing the item or the category and replenishing and filling those orders for a long period of time.

One of the risks that we have is that when those buyers make strategic changes around how they are stocking the produce department or the types of items they are carrying or where they are sourcing from their vendors, we can lose orders. And in fact, that's what happened with our largest Sourcing customer in the fourth quarter, is that we continued to see the elimination of some items that had been ordered from us for a number of years that resulted in lost business in a net revenue decline for the Sourcing business.

The net revenue loss from the lost business was the majority of the decline in the net revenues for the quarter, but there also were some weather issues that impacted the broader Sourcing business and helped to contribute to some of the net revenue margin decline moving from 8% to 6.8% in the quarter. The weather things, obviously, we believe will correct themselves and that we will be able to improve some of those margin opportunities around the weather-related items, but the lost business, as it says in our note, we do expect that that will continue. We don't know with certainty until orders show up our don't show up, but at this point, it looks pretty clear that that lost business will continue to impact our sourcing results for the majority of 2014.

With that, I will turn it over to Chad for some comments on our financial section.

Okay. Thank you, John. I'm on slide 13 now. You can see while our operating cash flow is down for the year on a GAAP perspective, the timing of the tax payment from the gain on sale of T-Chek had a significant impact.

We had a positive impact of about $100 million in the last quarter of 2012 because the taxes for the gain were accrued, but they were paid in the first quarter of 2013. So you can see on the third row of that chart, if you adjust for the timing of those tax accruals and tax payments, we actually have significant increase in our cash flow, both for the fourth quarter and the year, compared to 2012.

Our CapEx, including our investments in capitalized software, which is both internally-developed software as well as purchased software, the total of that capital -- of those capital expenditures for the year were slightly lower than predicted at $48 million. In 2014, we expect to spend about $40 million to $45 million in capital expenditures, including that software.

Our total debt balance at the end of the quarter was $875 million. That was made up of the $500-million long-term debt that we entered into in the third quarter, and we have $375 million outstanding on our revolving line of credit, which has a maximum of $500 million.

I'm going to move on to slide 14. We've talked about our capital structure a lot lately, but I will recap what our current goals and plans are. We currently have a goal of distributing at least 90% of our annual net income through ongoing share repurchases and dividends. This goal could change, based on investment opportunities or other capital needs.

We expect maintaining this program will hold our debt balance somewhere in the range of 1 to 1.5 times the EBITDA. As we have mentioned at our Investor Day, we would consider going as high as 2.5 times EBITDA for the right acquisition opportunity.

Looking at 2013 in specific, we used $310 million of cash in ongoing share repurchases and paid $220 million in dividends. These distributions total over 120% of our net income. The higher-than-normal distribution was driven in part by our strong operating cash flows.

In addition to that more normal ongoing activity, we have entered into a $500 million ASR program with two banks. The source of the funds was the long-term debt that I mentioned earlier.

One of the two banks terminated their ASR plan on December 11, which resulted and a delivery of an additional 1.2 million shares. The other bank's ASR is still open and will close between now and April 16, 2014. The precise closing date of their ASR is completely at their discretion.

If they had terminated their plan on January 31, they would have delivered us an additional 1.2 million shares. Our ending diluted share count was approximately 149.7 million shares, and this will go down when the second bank closes their ASR.

With that, I'll turn it back to John for one more slide of prepared comments talking about 2014 and forward.

My comments on page 15, the 2014 Thoughts and Initiatives. On the top of that chart is a recap of our Investor Day long-term growth goal. For those of you who didn't participate in that last year, given the changes over the last three or four years and the changes in the environment, through our long-range planning process, we took a look at how we thought we could perform over a longer period of time, given the environment over the last four years.

What we did at that point is lower our long-term growth targets to something that we thought was more realistic of the types of market share gains and operating leverage that we could gain in a more competitive environment like this. We stated then and would reiterate now that that plan assumes that margins will fluctuate, but it also assumes margin stabilization from the previous periods. When we communicated this plan last fall, we did not anticipate the more aggressive margin compression that we've experienced towards the tail end of 2013, nor did we contemplate the lost business in the Sourcing division.

