羅賓遜全球物流 (CHRW) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Second Quarter 2018 Conference Call. (Operator Instructions) Following today's presentation, Bob Houghton will facilitate a review of previously submitted questions. (Operator Instructions)

As a reminder, this conference is being recorded, Wednesday, August 1, 2018. I would now turn the conference over to Mr. Bob Houghton, Vice President of Investor Relations.

Thank you, Donna, and good morning, everyone. On our call today will be John Wiehoff, Chairman and Chief Executive Officer; Andy Clarke, Chief Financial Officer; and Bob Biesterfeld, Chief Operating Officer and President of North American Surface Transportation. John, Andy and Bob will provide commentary on our 2018 second quarter results.

Presentation slides that accompany their remarks can be found in the Investor Relations section of our website at chrobinson.com. We will follow that with responses to the pre-submitted questions we received after our earnings release yesterday.

I'd like to remind you that our remarks today may contain forward-looking statements. Slide 2 in today's presentation list factors that could cause our actual results to differ from management's expectations.

And with that, I will turn the call over to John.

Thanks, Bob, and good morning, everyone. Thank you for joining our second quarter earnings call.

In my opening remarks, I want to highlight some of the headline themes that you'll be hearing us talk about. First, we are pleased with our overall financial results this quarter. Volume trends improved in the quarter, with volume growth in most of our service lines. We delivered a double-digit increase in both net revenues and operating income and a 90 basis point increase in operating income margin. Combined with the benefits of U.S. tax reform, the strong performance enabled us to increase our cash returns to shareholders by nearly 30% in the quarter. Andy and Bob will provide more color on our financial performance in their prepared remarks.

We continue to see very high freight demand in the marketplace. Our results through July reflect that, and our customer interactions reflect expectations for continued high demand for the remainder of the year. The demand side of the equation is obviously driven by a healthy economy and is the more volatile part of the supply and demand relationship.

On the supply side, we see high orders for new equipment, driver shortages and significant logging device impacts on certain lanes and a lot of capacity owners realigning their networks and freight preferences to adjust to the market. While our cost and pricing charts show some leveling off of the significant year-over-year price increases, we do expect the market to remain tight for the remainder of the year.

Pricing continues to escalate. We experienced another quarter of double digit cost and price increases across most of our service lines this quarter. We now have pricing reflective of marketplace conditions across the significant portion of our business portfolio. This contributed to our sequential improvement in net revenues.

In our North America truckload business, pricing increased 20.5% in the quarter, approximately in line with carrier cost increases. Our second quarter price increases also reflect an increase in spot market activity that is typical of a rapidly rising price environment.

The strength of our business model is the ability to balance our portfolio between longstanding customer contractual relationships and our ability to participate in spot market freight opportunities, all while delivering supply chain expertise to both shippers and carriers around the globe. In the current freight environment, we are seeing shipper routing guides deteriorate, resulting in a shift in freight volume into the spot market. We are focused on continuing to honor our customer commitments, while also helping our customers to secure spot market capacity. We firmly believe the right business model is to leverage our people, process and technology to drive balanced growth over time, leveraging our supply chain expertise to build long-term committed relationships with shippers and carriers around the world, while also fulfilling spot market opportunities when they become available.

With those introductory comments, I'll turn it over to Andy to review our financial statements.

Thank you, John, and good morning, everyone. Let me begin by recognizing the hard work of the entire Robinson team across our global network in this volatile freight environment. Your performance was best in class as we continue to reach new milestones then push through them to even greater ones. Our organization is always striving for ways of doing it better, but it is also important to say thank you, and keep up the good work.

We saw a double-digit increase in both net revenues and operating profit while continuing to make significant investments for future growth. We also delivered operating margin expansion in our NAST, Managed Services and European Surface Transportation businesses. Congratulations to the Global Forwarding team, which grew operating income on a year-over-year basis and made significant sequential operating margin improvement. While the Robinson Fresh team continues to work exceptionally hard in this challenging environment, profit fell short of expectations. ELDs and award management have had an outsized negative impact on Robinson Fresh. Bob will share our plans to improve profitability of this business segment in his prepared remarks.

