羅賓遜全球物流 (CHRW) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson third-quarter 2016 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, October 26, 2016. I will now turn the conference over to Tim Gagnon, the Director of Investor Relations.

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

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 Andy will be referring to these slides in their prepared comments.

I would like to remind you that comments made by John, Andy or others representing C.H. Robinson may contain forward-looking statements, which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I will turn it over to John to begin his prepared comments on slide 3 with a review of our third-quarter results.

Thank you, Tim.

I'm going to start by referencing a few of our key financial metrics on that slide 3. Total revenues of $3.3 billion for the quarter were down 1.9% compared to last year. Total net revenues of $558 million were down 5% from a year ago. Income from operations of $211 million was down 9% from a year ago. And our earnings per share of $0.90 compares to $0.96 a year ago, or a 6% decline.

Year-to-date earnings per share of $2.73 is up 4% from $2.63 a year ago. Despite some quarterly decreases in some of our key financial metrics, we do believe that we're making good progress towards achieving our long-term goals.

I want to start my prepared comments by discussing a few of the themes that impacted both our third-quarter results, but also reflective the progress that we're making on those long-term goals. First topic I want to start with is margin compression. On our second-quarter call, we discussed the fact that in the months of June and July, our net revenue had begun to decline due to margin compression. Unfortunately, that margin compression carried on through the third quarter and impacted our results for 2016.

Most all of our services had margin decreases versus a year ago during the third quarter. But the point that we want to emphasize is that our margins are within the ranges of what we expect in our long-term planning. And we do accept the cyclicality of our markets as one of the things that we have to manage.

A big part of the 3PL value, particularly with our committed relationships, is managing the cycles and managing the price variations and margin compression that can occur in the marketplace. And we do feel that we did a good job this quarter of honoring our committed relationships and servicing our customers in a way that was very valuable to the market. So we talk a lot about margin compression internally, and you will hear a lot about margin compression on the call today, impacting our results.

The next topics regard to market share gains and volume metrics. Andy will cover and you will see a lot of metrics throughout our presentation about shipper growth and volume growth in our freight activity, as well as share gains in most of our services. We've talked in the past that in a lot of ways, this is one of the most important metrics in our business, as we have to make sure that we remain relevant in providing increased service levels to our customers and our carrier providers. We will share the metrics around our shipment activity, as well as our capacity sign-up.

We feel pretty good about the relevancy of our network in the marketplace and the fact that carrier sign-ups are at very high levels. And the services that we are offering around all the choices that those carriers have to interact with our network via mobile application or the Internet or telephone calls, or any way that, that capacity deems the right way to interact with our network. So we did have market share gains and volume growth in a lot of our metrics that we will share today, and that is something that we continue to feel very good about as a foundation for continuing to add value.

When we think about the margin compression and the relationship to the volume gains and the market share achievements that we've had, we also talked about the fact that we knew we were coming into this year with some challenging comparisons. There is a relationship between volume and margin, and in the second half of 2014 and 2015 we did have some very good results, with double-digit net revenue and earnings per share growth in both of those periods of time.

We've talked in the past that our portfolio business, the vast majority of it does re-price on an annual basis. And when we think about going after those market share gains and that volume activity, it's important that we are successful doing that during the periods of margin compression and when prices are cycling down. Because the market is very fluid and, as I said earlier, a lot of our business re-prices on an annual basis.

So overall, when you put those three things together, we had challenging comparisons coming into the year, the market cycle down, creating some margin compression. But we feel very good about our network, our relevancy to our shippers and our capacity providers, and the fact that we were able to achieve some good volume growth and market share gains.

Just a couple of other topics that I want to highlight before turn it over to Andy, again, things that both impacted third quarter as well as topics that are important to our long-term success. We do continue to invest in the most important part of our network, which is our people. We had around a 5% increase in our headcount from the third quarter versus a year ago. And as we invest in those people, we continue to feel very confident about the job families that we have and our approach of how we go to market to make those people successful.

You'll see that we did have a decrease in personnel costs, due to the variable nature of our business model. So that despite the fact that we are continuing to invest in the people that we need to execute our services, we also feel our model is working with regards to how it reacts during different environments.

The caliber of our people are extremely important, and we have talked in the past that the additions of headcount do tend to correlate more with volume and shipment activities than our net revenue growth. So this, again -- the third quarter reflects our ongoing investment in our network by hiring people and investing in the future capabilities of that network.

The last topic I would touch on is the acquisition of APC that closed on September 30. In terms of the third-quarter impact, it's really mostly the balance sheet numbers that you will see, because of the closing on the last day of the quarter. However, it's an important part of our long-term plan that we continue to look at our capital strategies and invest in our network through the right types of M&A activity that we feel can enhance our network.

We feel really good about this acquisition from a variety of perspectives. We had a long operating history with APC through the Phoenix relationship and working as an agent. We feel very good about the cultural compatibility and the capability of the Company. There were some very positive things that Andy and his team did around the structure and the capital deployment to make sure that we are reinvesting our capital outside of the United States, just like we had represented that we intended to do.