So we still do believe in that long-term growth target. We still believe that that is our benchmark and a reasonable goal or for the longer term, next 5 to 10 years of C.H. Robinson performance, but, results will fluctuate, and margins will fluctuate. And during periods of time where we have contraction, it will be difficult, or we won't be able to achieve those goals.

So while we still believe in that long-term growth target, the next bullet point talks about the fact that similar to the fourth quarter of 2013, our net revenues have decreased in January of 2014. We do not have our books closed yet, and we do not have the precise numbers for January of 2014. But the themes that we've talked about on this call, unfortunately, some of them are carrying into the year in 2014.

That market tightening on the Truckload side that we discussed has continued to date in the first quarter of 2014. Those price increases of 3.5% and 5% that I referenced in the fourth quarter, those have continued to escalate into January. Again, we have to scrub these for the quarter, and we have to look at fuel numbers. But probably something more in the customer pricing up 5% and carrier cost up 7%.

So again, we have to get out ahead of this, and at some point, make sure that we stabilize or expand the margins that we are doing on our pricing. But as the market is moving, we are moving customer prices, and we are reacting to the marketplace. But it has been a challenge to get out ahead of it and to manage through margin stability or improvement in the North America Truckload piece.

In addition, as I mentioned earlier, we have some of the lost business trends that are going to carry into 2014 for a while. And while we'll talk more specifically in some the Q&A about the expense management, obviously, the run rate coming into the year is something that we have to manage down over time and is going to take a while to get in line.

Pricing will be a high priority in 2014. As I mentioned before, that in these market conditions, we do have a long history of adapting to what's going on in the market, and this is the period of time where we feel like we can add a lot of values to our customers in the marketplace to adapt to these market conditions. We have to serve them and honor that commitments that we've made over the last year as these contracts cycle through, and we'll get into more specifics around how the pricing works and how we expect that to play out. But at the same time, it's very clear that in these changing market conditions, that while pricing is always important, that it will be a very critical focus for us in 2014.

The last bullet point of our growth continuing to be a top priority through leveraging our current resources, we do intend to manage differently in 2014. The term leveraging our current resources does imply that we intend to have a different attitude about our hiring and our addition of resources to the network during 2014. We do believe that in the environment that we are in now, and if you look at the various pieces of our business, that while we believe in the investments that we've made over the last couple of years, that during this type of market condition, we should be able to leverage some of those investments to continue to go after market share gains with current accounts and current resources that we have in place.

There's also a number of other things that we've been working on for the last couple of years around automation and operational productivity, regionalizing our North American business to share resources more efficiently across North America, and an enterprise sales approach around segmentation and going to the market more effectively, initiatives like that that we've been working on for a number of years, to position ourselves for a more competitiveness into the future.

It's just become clear that in the balance of productivity and managing the cost structure versus growing the business and going after market share gains, that we have two tilt that balance more aggressively and manage the cost structure of the Company down more aggressively, sooner than perhaps we've been thinking over the last couple of years. So while we'll be working hard to improve price and to manage the margin and the customer relationships just like we always have, it's also time to prove some of the return on the investments that we've been making and go after market share gains with more aggressive expense management in our network.

So I will finish the prepared comments by restating what I said in the beginning. We are not happy with the fact that our earnings per share decreased for the quarter.

The formula for managing this business is straightforward and is similar to what it's been in the past. You have to manage those account relationships and go after growth and business in the marketplace, manage pricing and margin, and control the cost structure and productivity in balance with that to grow both your market share and your earnings.

So there's a bunch of this that we have to own, and we do, and we're on it. We understand it. We know how to manage it, and we will improve it.

There is a bunch of this that is just reflective of a very challenging market dynamic and increased competition and changes in supply chains that may not go away in the near future, but we have to continue to adapt the Company and adjust to that.