Now on to Slide 4, in our financial results. Second quarter total revenues increased 15.3% to $4.3 billion, driven by significantly higher pricing across most service lines, volume growth in LTL and Global Forwarding and higher fuel costs. Total company net revenues increased nearly $100 million or 17% in the quarter. Net revenue growth was led by truckload services, up $59 million, and LTL services, up $17 million. We continue to see the benefits of investments in our Global Forwarding business, where net revenues increased 19% or $23 million in the quarter. Total operating expenses increased $61 million, a 15.4% increase versus the prior year period. Personnel expenses increased 19.8% in the quarter, primarily as the result of an increase in our variable compensation, which is based on our improved financial performance. We believe performance-based pay is the best way to align the interest of our employees with our shareholders. We expect variable compensation to be elevated for the full year given our stronger performance in 2018 versus 2017. Total company average headcount increased 4.2% in the quarter, led by increased headcount to support the growth opportunities in Global Forwarding as well as the acquisition of Milgram. These increases were partially offset by headcount declines in Robinson Fresh and NAST.

SG&A expenses were up slightly in the quarter to $112 million, primarily driven by increases in occupancy, purchase services and equipment rental and maintenance. These were partially offset by a decrease in allowance for doubtful accounts and travel and entertainment expenses. Total operating income was $219 million in the second quarter, up 20.5% over last year. Operating income as a percent of net revenues was 32.6%, a 90 basis point improvement versus last year's second quarter and a 200 basis point improvement versus the first quarter of this year. Our objective is to grow operating income at a rate equal to or greater than net revenues. And while we still have work to do in this area, our teams made nice strides in this quarter. We will continue to invest in our people, our processes and our technology to drive growth in our business and to make our operations more efficient.

Second quarter net income of $159 million increased 43.3%, which includes an $18.4 million benefit from the U.S. Tax Reform Act passed in December of 2017. We produced diluted earnings per share of $1.13 in the second quarter, up from $0.78 last year.

On to Slide 5, in other items impacting net income. The second quarter effective tax rate was 25.6%, down from 35.6% last year. The lower tax rate was driven primarily by the reduction in the U.S. corporate tax rate. Our year-to-date tax rate was 23.6%, and we continue to expect our effective tax rate to be between 24% and 25% for the full year. As noted in our first quarter earnings call, we adopted the new accounting standards update for revenue recognition in the first quarter of this year.

As a result, in-transit shipments are now included in our financial results. We do not expect this policy to have a material impact on our overall operating results. However, it does significantly decrease gross revenues in our Robinson Fresh sourcing. And in the second quarter of this year, that impact was approximately $28 million. There are, however, no impacts to net revenues.

Second quarter interest and other expense totaled $5.1 million, down from $9.4 million last year. Every quarter, we are required to revalue our U.S. dollar working capital and cash balances against the functional currency in each country where we conduct business and hold U.S. dollars. The resulting gain or loss is reflected on the income statement. The U.S. dollar strengthened against several of our key currencies this quarter, including the RMB, the euro and Mexican peso, resulting in an $8 million gain from currency revaluation. Future movements in our currency valuations will continue to have an impact on our net income. The decrease on this line was partially offset by higher interest expense due to increased debt levels and higher variable interest rates. Our share count in the quarter was down nearly 1% as share repurchases were partially offset by the impact of activity in our equity compensation plans.

Turning to Slide 6. Cash flow from operations totaled $108 million in the second quarter, up 88% versus last year, driven primarily by growth in net income. For the first 6 months, cash flow from operations increased 106% to $308 million. A combination of increased earnings and improved working capital performance drove the year-to-date cash flow improvement. We continue to expect to drive strong cash flow performance in the back half of the year.

Capital expenditures totaled $14.6 million for the quarter, and we continue to expect full year capital expenditures of between $60 million and $70 million, with the majority dedicated to technology.

Our capital distribution is summarized on Slide 7. We returned over $136 million to shareholders through a combination of share repurchases and dividends in the quarter, a 30% increase versus the year ago period. Year-to-date, we have returned over $270 million to shareholders, a 25% increase. We continue to evaluate opportunities to deploy our capital in ways that both add value to our customers and improve financial performance. Acquisitions that fit our strategies, business model and culture remain a top priority for us. We have returned over $2.8 billion to shareholders over the last 5 years, and we will continue to reward our shareholders with capital distributions moving forward.

Now on to the balance sheet on Slide 8. Working capital increased 9.2% versus the fourth quarter of 2017, driven by increased gross revenues and the resulting increase in accounts receivable. The contract assets and accrued transportation expense lines on the balance sheet reflect in-transit activity in accordance with the adoption of the revenue recognition policy. We continue to experience improvement in DSOs versus both the end of 2017 and Q1 of 2018, despite the fact that gross revenue increased over $300 million in both periods. Our debt balance at quarter-end was $1.4 billion. Across our credit facility, private placement debt, AR securitization and senior notes, our weighted average interest rate was 3.9% in the quarter.