So that also is another important element of how we invested in our network during the quarter and believe that we are positioning ourselves for good success in terms of achieving those long-term goals. Those are some of the overall highlights of impact on the quarter that I wanted to share with you. And with that, I will turn it over to Andy to walk through the results by service area.

Thank you, John.

And now onto slide 4 and our transportation results. As John mentioned, we anticipated a challenging pricing and execution environment coming into the second half of this year. The new last year's comparables would be difficult. Our people and our network did a great job managing through the environment by being proactive and serving customers in order to be the provider of choice at a time when routing guides are performing largely as planned.

Total transportation revenues were down slightly in the quarter to just under $3 billion. However, total revenues were up on a year-over-year basis in both August and September, and that positive trend has continued into October. The growth, month to date in October, is a result of our significant volume improvements, as well as the fact that fuel is normalizing on a year-over-year basis.

In October, our truckload volumes are up over 12%, clearly outperforming the market. Transportation net revenue margin decreased approximately 80 basis points from last year's third quarter. Though below last year, this margin is on the upper end of our historical third-quarter margins over the last five to six years.

The decreased net revenue margin was primarily the result of truckload pricing falling more than purchased transportation costs, impacting margins by approximately 140 basis points. That decrease was partially offset by the positive impact of fuel of approximately 20 basis points, and in the change in our mix of services of approximately 40 basis points.

As we did in the last quarter's presentation, we have included slide 5, which provides a longer historical perspective of pricing and cost, and the respective impact on our margins and results. On this graph, the light and dark blue lines represent the percent change in North America truckload rate per mile to customers and carriers, net of fuel costs over time. The orange line is the net revenue margin for all transportation services.

You can see by looking at the light and dark blue lines that in this year's third quarter, there is a separation where the rate of change and our price to customers fell faster than the rate paid to carriers. In last year's third quarter, in comparison, the opposite was true, where our costs were falling at a faster rate than price. This story also highlights the volatility of our business. This year's third quarter also represents the first time in nine quarters where the cost line was above the price line, which has impacted business results over the past couple of years.

One of the many things our customers ask us to do is provide contractual rates and access to capacity, to avoid some of the highs and lows of the markets, so they are better able to plan their transportation spend. There are times when this contractual commitment will benefit our results, and other times when they will not. Our ability to provide this type of service is one of the reasons shippers choose Robinson as a core provider in their businesses. During the quarter, our committed or contractual businesses represented approximately 62% of our truckload volume, which is in line with the past several quarters.

We often speak about the uncertainty of how the market will perform looking ahead. We're not sure if we have reached the bottom of the decreased pricing environment that we've seen this year, but the third quarter did see some improvement in pricing. We don't feel like there has been a big change in the market, as demand continues to be tepid, but things do seem a little bit better sequentially from the third to the fourth quarter to date.

Moving on to slide 6 and our truckload results, truckload net revenues were $309 million, a decrease of 10.4% in the third quarter. Truckload volumes, however, increased 7.5%, and this growth was a result of an increase in shipments across all of our services, from drive-in, flatbed, to dump control. We also saw volume increase growth across all of our mileage bands, from short- to long-haul segments.

As mentioned earlier, for the first time in nine quarters, customer pricing was down more than carrier costs. Customer pricing net of fuel was down 5.5% versus last year's third quarter, and purchased transportation costs net of fuel was down 3.5%. We again added 4,200 new carriers in the third quarter. These new carriers moved nearly 18,000 shipments for us in the quarter.

As we look ahead to the remainder of the fourth quarter and into 2017, we don't expect a significant change in the North American market. And we will remain focused on growing our volumes and executing a balanced approach to taking profitable market share.

Moving to slide 7 and the less than truckload results, net revenues in our LTL business grew 2.4% to $96.4 million. Volumes increased 5% when compared to the third quarter of last year. Pricing, however, was down slightly, and net revenue margins held flat during the quarter. This quarter's growth slowed to bit when compared to the first two quarters of the year, as the size of our shipments were down on a year-over-year basis and the lower-priced truckload market is having an impact on LTL demand. We continue to be confident in our leading position in LTL and our ability to offer a compelling solution for our customers.

Transitioning to our intermodal results on slide 8, intermodal net revenues decreased 24.5% in the quarter, while volumes were approximately flat. As has been the case for four quarters, the overall intermodal market has been challenged by the loose truck market, and volumes have suffered.

We did achieve approximately 15% volume growth in the quarter with our large strategic customers. The trend has been positive for the past few quarters with these larger, more committed customers. The transactional opportunities, however, continue to be scarce, which is the primary reason for our net revenue decrease in the quarter. As we have mentioned in previous quarters, the lower truckload pricing is limiting the long-haul intermodal opportunities.

Moving on to the global forwarding business on slide 9, third-quarter net revenues in our Global Forwarding Services were $88.7 million, a 2.1% decrease from 2015's third quarter. Ocean net revenues were down 3.1%, air net revenues decreased 1.7%, while customs grew 2.6%. Ocean shipments increased approximately 5% in the quarter, and pricing continued to be down, with total revenue per shipment off double-digits in the ocean service line.