Those are the prepared comments that we have. With that, I will turn it over to Tim, who has organized the questions that were submitted so we can go through the Q&A portion of the call.

Thank you, John. That me first start by thanking all of the analysts and investors for taking the time to submit questions. We received a lot of great questions, and we'll do our best to get through as many as we can in the time allotted.

John and Chad will share in the duties to respond to the questions, and I will facilitate by first asking the question, and then either John or Ted will respond. So we'll get right into that now.

And the first question is for John, and it relates to headcount. Why does headcount still need to go up at such a rapid pace relative to net revenue? How long does that continue?

Are employees beginning to get somewhat disgruntled with the pay-per-performance incentive comp structure due to recent performance? And has that led to higher turnover? So, a lot there.

Okay. Some of this was covered in the prepared comments with the fact that we have been doing, over the last couple of years, what we've done for the majority of time, which is to look at our headcount investments largely in correlation to volume. While we've always had productivity initiatives, and we have as many today as we ever have. Our historic benchmark looked at headcount and staffing additions highly correlated to volume.

As I stated in the comments, we do have a different approach to that during 2014. It's not without risk. We have to drive market share gains and productivity in the network, and obviously, we want to be smart about the balance of that. So the trade-offs between market share and investing in the network and adding resources to go after it versus margin and product of the is something that we've struggled with every day, but we are taking a different approach going into 2014.

To the question of employees with variable comp and incentive pay, and is that causing turnover or morale issues. I don't think our industry is unique in the standpoint that expecting more with less has put some strain on our workforce. As I mentioned earlier, the variable pay and pay-for-performance culture that we have, those create tension in our network around the fact that people are working as hard as they ever have, and in many cases, making less money for it.

I think that's just a reflection of the times. Statistically, I don't -- our turnover has not accelerated. Although anybody who's involved in any service business, you know that it's more about which turnover you are having and are you keeping the right people and are those were still on the bus motivated with the right morale.

It's a challenge that we have to manage just like every other business that is going through margin compression and productivity expectations. But this Company has a very strong culture of pay for performance. We all understand it, we're all a part of it, and it's just one of the risks of the business that we will have to continue to manage.

Thanks, John. The second question is for Chad.

Does CHRW have any meaningful cost levers remaining to pull? Is it possible to drive further costs from the network, or does further margin improvement now depend on volume increases and pricing?

As you know, the bulk of our operating expense is our personnel. John, both in his prepared remarks as well as answering the last question, covered a lot of the personnel expenses, so I will focus on SG&A.

We also believe we have some room to leverage our SG&A expenses in 2014. We have always aggressively managed our expenses and will continue to do so in the future.

We have received some questions about Phoenix integration expenses going away. From the time of the acquisition, we have said that people managing the integration are the leadership of the Company, not external consultants or dedicated people.

There are still significant ongoing integration work into 2014. There's both the systems as well as the integrating the go-to-market strategy that John mentioned earlier. We believe we have a strong Team that will now begin to focus more on the integrations of sales and the go-to-market strategy and growth as our other integration efforts reduce.

Our total SG&A expenses for 2013, including amortization, was about $327 million, or about $82 million per quarter. When you look at the pro forma Q4 2012, you will see that, that was $80 million for the fourth quarter.

Many of the SG&A expenses are predictable, like rent, communication cost, depreciation, amortization. Many others are far less predictable, like claims and bad debt expense. Because of this, our SG&A expenses will continue to fluctuate quarter to quarter.

In 2013, we had $74.3 million in the first quarter and $84.7 million in the fourth quarter. In Q1, we had low bad debt and claims expense. In Q4, we had relatively high bad debt and claims expense. So that made up -- those two expense categories made up about half the variance between the high and the low for the quarter.

We feel like the average of $82 million is a good benchmark for 2014. It will fluctuate from quarter to quarter like it always has, I'm sure. Obviously, the first quarter will be a relatively difficult comparison.