I will wrap up my comments this morning with a look at our current trends. Our consistent practice is to share the per business day comparison of net revenues. This July has 1 additional business day versus the prior year. July 2018 global net revenue per business day has increased 20%. Truckload volume has decreased approximately 2% versus the year ago period, where volumes increased 3%. We are pleased with our continued sequential improvement in truckload volume performance and our strong total company net revenue growth per day in July. We do expect our net revenue growth rate to moderate towards the end of the quarter as we begin to lap the tightening in the truckload market from weather-related disruption, which began in the last week of August of 2017. As a reminder, third quarter 2017 net revenue per business day increased 3% in July, 4% in August and 18% in September.

Before I turn the call over to Bob, I'd like to express our thanks to all of the people at Robinson from across the globe who work every day to make our customers, our suppliers, our fellow colleagues and our shareholders successful. Global logistics and transportation is an industry that has been and will always be both volatile and extremely competitive. Our performance is evaluated every day. Your commitment to excellence has shone through in these results, and we thank you. We appreciate you all listening in this morning. And I'll now turn it over to Bob to provide additional context on our segment performance.

Thank you, Andy. Good morning, everyone. I'm excited to have the opportunity to speak with all of you today and provide an update on our operating segment performance.

To set the stage for the performance discussion, I want to first highlight the volatile nature of the logistics market.

On Slide 10, the light and dark blue lines represent the percent change in North America truckload rate and cost per mile to both customers and carriers net of fuel costs since 2008. The gray line represents the net revenue margin for all transportation services. As John mentioned in his opening remarks, the change in North America truckload rate per mile and cost per mile were both around 20% this quarter. This level of increase remains near the highest levels we've seen this decade. You can see that despite the high level of volatility in the freight market, we are able to maintain our margins through these extended freight cycles. Our second quarter transportation net revenue margin of 16.2% is up 80 basis points versus the same period 5 years ago. And our annual net revenues have increased over $715 million during this 5-year time period. One of the metrics that we use to measure market capacity and volatility is the routing guide depth from our Managed Services business. In the second quarter, average routing guide depth was 1.8, representing that, on average, the second carrier in a shipper's routing guide was executing the shipment in most cases. The quarter also included weeks where the routing guide spiked to 5 in certain parts of the country, indicating periods of localized displacement between both supply and demand. By comparison, average routing guide depth in a balanced market is roughly 1.4. So we do remain in a tight capacity environment.

We think this chart does a great job illustrating a high degree of cyclicality and volatility in North American trucking market. The broad-based increases in market pricing over the past 4 quarters have been challenging for our industry and our customers. I'd like to recognize our employees across North America that are working to bring innovative solutions that help customers navigate this marketplace and consistently provide a great experience to the increasing number of motor carriers across our network. The fact that these carriers choose to work with C.H. Robinson makes it possible for us to serve our customers in this dynamic and fast-changing environment.

While the chart on Slide 10 indicates that the year-over-year change in price and cost moderated slightly versus last quarter, the absolute price per mile and cost per mile continue to increase. We are introducing a new slide this quarter that shows the underlying price and cost data from the previous slide. The graph on Slide 11 shows North America truckload average price per mile and cost per mile since 2010 for C.H. Robinson. We have excluded the actual price per mile and cost per mile scale on this slide to protect our proprietary data. The second quarter represents the fifth consecutive quarter of sequential increases in our North America truckload price per mile and cost per mile. This chart also shows that since 2010 we've continued to adjust our pricing in response to changes in marketplace conditions. We've generally maintained a consistent gap between price and cost, even in periods of high inflation. Despite significant levels of freight market volatility, both customer pricing and carrier costs have increased at roughly 3% annual average rate over this time period.

Turning to Slide 12 on our North America Surface Transportation business. NAST net revenues increased 21.4% to $437 million in the quarter, led by double-digit growth in each of our service lines. In the truckload market, continued strong demand and tight capacity led to another quarter of sharp increases in freight costs. In our contractual business, we worked with our customers to adjust pricing to reflect the rising cost environment, while continuing to honor our commitments across our portfolio of contractual freight. Our teams were also active in helping customers secure capacity within the spot market as routing guides fail.

Led by higher pricing, our net revenues increased 22.9% to $307 million in the quarter. Repricing activity did negatively impact our volumes in the quarter as double-digit growth in the transactional shipments were offset by declines in contractual shipments.