The pricing environment, especially in the transPacific lane, did change in September as a result of the Hanjin bankruptcy filing. Hanjin is not a core carrier for Robinson, so we were able to provide great service for customers. I think what surprised us and the rest of the industry was the degree to which the remaining carriers raised their rates over the short term, sometimes as much a $750 to $900 per container. This situation did pressure our ocean margins in September, and it took a few weeks for our account managers to revise pricing with customers.

As John mentioned earlier, we made an investment in the global forwarding business at the end of the quarter with the acquisition of APC Logistics. We are very excited to have APC as part of the Robinson Global Forwarding team. The addition of nine offices and 313 employees in Australia and New Zealand strengthens our global value proposition. The integration is proceeding quickly and smoothly, and we are excited about our combined ability to grow with their customers in Asia and Europe.

We had a strong quarter, growing air shipment volume approximately 18%. This has been a strategic focus for us, and the double-digit volume increase is a result of an environment where demand is generally soft. Despite the strong volume growth, we continued to see weak pricing down double-digits, that led to a decrease in net revenue.

Moving to other logistic services on slide 10, net revenues increased 31% in the third quarter of 2016 compared to the same period last year, led by the continued strong performance at TMC. The managed services business represents approximately 65% of the net revenue in this category. Managed services net revenue increased 29% in the third quarter, and is currently on pace to service over 4 billion in freight under management in 2016.

The growth we're seeing in the managed services is a result of our global investments over the past decade. We're seeing double-digit growth in Europe, Asia and South America, in addition to the 24% growth in North America. The managed services business leverages our Navisphere technology platform, providing visibility, control and deep integration across supply chain partners, while providing process management and consulting services to drive continuous improvement in our customer supply chains. Congratulations to the TMC and IT teams involved in onboarding Microsoft.

Transitioning to our sourcing business on slide 11, congratulations to the Robinson team for growing sourcing net revenues 4.7% in the third quarter. The net revenue growth was primarily the result of a 6.4% case volume growth, offset by a decrease in net revenue per case. The 6.4% case growth was driven by strong performance in the foodservice segment and our strategic and key commodities.

I will now transition to slide 12 and a review of our summarized income statement. For the third quarter, operating expenses decreased 2.4% to $347 million. Personnel expenses decreased 2.7%, primarily driven by lower variable compensation incentives, and partially offset by an average headcount growth of 4.5% in the quarter. As John mentioned, we've been making strategic investments in headcount throughout the year to grow volumes.

SG&A expenses decreased 1.6% in the third quarter, primarily due to a lower provision for bad debt and lower claims in this year's third quarter when compared to the same period in 2015. The combined impact of these two expense items were approximately $6 million in the quarter.

We are pleased with our credit and finance results, as they reflect the quality of our customers and receivable balance. Our operating income as a percent of net revenue was 37.8%, a decrease of 170 basis points from last year. Our effective tax rate during the quarter was 36.7% versus 38.5% last year. We did have a one-time tax benefit from an item related to the Freightquote acquisition that increased the earnings per share by approximately a penny. The remainder of the improvement versus last year was the election of APB 23 in the first quarter of this year.

Onto slide 13 and other financial information, we generated nearly $130 million in cash in the quarter and had just over $27 million in capital expenditures. Year-to-date cash flow from operations was $377 million, and year-to-date capital expenditures were approximately $71 million, reflecting the build-out of our second data center. We finished the quarter with $224 million in cash, and our debt balance is $1.225 billion, with $500 million at 4.28%, and $725 million on the revolver with a current rate of 1.52%. The debt balance increased at the end of the quarter, as we utilized the revolver for a portion of the purchase price of APC, which closed on September 30.

And finally, before turning it back to John, slide 14 and our capital distribution to shareholders, we returned approximately $130 million to shareholders in the quarter, with $63 million in dividends and approximately $67 million in share repurchases. In the third quarter, we returned 101% of our net income to shareholders, and year to date, we have returned 86%.

Again, our thanks to everyone at Robinson for a solid third quarter in a challenging environment. Thank you all as well for listening in. With that, I will turn it back to John to make some closing comments before we answer some of your questions.

Thanks, Andy.

In terms of wrapping up our prepared remarks on slide 15, with regards to our final comments, really, the first two bullet points tie into the opening messages around margin compression and volume growth. As you see there, we continue to have strong North America truckload volume growth at 12%, that Andy mentioned, as well as some ongoing margin compression, resulting in a net revenue decrease of approximately 4% per business day so far in October.

Once again, we do have some strong comparisons from the [fourth quarter] of the year ago that we will be dealing with, that are helping make that net revenue growth a little bit more challenging. But overall, the major themes carry forward, in that we continue to feel very good about our service levels, the relevance of our offering in the marketplace, and the mixture of volume and margin compression that we are dealing with in the marketplace.