Thanks, Chad. The next question is for John.

Your guidance assumes that gross margins stabilize. Do you think that is it's possible in 2014? Do you expect to meet your long-term EPS guidance of 7% to 12% this year?

I addressed this somewhat earlier. Obviously, with a net revenue decline in January and continued margin compression, with a run rate of increased expenses, it's not realistic to assume that margins are going to stabilize or that we will achieve those long-term targets in the first part of 2014. So the answer would be no.

We still to believe in that long-term target, and as I mentioned earlier, through repricing efforts that can take a couple of quarters and better expense management throughout the year. We do believe that our earnings growth opportunity is much better in the second half of 2014 than it is in the first half.

Thanks, John. The next question, again for John.

How did weather impact your business in the fourth quarter? What impact has it had quarter to date?

I mentioned in the Sourcing area that a number of the crops that we buy and sell and distribute were impacted by weather throughout 2013. Some of those volumes were impacted in the fourth quarter as related to weather freezes and different things that happened. So there was definitely was an impact in the Sourcing business.

In the Transportation business, there were days in December and January where you could correlate to really cold weather and the absence or decline of Transportation volumes. In the past, we've always believed that most weather activities that volume would come back after a period of time. I don't know, in some of the January weather, whether that was true or not.

It does feel like some of the worst weather days in the month of January did diminish volumes pretty significantly where there wasn't a corresponding rebound to it. So that's another thing that we'll study more over time. It does feel like weather was a contributor to some of our challenges over the last couple of months.

Thanks, John. The next question is for Chad.

What are your growth expectations for Phoenix, which to us means Global Forwarding in 2014? Are there additional opportunities to benefit from the Company's increasing buy scale this year that did not benefit results in 2013?

Right. We've talked about the combined marketing and the increased focus on cross-selling and going to market with Phoenix in 2014. We believe that we will continue to add market share. So obviously, a lot -- being a major player in the transpacific lane, a lot of how well we do and how quickly we grow will be dependent on how fast the market grows, and we also feel comfortable that we will continue to add market share.

As far as leveraging the buy scale, yes, we think we still have some room to go. The new Ocean contracts went into effect in May of 2013, so for the first four months, we were operating under the old contracts of both Phoenix and C.H. Robinson. We think that these new contracts will continue to add efficiency, and we also feel like the more we get the two companies integrated from an operational perspective, we'll find even greater opportunities to consolidate volume, to increase the profitability of our LCL business, which will create greater density, and also, continue to leverage the progress that we've made in our Air gateways.

Thanks, Chad. The next question again for Chad.

Can you discuss how CHRW's bid season with customers works? Namely, when does it begin and end? Is there a bellwether customer that sets market expectations for pricing?

Our transportation business is very fragmented or a very diverse with a large number of customers. No transportation customer is greater than 3% of our business -- or greater than 2% actually. So there is no single bellwether customer that really signifies what we think rates are going to do.

When you look at -- I've read about the industry, and when we look at our own contracts, 70% of contracts happen in the first half of the year, even the first four or five months of the year. Obviously, shippers choose to bid when they feel it's advantageous to them. Sometimes shippers, even if a contract expires, will continue to try to tender us rates under those old contracts. That is the point of view of the shippers.

Robinson and almost all of our Truckload contracts, as well as the industry as a whole, has the ability to raise prices during a contract. Obviously, every time you do that, you risk losing freight or creating a competitive bid situation which could lead to lost freight.

As John mentioned earlier, we are going to continue to focus and focus even harder on our pricing with our existing customers. We may lose some business through that, but we understand the need to address some of our lower margin business on a case-by-case basis with customers throughout 2014.

Thanks, Chad. The next question is for John.

North America Truckload volume growth meaningfully decelerated in Q4 2013. It's up to 6%, versus 9% in Q3, despite a strong spot market. We typically think of market volatility as a favorable environment for a broker to operate in, as they generally benefit from additional spot market opportunities as large carrier capacity gets soaked up.