NAST truckload volume declined 4.5% versus the year ago period, where volume increased 8%. The combination of contractual volume declines and transactional volume growth resulted in approximate mix of 55% contractual and 45% transactional volume for the quarter versus a 65% contractual and 35% transactional mix in the year ago period. Our truckload volume trends improved in the second quarter into the start of the third quarter. Truckload volume per day has improved sequentially every month this year and declined just 2% in July. We have successfully repriced much of our contractual portfolio over the last couple of quarters, and we're confident in our ability to execute against our contractual opportunities through the remainder of this year. So we expect that our volume performance will improve as we move through the balance of 2018. At the same time, we'll remain disciplined on pricing and will continue to adjust our pricing to reflect market conditions. Our goal remains balanced growth within our NAST truckload business and a long-term focus on taking market share and growing volumes above industry benchmarks. We started to close this volume gap versus industry benchmarks in the second quarter and in July.

The hard enforcement of the ELD mandate that took effect on April 1 is not slowing our rate of new carrier adoption. In fact, our new carrier adoption rate is increasing. We added roughly 4,400 new carriers in the second quarter, which is a 19% increase over last year's second quarter and a 5% sequential improvement versus first quarter of this year. These new carriers moved approximately 19,000 shipments for us in the quarter, contributing to our sequential improvement in truckload volume performance. Carriers continue to see C.H. Robinson as a third-party logistics company of choice for securing freight that meets their needs and allows them to be successful business owners. The addition of thousands of motor carriers every quarter allows C.H. Robinson to expand the largest network of motor carriers in North America and bring new solutions to life for our customers.

In our less-than-truckload business, we delivered another quarter of strong performance. Net revenues increased 17.8% to $114 million, driven by double-digit increases in pricing and a 6% increase in volume, primarily driven by growth in manufacturing and e-commerce. Within our intermodal service line, net revenues increased 17.3% in the quarter. This was driven by higher pricing and a 3.5% increase in volume. Our results are benefiting from new technology that we launched last quarter that allows us to more efficiently move freight within our customers' network from the road to the rail.

Slide 13 outlines our NAST operating income performance. Second quarter operating income increased 31.6% to $185 million. Operating margin improved 330 basis points to 42.3% and improved 30 basis points sequentially. This strong NAST performance includes the impact of higher variable compensation expense. And as Andy mentioned, we believe performance-based pay is the best way to align employee and shareholder interest, and this is reflected in our strong NAST operating performance results this quarter. I'd like to thank the entire NAST organization for another quarter of strong financial performance and for helping our customers and our carriers navigate this challenging freight environment.

Within NAST, we also continue to make progress against our efficiency and productivity initiatives as well. Our technology investments are driving productivity through tools that automate our customer and our carrier interactions and further improve our ability to profitably match both shippers and carriers. We're selectively consolidating activities in office locations across our network to continue to maximize our scale. As a result, the rate of headcount growth in NAST continues to decline and was down nearly 1% in the quarter. We continue to expect NAST headcount to be flat to down modestly for the full year.

Turning to Slide 14 in our Global Forwarding business. Global Forwarding net revenues increased 19% to $144 million in the quarter, with pricing and volume growth in each of our service lines. Our acquisition of Milgram & Company Canada contributed approximately 4.5 percentage points to the growth in the quarter. Ocean net revenues increased 18.5% in the quarter with Milgram contributing approximately 2 percentage points of that growth. Ocean shipments increased 7% in the quarter through a combination of growth with existing customers and new business wins. With a robust sales pipeline of both new and existing customers, we do expect continued growth in our ocean business over the balance of this year.

Second quarter air net revenues increased 17.4%, with Milgram contributing approximately 2 percentage points. Air shipments increased approximately 9% in the quarter as we continue to benefit from investments to grow volume and density in our air gateway cities. Our second quarter results also include adjustments to pricing that reflect current market conditions. Customs net revenue increased 27.5% in the quarter, with Milgram contributing 21 percentage points to this growth. Customs transactions increased approximately 60% in the second quarter as we continue to execute our strategy of broadening our service portfolio and expanding our customs presence across the globe. Our Global Forwarding business continues to benefit from an expanded service offering and geographic footprint. The second quarter of 2018 represents the seventh consecutive quarter of double-digit net revenue growth. This is terrific performance by our Global Forwarding team.