On the bottom of the slide 15, just a couple of other topics to share a few thoughts with before we get into the Q&A. We've hit on this theme a couple of times, but just wanted to share that we are very excited and feel really good about the initial interactions on APC integration. I mentioned earlier that we do have a long-standing relationship with them through our agency agreement. The Companies of APC and Robinson have worked together successfully for a long time, but integrating our businesses is going to provide yet another opportunity to share information and to jointly market what we think is a more effective way.

There are some agent relationships, both within C.H. Robinson and APC, that are transitioning during the fourth quarter 2016. So there is a lot of activity associated with that. But we feel very good about our approach to the market and the progress that we're making on that thus far.

There will also be some additional IT integration that we will be accomplishing in the next few quarters to come. But overall, again, just something that we feel very good, as the perfect type of network investment and capital allocation that we want to do to continue to strengthen our network. And wanted to share with you that we are off to a great start, with some early customer wins, and feeling about how we are progressing with that.

In addition, the results of APC are not included in the comments above with regards to the net revenue to date. So the results of APC, when included in the fourth quarter, hopefully will improve our net revenue by a couple of percent. We do believe the acquisition will be modestly accretive going forward in each of the periods.

The last bullet point on here about confidence in our network is something that we talk about frequently, but I think it's worth mentioning to just call out again both the confidence that we do have in our team and the relevance of the 3PL model. When you think about the changes in the marketplace and the lack of predictability that happens within the transportation marketplace, some of the things that go unnoticed at times are things like a significant hurricane in the Southeast this quarter. The large ocean carrier bankruptcy that was mentioned, and all of the re-routing and service opportunities that had to come from that.

There is, every quarter, some good examples of how the 3PL model and how the Robinson network really plays an important role in the marketplace to absorb some of that volatility and improve services. And react to a lot of things that happen in the marketplace that are important to the shippers and the providers out there, that we do that.

So I just wanted to close again by saying that there is a lot of change going on, there's going to be a lot of pricing activity, there's a lot of volume happening in the network, a lot of changes. And we just feel really good about our network and our ability to react and succeed in any of those environments, and reestablishing the value and relevance of our network to the marketplace.

So with that, that concludes our prepared comments, and I would like to turn it back to Tim to facilitate the question-and-answer session.

Mr. Gagnon, the floor is yours for the question-and-answer session.

Thank you, Donna, and thanks to the many analysts and investors for taking the time to submit questions. I will frame up the questions as they were submitted, and turn it over to John and Andy for a response.

And with that, let's get right into it. The first question is for John. The number one concern I continue to hear from investors or potential investors is margins are high, why shouldn't I be more concerned about margins going down in the coming quarters?

Hopefully, our prepared comments gave some light to addressing this issue. But I want to repeat some of it, because it is very important and foundational to how we approach things. If you start with the long-term perspective, part of what we have said is that we accept the cyclicality and the margin expansion and compression that happens in our model. Particularly as we move into more committed relationships, where we have fixed pricing on the shipper side for a period of time, and often more transactional or fluid procurement costs.

So it's very fundamental, as we said in the prepared comments, to how we approach market and how we try to add value. And the way we think about margin expansion and compression is, kind of monitoring it over the long term, to make sure that we are within the parameters and boundaries of what we've set as expectations around how things are going to cycle.

So from a long-term perspective, we don't get concerned when we see margin expansion and compression. We just focus on our business processes and making sure that we are reacting in what we think is the proper way to make sure that we are adjusting. Much along the chart that Andy talked us through around how customer pricing and carrier pricing are changing, and making sure that those blue lines stay close together over time, to manage that. So from a long-term perspective, we're not concerned about it in terms of it happening, because we do plan for it and it's part of our business model.

From a short-term perspective, we are concerned about it. We have a lot of things that we do to adjust pricing, and a lot of management processes that are very focused on making sure that we are adapting and managing prices. And we talk about comparisons and we try to share as much as we can about what is happening with margin compression or margin expansion.

So hopefully, we've shared what we know about that. And whether or not somebody should be more or less concerned about it in the short term, I think we're doing all that we can to manage through it. And in the long term, we feel like it's part of our business model that we have dealt with for decades.

Thanks, John. The next question for Andy. Any chance you have net revenue by month for the third quarter?

Yes, thank you. And these are on a per-business-day basis. July ended down 3%. August was softer, declining 7% for the month on a per-day basis. And September recovered a bit, but was still down 5%. What's interesting about September was, and as we've mentioned this, the growth of our Global Forwarding business was challenged in the month, particularly September, by the Hanjin bankruptcy, and the subsequent carrier rate increases. It negatively impacted our net revenue for that service line.

Thanks, Andy. The next question for John, a two-part question. First part, how did total Company net revenue trend year over year by month in the fourth quarter of 2015? And then the second part, when are your contractual agreements typically renegotiated?

Starting with the numbers, last year in the fourth quarter of 2015, our net revenues grew 14% in October, 15% in November and 12% in December. So that's the month by month of the double-digit net revenue growth that I mentioned from a year ago that we are comparing to. You may also remember that those 2015 numbers did have some Freightquote growth in there that I think we quantified at about 3% contribution to the growth, but still double-digit without the acquisition of Freightquote from a year ago. So that's month by month in the growth that we referenced with regards to the comparisons coming into this quarter in 2016.