Were there factors that constrained CHRW's ability to leverage the strong spot market last quarter to grow shipments? Do think more of the spot market traffic is going to the brokerage arms of asset base carriers?

There's a lot of components to that question, and it ties in briefly to what I talked about earlier, that going into this year and currently, we do have a very high volume of committed customer relationships. So when the market begins to tighten like this, it puts strain on those margins and on those commitment to service the customer commitments that we have out there.

The transactional volume increases require a shipper that's willing to pay more, They require available capacity to actually meet that transactional opportunity. And again, in OurWorld, the boundaries between committed and contractual and transactional vary more than they would for an asset carrier, where it's clear who's equipment the freight is moving on.

So we do see an increase in transactional opportunities and spot bids and freight like that, that we are going after, but we're not as successful in adding significant volumes of transactional freight as we have been in periods of the past when the market begins to tighten. Whether the shippers are actually choosing to ship at a higher rate, at what degree they are doing that, we know some of it. Whether we are winning as much share around that in the past or not, whether competition is a bigger factor, that's hard to tell.

If we are missing out on that freight, we don't necessarily get informed where it's going, whether it's an asset based competitor or another broker or where that freight might be going. So that's something that we are definitely monitoring. As or market conditions continue to change, is a clear point of emphasis to make sure that we are pursuing transactional opportunities in addition to our committed freight.

Thanks, John. The next question again for John.

In your prepared remarks, you had indicated that Truckload rates to customers increased 3.5% year over year while costs were up 5% year over year.

How did these two measures trend in January? What percentage of CHRW's book of business is currently operating under contractual agreements? When do these contracts predominantly end?

I mentioned earlier that in January, the preliminary estimates were more around pricing -- customer pricing up 5%, cost up 7%. Remember, in our business, since we are working with predominantly medium and small carriers who like a very fluid pricing arrangement, that the vast majority of our Truckload capacity is sourced on a fluid or spot-market-type basis, where the percentage of the freight that works with the customers is much more committed.

Again, the definitions vary in each account. The definition of commitment and how long that last varies by each account. Most all the contracts have 30-day notification periods where, as Chad mentioned earlier, we can propose different pricing. But then it all comes down to the load acceptance and the volumes and how each shipper and carrier in the marketplace are balancing the changing market conditions.

So as I mentioned earlier, we revisit pricing daily. It is an hourly topic around here around monitoring where we have margin issues, where we have losses, and the pricing adjustment that it takes to correct those. It is thousands of unique relationships and account managers to figure out what is the right technique and timing in terms of adjusting those margins.

Okay. Thanks, John. The next one again for John.

We saw some robust trucking activity in late November and for some of December. If the market tightness seems to be continuing in January, isn't this the type of market volatility during which you've historically enjoyed significant share gains? Do you feel that will be the case in Q1?

How long does it typically take for your net revenue margin to stabilize after an inflection in truck demand?

When we look back over the last 10 or 20 years, assuming history is a relevant guide for how we will react and how we will be able to adapt these things, on average, it can take 2 to 3 quarters for pricing changes to go through. Now, it depends on the time of year, the severity of the tightening, and the price increases.

I don't know if December and January is indicative of what 2014 will be like in its entirety or if things will escalate in terms of tightness. But it can take a quarter or two, at least, to get through the more committed business and reprice some of that. And again, how successful that is depends upon how well we anticipate the future market conditions.

We've commented a lot over the last four years, that with the increased pressure on a lot of our customers around their supply chain and the competitive factors, price increases are challenging to get through in today's marketplace. That will continue to change as market condition change.

But if you look at the environment over the last 4 years, it does make for where this is hopefully an inflection point and hopefully an opportunity to add more value to our customers. But it does take time to work through, and probably 2 to 3 quarters would be the right guide from a historical standpoint.

Thanks, John. The next question is for Chad, and a Sourcing question.