Slide 15 outlines our Global Forwarding operating income performance. Second quarter operating income increased 7.6% to $30 million. Operating margin declined 220 basis points year-over-year to 20.7%. Operating expenses increased 22.4% in the quarter, driven primarily by a 17.8% increase in headcount and higher variable compensation expense. Milgram accounted for approximately 7.5 percentage points of the headcount growth.

As we stated in last quarter's earnings call, Global Forwarding first quarter profit performance fell well below our expectations. We challenged our Global Forwarding organization to rapidly deploy plan for improving their business results, and they rose to the challenge.

As you can see on Slide 16, Global Forwarding second quarter operating income increased 262% on a sequential basis, and sequential operating margin improved 1,400 basis points. Net revenue increased sequentially in all service lines, and average headcount declined 1% versus the prior quarter. While sequential SG&A declined 8%, led by lower bad debt and tighter operating expense controls. We are very pleased with this rapid turnaround of profitability, and I'd like to offer a very strong congratulations to Mike Short and the entire Global Forwarding team for their outstanding execution this quarter.

Moving forward, we continue to see significant opportunities to drive scale and geographic reach in our Global Forwarding business. Driving this growth will require continued investments in people, process and technology. We also realize that we have opportunities to drive greater efficiency as we grow this business. We'll continue to be focused on a significant top line growth opportunities in front of us across the globe. We'll also be focused on operating margin expansion through digital transformation, led by additional technology deployment and intelligent process automation. Over the long term, we continue to expect our operating margin performance to be consistent with other leading companies in the Global Forwarding segment of the market.

Transitioning to Slide 17 in our Robinson Fresh segment. Sourcing net revenues were $32 million for the quarter, down 10.3% from last year. Case volumes declined 6%, primarily due to our strategic customer exiting the fresh produce business and lower levels of customer promotional activity within retail. Higher purchased transportation costs also contributed to the net revenue decline. The revenue recognition policy change negatively impacted sourcing total revenues by approximately $28 million, but there was no impact to net revenue. Transportation net revenues of $24 million were 6.6% below year ago levels. Truckload volume declines and margin compression at our committed business were partially offset by an increase in revenue per shipment in transactional business as well as volume growth in our LTL business.

Slide 18 outlines our Robinson Fresh operating income performance. Second quarter operating income declined 35.2% to $9 million. Operating margin declined 680 basis points to 16.6%. Operating expenses decreased slightly in the quarter as a 7% reduction in headcount and a 9% reduction in SG&A were partially offset by increased variable compensation expense. Robinson Fresh second quarter results also include a $4 million contingent auto liability claim.

To be clear, this level of profit performance fell well below our expectation, and we are not satisfied with the erosion of the profitability of this business over the last several quarters. The hard enforcement of the ELD mandate has had a greater impact on the temperature-controlled and multi-stop, multi-pick loads that are common in the fresh produce business. Our Robinson Fresh business has a more concentrated set of customers with longer-term contractual relationships than our other business segments. So we do not have the same amount of transactional business as in our NAST portfolio to offset the margin compression on committed business. Many long-term committed customers were repriced during the second quarter, and we'll continue to look for opportunities to reprice our Robinson Fresh business to reflect the marketplace conditions as the year progresses.

We've also exited certain facilities within the network, invested in technology to improve our sourcing office efficiency and implemented stringent operating expense controls.

Moving to our All Other and Corporate businesses on Slide 19. As a reminder, all other includes our Managed Services business, Surface Transportation outside of North America, other miscellaneous revenues and unallocated corporate expenses. Managed Services net revenues increased 10.5% to $20.1 million in the quarter, driven by a combination of selling additional service lines to existing customers and new customer wins. Customers value our transportation management system, which allows them to control their carrier selection process and manage their complex supply chains without the required investment in technology. Freight under management increased 7% in the quarter to nearly $1 billion. The highly automated nature of this business enabled us to not only invest for customer and geographic growth, but still expand operating income margins by 10 basis points. Other Surface Transportation net revenues increased 8.5% in the quarter to $15 million. The increase was primarily the result of pricing increases in our European truckload business. We have a strong pipeline of new business, and we expect volume trends to also improve in this business throughout the third quarter.