When are the contractual agreements typically renegotiated? We've talked about this quite a bit. Most of the contracts will have 30 day outs for either side, so that there's an expectation of an annual commitment from a pricing standpoint. And typically with 30-day notice from either party, in terms of if you want to terminate the arrangement.

The vast majority of the business gets repriced when a shipper originates a new bid process to take a look at that price, or when the providers come up and say that they can no longer service the business under those price arrangements. We do have a disproportionate amount of bid activity typically in the springtime, so there's more of an annual cycle to that.

So as we said in our prepared comments, we're constantly looking at pricing, looking at committed arrangements versus transactional arrangements. There's always bid activity happening in the marketplace, and we will see more of it around year-end and in the springtime as everybody looks at their pricing arrangements and thinks about what's appropriate going forward.

Thanks, John. Next question for Andy. Can you quantify the impact the Hanjin bankruptcy had on your ocean forwarding business in the quarter? Do you anticipate this margin squeeze will be short-lived, or is it something that could linger for a couple of quarters until capacity re-enters the market?

Hanjin filed on August 31, and what happened shortly thereafter is, the other carriers that remained in the trans-Pacific eastbound lane began to raise rates. I think what happened then shortly thereafter was that they doubled them. They were up as high as $750, as I mentioned earlier, $750 to $900 a box. Now, we weren't able to immediately pass those rate increases along to our customers. As I mentioned, our account managers are out there right now having those discussions with our customers to reflect the rates that are now in place in that trade lane. We would expect the impact to trickle into the fourth quarter, but not much beyond that.

As far as the quantification, to give you an idea, we were growing volumes and net revenue was fine in our ocean trade lane in July and August. However, September, on a net revenue basis, was down 15% overall in our ocean business, to give you an idea of how much those rate increases impacted the ocean trade lane.

Thanks, Andy. Next question for John. What was the driver of the need to drop prices to customers so rapidly in the third quarter of 2016? Why weren't truckload carriers willing to absorb price reductions? And was it the shipper's desire to share more of the cost reductions that had been accruing to C.H. Robinson over the past year to 1.5 years? And was push-back from carriers suggesting that they had an alternative source of freight?

There's a lot of good questions in there, really all centering around the bid process and the pricing expectations. And I guess one of the things to reiterate is that, very much like earnings season, part of the challenge in this is that there's an element of what's expected versus what's actually occurring. When you come into a year like 2016, we've mentioned a couple of times that shipper expectations were generally for fairly meaningful price reductions. So if you look at bid activity a year ago, these bids typically have lots of parties, they are very efficient, there might be multiple rounds of electronic bidding. And it's not any one person or any one expectation, but there's a consensus that comes out of those bid processes around what a shipper is expecting and how the market responds to it.

A year ago, there were many bid activities that achieved mid-single or high single-digit rate decreases as a result of those bid processes. You can see, during our third quarter here, we had a 5.5% decrease in terms of the pricing that we charged to shippers. As the year goes on then, what we are experiencing is a more fluid or transactional procurement of a lot of those truckload costs. So while during the quarter they were down 3.5%, they were not down the 5.5% that was achieved in a lot of the committed bid relationships that we worked with on the shipper side.

So when we get into the third quarter and we have committed pricing from bids, and you mix that in with a current transactional market that, again, is softer than a year ago but maybe not quite as soft as people expected, that's when those blue lines on our margin graph get some separation and we see the margin compression. So really the bottom, if you will, or the tipping point, that may have occurred during the second and third quarter of this year is really a function of not so much of prices starting to go up versus the year ago, but cost increases being more than were expected when a lot of those committed relationships were entered into.

So it's challenging. It's part of the reason why it's difficult to predict, because you're dealing with a lot of changes in the marketplace and the management of expectations and bid processes versus what then ultimately occurs. But as I said in the previous question, we view it as one of our strengths, that we have the types of account management processes and relationships to adjust to how the market does actually change. And we focus on that ten-year graph of showing that over time, we've been very successful at making sure that our pricing relationships and our cost relationships do adjust together.

Thanks, John. To Andy with the next question. Would you anticipate the tax rate remaining in the 37% range, or returning closer to the historical level of 38%?

Our tax rate will remain below the historical tax rate of 38.5%. And the primary reason for that is, at the beginning of this year, we elected APB 23, which means that we will permanently leave non-US earnings outside of the United States. We will also then redeploy those earnings in the areas outside of the United States. The APC deal is a great example of this reallocation of capital, because Australia's corporate tax rate is 30%, which is lower than US tax rate.

So as more of earnings are generated outside of the United States, the effective tax rate will go down. Now, mind you, we still generate a significant amount of our earnings and that income inside of the United States. But as more capital is deployed outside of the United States where the tax rates are lower, the effective tax rate of our organization will continue to go down. So we do expect it to be below the 38.5%, into the range of 37%.

Thanks, Andy. Next question for John. What are your plans for headcount for the rest of 2016? Should we expect headcount to grow in 2017?