Do expect your Sourcing business to grow in 2014 at the 4% to 8% long-term rate you are expecting? Is there any other color you can give on the large customer you've lost in terms of dollars or impact to overall net and margins as well as EPS?

Okay. I'll start with the question about the overall impact of the large customer.

It is -- they were our largest customer in Sourcing and will likely the customer number one or two after this. So I think it's very important to understand that we did not lose the customer. As John mentioned, there's just certain commodities that they are not going to order -- that they don't plan on ordering from us going forward.

As far as quantifying that, it's based on what we know today. It's somewhere around 10% of the total Sourcing net revenues. As John mentioned, Sourcing has a much more concentrated customer base for us, and we did lose a significant portion of the customer, but expect that to be at least 10% of our net revenues.

As far as will we grow at our long-term rate in 2014, that would be extremely difficult to achieve. Our Sourcing division does have plans to return to positive growth, even with this 10% headwind, but that is an admittedly aggressive plan.

As far as operating margins and EPS, our Sourcing division has operating margins about equal to the consolidated numbers. So really, the answer to that question is how successful they will be at replacing the net revenues.

Thanks, Chad. The next question is for John, and an Intermodal question.

Are you interested in Intermodal acquisitions? Does the XPO-Pacer deal change how you think about expansion in the Intermodal space?

If you aren't looking for Intermodal M&A, are you thinking about adding to your own container count? What else can you do to increase your presence in the intermodal segment of the market?

I started to discuss this earlier, and looking at our results. We feel very positive about our knowledge of the Intermodal market, the relationship between Truckload and Intermodal, and where it makes sense to ship, by which mode of transportation, and our ability to execute on in Intermodal shipment.

The challenge that we have -- or the growth opportunity that we have is in the more dense freight, the larger volume commitments where asset commitments do serve those relationships better. It just creates so much more operating efficiency that it's very difficult to be price competitive if you don't have that.

So the answer to the question is yes, were interested in both. We're interested in looking at continuing to grow our organic capabilities with either more equipment commitments or dedicated drayage-type solutions that will help solve that business. Or of the right acquisition opportunity comes along that we think will create value and be able to be well integrated into our culture, that we would pursue that as well.

So we are very interested and committed to growth in the Intermodal space and are looking at both whatever type of investment that we could make to move us forward in that.

Thanks, John. Next question for Chad.

CHRW recently lowered its long-term growth targets. Is the Company planning on revisiting its long-term incentive compensation to reflect CHRW's new targets to try to help employee morale, retention?

We are constantly analyzing our compensation programs, balancing the variable cost model, with the maintaining our employee base. So yes, we spent a lot of time on this. When you look at the equity grants that were made to the leadership, so the top 350 or so people in the Company, basically branch managers, although we have two executives and corporate directors, we did change the vesting formula for our equity.

So instead of being the average of operating income plus -- the average of operating income and EPS plus 5%, we went to EPS plus 10%. Again, this is just for the new awards. The vesting formula for the awards that were granted previously to December of 2013, stays at their original growth plus 5% formula.

Last year, so -- beginning last year, so the awards done in 2012, which is the vast majority of the people but a small amount of the total, relatively small amount of the total amount of equity awards, we went to time-based with them, as we previously announced. So those more individual contributor and key up-and-coming leaders in the network, their equity awards are time-based.

So we did adjust equity programs. We have not adjusted any of the other programs at this point.

Thanks, Chad. Unfortunately, we are out of time, and I apologize that we couldn't get to all the questions today. We appreciate you, and thank you for taking part in the call today.

The call will be available for replay in the Investor Relations section of this the C.H. Robinson website at www.chrobinson.com. It will also be available by dialing (800)406-7325 and entering the pass code 466-0962#. The replay will be available at approximately 7 p.m. Eastern time today.

If you have additional questions, please feel free to call me at (952)683-5007, or email is fine as well. Thank you again. Have a good day.

Thank you. This concludes the C.H. Robinson fourth-quarter 2013 conference call. Thank you for participating. You may now disconnect.