Before I turn the call back to John for some final comments, I'll take a minute to wrap up the section in our business unit performance. We delivered strong overall business results this quarter, with significant top and bottom line growth and expanding profit margins. Through a challenging and dynamic freight environment, we assisted our customers in navigating the marketplace and helped them accelerate commerce in their businesses. As we move through the balance of 2018 and beyond, I'm energized by the opportunities ahead of us. We will leverage our comprehensive offering of services and capabilities to deliver logistics expertise for our customers and our carriers. We remain focused on driving innovation and productivity via digital transformation, and we will continue to accelerate our investments in emerging technology and advanced analytics to further transform how we have continued to add value to our global ecosystem of over 120,000 customers and 73,000 active carriers. Driving the success will be our people, our processes and our technology. I'm highly confident we will continue to deliver industry-leading capabilities to our customers and our carriers and strong returns to our shareholders.

Thank you for listening this morning. And I'll turn it back to John now to make some closing comments before we address your pre-submitted questions.

Thanks, Bob. Before we move to those questions, I'll wrap up our prepared remarks with some comments on our expectations for the balance of 2018.

As stated earlier, we believe that the current freight market fundamentals will remain in place for the remainder of the year. With a healthy economy, demand for rate will remain strong. While an increase in new equipment orders may suggest an increase in capacity, we believe the aging truck driver demographics and declining number of new truck drivers, combined with the impact of the April 1 hard enforcement of ELDs, will continue to constrain capacity. So we expect the market to remain tight through 2018.

We're closely monitoring the escalating tariff activity. The current tariffs that are in place did not have an adverse impact on our first half financial results. Our primary focus has been to work with our customers to help them understand and quantify the impacts or potential impacts of some of the proposed tariffs. We're also working to ensure proper compliance for all enacted tariffs. While the cost of the tariff is ultimately borne by the shipper, our business could be negatively impacted by any resulting slowdown in global trade or redesigning of global supply chains that negatively impacts our customer shipment activity. We will continue to monitor the situation and work closely with our customers and to adapt to any required changes.

We remain focused on working closely with our customers to help them understand the market and to ensure we both meet our customer commitments and achieve pricing reflective of the marketplace conditions. We continue to invest in our people, our processes and our technology to deliver an expanding set of insights and capabilities that increase the value of the supply chain expertise we deliver to our customers and carriers. And we remain focused on operating cost efficiency, driving higher levels of service execution for our employees and increasing returns to our shareholders.

Lastly, I, too, would like to personally thank the over 15,000 C.H. Robinson team members around the world for their outstanding efforts in delivering strong operating results this quarter. In a rapidly changing freight environment, we were able to deliver double-digit growth in net revenues, operating profit and earnings per share while continuing to invest in the digital transformation that enables us to drive increased value to our customers, carriers, employees and shareholders. We returned $136 million to shareholders this quarter and delivered a significant improvement in our operating cash flow. We delivered strong results in the quarter and am confident that we have the right people, processes and technology to continue to win in the marketplace.

That concludes our prepared comments. And with that, I'll turn it back to the operator so we can answer the pre-submitted questions.

Mr. Houghton, the floor is yours for the Q&A session.

Thank you, Donna. First, I would like to thank the many analysts and investors for taking the time to submit questions after our earnings release yesterday. For today's Q&A session, I will frame out the question and then turn it over to John, Andy or Bob for a response.

And the first question comes from Jack Atkins with Stephens. John, how do you view the potential duration of the current freight cycle? Your comments around a strong outlook for the remainder of 2018 are encouraging. But is there anything on the horizon from a supply or demand perspective that you believe could disrupt the cycle from persisting well into 2019?

Yes. So we all know that the markets are moving faster than ever and a lot of ways maybe harder to predict, but just to share a little more color on kind of our view of the marketplace today, we have always believed and continue to believe that in the supply and demand relationship, the demand is more the trigger point or the more volatile variable in the 2 equations, evidenced by even this current cycle, where ELDs and some of the capacity constraints are clearly an important factor. But really, the tipping point was the hurricanes and the spike of expedited demand services in the fall of a year ago.

So while it's hard to predict these cycles, we do feel like the overall demand, the healthy economy and the likelihood that, that will continue for the remainder of the year is what will keep that market tight. Many of you probably know better than we do what would cause a recession or a significant change in the demand outlook for the freight outcome, but I know that across our customer base and internally, nobody is planning on that. So we continue to expect a tight freight market with similar kind of pricing dynamics and fundamentals for at least for the remainder of the year and heading into next year.

Thanks, John. Next question for Andy. The number of analysts asked about Global Forwarding operating margins. The results in Global Forwarding show a solid improvement in the second quarter relative to your first quarter results. Can you provide a path to more normalized operating leverage in Global Forwarding? Is it simply scale or productivity initiatives or a combination of the 2?