A couple of things to remember there. I think it was mentioned already, but with the closing on September 30, we will have the 300-some APC employees that will come in -- or are in the numbers, I guess, but will be factored into our productivity metrics and average headcount for the fourth quarter of 2016. As I mentioned in the prepared comments, because we do look at our hiring practices very much correlated around volume and growth of shipment metrics, we do expect to continue to add to our team in the remainder of 2016, and likely going into 2017 as well.

When we have periods of margin compression, we do get a little bit more conservative in terms of thinking about our headcounts. And just like so far this year, where we have had headcount growth less than our volume growth, I would expect that in Q4, and 2017 as well, too. The combination of productivity initiatives, using technology to automate and just managing our expectations more aggressively when we are in a period of margin compression -- all of those lead to probably slightly more conservative hiring practices. However, as I mentioned in the prepared comments, when we feel good about the market share gains that we're having and investing in the network, we will continue to look at how we build out our team and add to it.

Thanks, John. Next question for Andy. What is the catalyst for the acceleration in the North America truckload volume growth in October? How sustainable do you view double-digit truckload volume growth to be?

The short answer is, we have a highly motivated, talented and aggressive North American service transportation team. We happen to think they are the best in the business. They know what they need to do in markets like these because they've been through it before.

The longer answer, I think, reflects and relates to what John and I both mentioned earlier, which is what we viewed as shippers' expectations going into this year as demand slacken and capacity loosened. Our people are in front of our customers every day and staying relevant to them. Now, are we making as much as we did last year? No, but that's part of our business model and part of the cycle.

As to the sustainability, well, that depends. We will emphasize, as we always have, balance and profitable growth. But I just want to take a step back for a moment and reflect on some of our key year-to-date performances. Truckload volumes up 5%, and that's off of a very large base. LTL volume is up 7%, again off a very large base.

Ocean volumes up 6%, and we're still the number one NVOCC from China to the US. Our air volume is up 18%. Managed services revenue of 29%. And sourcing volume is up 7%. The point is that, while this quarter is not stellar, I think it's helpful to take a slightly longer-term view and look at the trends as well.

Thanks, Andy. To John with the next question. Can you please give us your thoughts on the outlook for the forwarding business overall? How are margins trending? And which trade lanes provide the most opportunity for CHRW?

We have not wavered at all on our overall view that our forwarding business is in a great spot right now, and we continue to have a very positive longer-term outlook. And we have all discussed the fact that ocean pricing in many of the lanes had dropped down to levels that clearly were not sustainable for the steamship lines. The fact that a bankruptcy occurred fairly abruptly and prices moved somewhat abruptly. Similar to comments in truckload, we our seeing some examples like that of volatility and aggressive movement of margin, that maybe did not occur quite the same 10 or 20 years ago.

But all of that activity is typical in terms of the reduction or addition of supply as the marketplace wavers. So similar to the broad comments I made about the enterprise, the fact that there is volatility, and margins are moving around, is well-within the boundaries of what we think we are going to need to do in our long-term plans. Since the additional investment in Phoenix four years ago, and now followed on with APC, our team has had great momentum in terms of leveraging the increased scale that we have had, to become that number one NVO from China to North America. And really looking at how you leverage scale in the global forwarding business to be more competitive and to provide better service.

We've mentioned several times over the last year our additional initiatives in the air freight world, where, again, the margins are heavily driven by scale and density, where you have to build up your volume and build full pallets in order to get to industry norms around profitability. So our long-term outlook is that we hope to be able to continue to gain scale and improve our margins on air freight by building that density.

On the ocean freight standpoint, we do feel like we've reached a level of competitiveness and scale, where our margins are very good. But there are a lot of opportunities to expand corridors like Asia to Europe, and North America to Europe, where we don't have that same level of volume and activity today.

So overall, the team is in a good spot, we like our network, we like the scale and competitiveness that we've reached in some of the primary ocean corridors. And we are investing aggressively in other areas and other services to try to build up with that. So all in all, a very positive outlook for our forwarding business going forward.

Thanks, John. To Andy with a question on the bad debt accrual. Can you talk about why the year-to-date bad debt accrual is tracking down nearly 80% year over year? Also, did you make any accrual for bad debt for Hanjin in the quarter? And how should we think about bad debt next year? Should it normalize to, say, just under 1% of net revenues?

I will answer them in a slightly different order. First, we don't have exposure to Hanjin, simply because they are not a customer. So there's no accrual for Hanjin. And then back to the first part, which is, overall, Robinson's receivables are down versus last year. The reason they show us being up on the balance sheet is that we closed the APC acquisition on September 30, and we have an opening balance sheet which is reflective of their numbers. But traditional C.H. Robinson receivables are down. So that's the first reason why the reserve is down.

The second reason is, the quality of the receivables are up. So each of our customers receive a D&B rating, and today, there are more dollars in what we would call the low-risk category of customers. There are more dollars in that low-risk category today than there were last year. So therefore, that lowers your reserves.