Yes. Thank you. And Bob did a great job of explaining the sequential improvement that the team performed in, so I won't go into that. But if you take a historical view, we decided in 2016 to go on a segment reporting to really give our investors a clearer view of our different reportable segments. And so given that, if you look at Global Forwarding, those last 3.5 years, the operating income as a percent of net revenue has kind of varied between on the low side 18%, on the high side, 22%, and on average. And so if you look at that 20.7% for the Q2 of this year, it's really within that band. Included in those numbers, because we acquired, first, obviously Phoenix; secondly, APC; and thirdly, Milgram, there is a lot of noncash amortization in those figures. So when you add that back in, and it's roughly 6% to 7% on the operating income line, it's the 27%, 28% as a percent of that revenue. So while the team does have continued strides to make, and they will, we do believe that those margins are reflective of a really nice and really strong Global Forwarding operation.

Secondly on that, if you think about the growth of that organization it's had, if you go back to Q2 of 2016, so just 2 years ago, our net revenues was up nearly 50% on a quarter-over-quarter basis in that regard. So we are growing scale. We are growing organically with some of our additional services. So we do believe there continues to be opportunities for significant operating margin leverage as we continue to grow.

Thanks, Andy. Next question for Bob is from Jack Atkins of Stephens on Robinson Fresh. Todd Fowler of KeyBanc and Fadi Chamoun of BMO asked similar questions. Robinson Fresh results were negatively impacted by the adverse insurance claim, but can you speak to what's driving the top line and net revenue margin pressure at Fresh? I would have thought that the segment would see improved net revenue trends after being able to reprice its customer contracts in the first half.

So Robinson Fresh is a unique business within Robinson. And while we report both the produce sourcing and transportation revenues separately within the business, and they're really closely linked. And at times, I think it's difficult to interpret how the results of one impact the other. In many ways, our Robinson Fresh products business is experiencing many of the same challenges today that many manufacturing and other food companies are experiencing in this rising freight environment. Our produce business is working to forecast the delivered sale of a product to either retailer or food service provider at the fixed price into the future. And when the cost of transportation rises beyond the forecast, both the profitability and demand can tend to be impacted. So across many of the commodities that we sell, demand for our case sales is really driven by the demand for promotions at retail. So if you think about that supermarket flyer that advertises grapes for $0.99 a pound versus $1.99 per pound, consumers are going to tend to buy more when they're $0.99. So promotions drive consumption in our business that ultimately drives demand. When freight costs escalate, promotional prices escalate, and demand goes down. And does have really negative impact on our overall volume of cases sold.

According to our IRI in second quarter, products sold strictly on promotion at retail during Q2 was down about 420 basis points versus Q2 of last year. Additionally, a portion of the freight volume of Robinson Fresh is tied to the sale of that produce. So much of that is priced in advance, and it's difficult to reprice that freight as we're not just repricing the freight component, but ultimately the delivered price of that product. So in a rapidly rising cost environment, we do see potential in the Robinson Fresh business for margin compression on both the freight side and potentially decrease demand on the product side within RF.

Thanks, Bob. The next question is also for Bob regarding NAST EBIT margins and comes from Ben Hartford of R.W. Baird. Scott Schneeberger of Oppenheimer and Tom Wadewitz of UBS also asked about NAST EBIT margins. NAST results were strong during the second quarter, but segment EBIT margins as a percent of net revenue remained below second quarter of 2015 and second quarter 2016 levels. Can NAST further improve EBIT margins from Q2 2018 levels and return to recent historical highs? And if so, what is the pathway to doing so?

So I don't think that we're at the peak at our EBIT margins as a percent of net revenue. How we improve those margins is really under a constant state of evaluation and fine-tuning from the leadership of NAST. In the forward long -- mid to long-term goals of NAST around effectively leveraging our data differently, expanding our core services, enhancing our customer experience and driving the reinvention of the model are all really geared towards driving additional efficiency and effectiveness of NAST.

So we spoken on this call and in the past about how we're optimizing our network footprint. And this is an important piece of the future success. But really, I think about our success in NAST being driven not only by where work gets done, but also how work gets done. So we've seen uplift in gaining scale from evolving our footprint, centralizing some task-oriented work and building out more scale centers of excellence. But really, the real opportunity for us is around the ongoing reengineering of how work gets done, how we leverage our artificial intelligence, machine learning and advanced analytics even more effectively to evolve our workflows and eliminate steps within our processes. So we continue to be focused on maintaining the flat headcount within NAST as we continue to add more commercially facing roles and engineer out task-oriented work. Our IT teams, our engineers, and our business leaders are really active and thinking differently about how we get work done and how we positively impact that EBIT margin.