The final category is the agent. And again, it goes below 60 and above 60. In terms of our aging categories, there are more dollars today in the less-than-60 category than there were last year. Again, you take higher-quality receivables where the amount that is less than 60 is higher than last year, therefore you have a low receivable.

As far as looking forward into the future, it's certainly hard to determine or give an accurate prediction as to whether we will take more customers in the low- to medium- or high-risk category, or whether those customers will be paying in 30, 45 or beyond 60 days. So we are very happy with our credit and finance team, our credit and finance policies. We do expect to continue to drive good results on our receivables balance.

Thanks, Andy. To John, an M&A question. With the APC acquisition complete, do you expect to focus on acquisition opportunities going forward more domestically or globally?

We've hit on this a little bit already, but we do expect to continue to look for both. We will look for market share and service expansion opportunities both in North America and outside of it. Andy talked about some of the restructuring that we've done to make sure that we can take the earnings that we're now achieving outside of North America and redeploy those internationally, to have a more efficient structure. So with that in place and the success of some of our businesses outside of North America, the mix going forward will have a greater bent towards looking at global acquisitions than we have had in the past. But we will continue to look for both.

Thanks, John. And staying on the topic of APC, for Andy, can you please provide us more color on the APC acquisition? What is the split between air and ocean? And what is the geographic distribution? Do you expect APC's net revenue growth to be similar, slower or faster than the legacy business?

It's great we've hit on this theme several times throughout the morning. The color is, we are excited to have them part of the Robinson global forwarding network. Prior to the acquisition, I think they were the sixth largest forwarder in Australia. The mix of their business, because it's an Asian-based business, wais primarily ocean import, customs, with a little air import mixed in. I think if you were to categorize it, it's roughly, a third of it was coming from North America, a third from Europe and a third from Asia.

But because they were an Asian-based network and they were focused primarily on the import, they didn't focus as much on the export market. Which, Australia does have a pretty strong export market. Now that they're part of a global network of Company-owned stores that are branded Robinson, they can begin to really sell. And as John mentioned, the initial interactions have been incredibly positive. An Australia export service, and we've got teams in the US, we've got teams in Europe, and teams in Asia that are working on it.

Additionally, and we talked a little bit about this, is that we are able to pick up that business that they were traditionally running through agents in Europe and Asia. And roughly, that was for a magnitude, two-thirds of the business. So we are excited about the initial returns on picking up their Asian businesses in those markets, because we have teams on the ground that are working on it today.

I would just finally close by -- usually, it's very rare to find an acquisition like this, where the cultural fit is exceptionally high. They run their operation incredibly tight and incredibly successful, and they fit very well into the Robinson culture and the Robinson team. There are a lot of incremental and additional opportunities that we look to explore with them. So the color is very positive.

Thanks, Andy. To John with an LTL question. What are your expectations for LTL growth, especially if we remain in a relatively lackluster industrial production environment? Do you think you can meaningfully outpace the market growth by taking share from the asset-base providers?

I guess the first point of clarification is, when we think about our LTL offering, we don't see it as competing directly with the asset providers. It's about partnering with those asset providers in the vast majority of everything we do in the LTL space. It is tendering it to a traditional asset-based LTL network, where they are executing the freight.

So from our standpoint, the question becomes how much more the market can we improve our value proposition to be involved in the transaction, to use our technology, to use our routing, to use our tools, to help both the shipper and the carrier with a better outcome around doing that. We do feel good about that. We think we can continue to take market share and grow faster than the overall market, just by continuing to penetrate our services that are out there. So yes, we do feel very positive about it.

And in terms of the competitive market, there are some additional LTL third parties or brokers today that maybe there weren't 10 or 15 years ago. But again, as I commented earlier, I think that, in some ways, provides validation to our business model on how we are adding value. And we will have to continue to evolve with a more competitive landscape, just like we do in all of our other services.

Thanks, John. Next question for Andy on ELDs. Are you beginning to hear from customers that want to secure capacity from carriers that are already ELD-compliant? What procedures does Robinson have in place to make sure that carriers they use are compliant once the mandate is effective?

We really haven't heard any specific requests from customers related specifically to using ELD-compliant carriers. It just hasn't come up yet. As far as the accountability in terms of the compliance, so let's all remember that ELDs are not actually changing the hours of service, it's only change in the manner in which those carriers complied the hours of service.

And today, as well as in December of 2017 when the new law goes into effect, is, part of our agreement with all of our carriers is that they comply with local, state and federal regulations and laws. We would expect them to continue to comply with all local, state and federal laws, just like we do today. So there won't be any change in terms of how we actually adjudicate that.

Thanks, Andy. To John for a question on European truck brokerage. What percentage of your truck brokerage net revenue is generated in Europe? How would you characterize the state of the truckload supply and demand dynamic in Europe? Are margins behaving better in Europe than in the US?

Our European business represents about 5% of our truckload net revenue. Because we are much smaller in Europe and don't have the network scale, our margins are lower in Europe than they are in North America. In addition, because we have that smaller, more transactional network, our margins in Europe are actually more stable than they are in North America. That's just in the Robinson business.

We've talked a lot today about how those committed relationships and the large shippers that we deal with and enter into those agreements, that are -- a little more than half of our North American truckload business contribute meaningfully to the margin volatility, and the expansion and compression that we have during the various cycles. So our business in Europe is profitable. The margins are lower, but they are more stable because of the mix of business and the transactional majority that we do in Europe.

Thanks, John. To Andy, and a question on managed services. Your TMC operation seems to have emerged as the premier transportation manager in the US. Are you satisfied with the revenue and profit generated from this operation, given the amount of freight you manage and the amount of value you create for customers?

I would say, it's hard to say that we are not satisfied with 31% growth in the quarter. The team there is doing a great job. And yes, we agree with your statement, with one caveat. We do believe that TMC is the premier transportation manager -- but not only in the US, but the entire world.

We have five control towers on four continents and the Indian subcontinent, and it's backed up by a world-class IT team that provides global supply chain visibility. They continue to win mandates from new and existing customers, and are on track to manage over $4 billion in freight spend. So yes, we're pretty satisfied.

Thanks, Andy. To John with a quick question on regulation. Are there any other pending regulations you think could cause a disruption to trucking capacity? If so, can you please give your thoughts on them?

Short answer is, no. Andy lined out the discussion around ELDs and why we don't think that will be disruptive from our standpoint. In our industry presentations, we talk a lot about the last six or seven years and the escalation of regulation around safety and emissions-type themes, of hours of service, CSA and different things that have added cost and have added some price inflection to various periods in the truckload portion of it. We've lived through most of those. ELDs is the big one that everybody is talking about right now, and we don't expect a lot for that. So the short answer is, no.

Thanks, John. Next question for Andy on the topic of M&A. How does the acquisition pipeline look? Are you seeing quality properties that might be a good, accretive, strategic fit? Are valuation expectations on the part of the seller reasonable?

We have a really strong team dedicated to this area, and the acquisitions pipeline looks good right now. That doesn't mean that we are going to run out and buy a bunch of companies. Because our filter is what they have always been -- it's cultural, it's strategic, it's business model and it's value. We are in constant dialogue with companies that are out there, and remain disciplined in our approach. Some sellers right now are reasonable, while others -- their valuation expectations are beyond what we believe are reasonable.

Thanks, Andy. Next question for John on intermodal. Would you consider buying a large existing intermodal franchise from an asset-based carrier? Would you be willing to fix an existing business, or would you prefer to buy something already firing on all cylinders? Or would you rather just grow organically? Have your thoughts evolved on this in recent months?

Well, from an overall M&A philosophy standpoint, our first preference is to grow organically, because that does have the highest return on it. We've acknowledged that there are a lot of opportunities where we can invest through M&A and not only accelerate our growth, but sometimes bring in management and business processes that we're not as capable at, that are really good for us.

So we would -- we have not and we do not really look at fixer-up-type acquisitions. We are generally looking for what we think are well-run and good businesses that are going to add to the strength of our network and add to our competencies. Because we really don't have the bandwidth or the extra management in place to go around and fix things.

We would like to be bigger in the intermodal business. We do remain very open-minded about intermodal opportunities and looking at how we can be more relevant to that space in the future. But our approach has generally been around looking for good management teams and well-run businesses that will make us stronger.

Thanks, John. To Andy with the next question. How are you thinking about your preferred spot or contractual mix heading into 2017, given the general consensus expectation that ELDs will begin to have an impact on capacity next year, which could drive higher rates and margin compression -- especially if you have an outsized mix of business tied to contractual commitments?

I think we've hit this point quite a few times, not only on this call but also in previous ones, where we try to meet customers where they want to buy. And what we've seen and what we've experienced for some time now is, customers are looking to secure capacity, and they are looking to secure rates. Which is part of the reason why we are helping them manage their supply chains and growing our volumes the way they have.

But that being said, our mix between contractual and spot remains fairly consistent quarter over quarter and year over year. When we see disruption, whether it's significant or not, on either supply or demand, that mix shift shifts. So if we were to see a significant impact capacity to ELDs -- which, by the way, we don't anticipate -- we would expect to see more higher-margin opportunities in the spot market, while we would continue to honor our commitments to our contractual customers for the agreement. Which usually reset every 160-plus days.

So obviously volume would increase if there is a disruption, and we would take advantage of it in the spot market. And we would continue to honor those contracts on the contractual side. But we would also take advantage of -- in a situation like that where routing guides failed, the further down you go, the more opportunities there are for margin expansion.

Thanks, Andy. Unfortunately, we are out of time, and we apologize that we couldn't get to all the questions that came in. We really appreciate everybody participating in the third-quarter 2016 conference call. This call will be available for replay in the investor relations section of the C.H. Robinson website at CHRobinson.com. It can be accessed by dialing 1-877-660-6853, and entering the passcode 1364646518#, and that replay should be available later this morning. If you have additional questions, please call me, Tim Gagnon, at 952-683-5007, or by email. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes delays today's teleconference. You may disconnect the line at this time, and have a wonderful day.