Thanks, Bob. Next question for Andy from Matt Reustle of Goldman Sachs. Please provide monthly net revenue trends during the second quarter. And additionally, while net revenue per business day growth moderates in the back half of the year, can you still show an acceleration in operating income growth?

Our monthly net revenue growth per day in 2018 was 15% in April, 14% in May and 23% in June. And I'm going to give you the comparison, as you all recall, this time last year, we talked about how challenging Q2 of '17 was and April of '17 was down 3%, May of '17 was down 5% and June of '17 was down 3%. So hopefully, that will give you a little better historical perspective on the monthly net revenue per day.

As to the latter part of the question, clearly, I think that we and the team did a great job on a year-over-year basis of driving 20% operating income growth, but also sequentially, in the second quarter, we grew operating income nearly $30 million, which is reflective of what we've seen in previous periods. We have, as Bob was mentioning, on headcount doing a really nice job of making investments that are driving productivity, driving better statistics in that regard. I think across the board, you've seen our SG&A pretty much level out, and the only thing that would impact that one way or the other would be issues like allowance for doubtful accounts or continued auto liability claims, which would change that number one way or the other. So as we continue to drive strong net revenue growth, we do believe that, that will translate into operating income growth as well.

Thanks, Andy. Next question comes from Bascome Majors with Susquehanna. Bob, you've been in the COO role for more than a quarter now. What's been your focus during your first few months on the job? And what opportunities do you see to improve productivity in the coming quarters? Based on your vision for the company, how will Robinson look different in 2 to 3 years compared to today?

So thanks for the question there, Bascome. I guess I'll take you on a quick tour over the last few months. I've been in this role since the end of February and beginning of March. So in terms of where I've spending time, I'd say, first and foremost, I've been focused on continuing to provide guidance to our strong team of NAST leaders as we continued down that path of NAST reinvention. I spent a couple of weeks in Europe with our Surface Transportation and Global Forwarding teams, looking and discussing ways that we can drive greater synergies between our North American and European businesses. I've been working closely with our IT organization to determine succession for Chad Lindbloom's retirement. And really been balancing the rest of my time between Robinson Fresh, Managed Services, the broader Global Forwarding team as well as working with our commercial team as we continue to think about refining our go-to-market strategy to drive growth and serve those 120,000 customers. I'm really fortunate that I've inherited a really strong team in all levels on a global basis.

One output that I wanted to share from the first few months is that we're really excited about the fact that we have named the new Chief Technology Officer in Mike Neill. Mike has been with Robinson for about 15 years, and he's a really strong software engineer and a great leader of people. So Mike has been at the core of building out our product roadmaps, our infrastructure as well as our architecture. And I'm really confident in his vision for the future of the Navisphere platform. Mike would be a great add to our overall executive leadership team. And we'll continue to add talent to help support Mike and accelerate the speed of development deployment of software.

Across other parts of the business, we've established and reaffirmed our mid to long-term growth plans. And we've identified several opportunities to drive both top and bottom line growth. In terms of the future in my vision, I believe that we're really going to continue to be a people, process and technology-oriented company, but our investments in each of those areas are going to continue to evolve and shift in the coming years. As I think about Robinson and our proud history and our future, I really think about it in terms of 3 chapters, it's this incredible story of excellence evolution and transformation. The first chapter of Robinson really defined our entrepreneurial spirit and closely mirrored the history of transportation from the first refrigerated truck in 1939 to the interstate highway system beginning in 1945 to deregulation. Each of these changes brought new ideas, new ways to serve our customers and suppliers. And throughout all of it, we were there taking a leadership position.

Our next chapter that went really from becoming a publicly traded company in '97 to the beginning of our global expansion in Europe, in South America and Asia and the launch of Navisphere, our global technology platform, that was really about establishing our evolution and further strengthening our culture and our global reach.

Today, we're living already our next chapter of transformation, and we truly have the opportunity to shift and capitalize on this digital economy. We're clearly in the most competitive and dynamic environment in our history, and we don't believe that chain will ever be slower than it is today. So we've got this incredible opportunity in front of us in a global basis to enhance the way that we create and deliver value to our customers, our carriers and our shareholders by leveraging new ways of thinking, new ways of acting and creating value. So we're going to double down our commitments to both top and bottom line growth, as Andy said, and serving our customers in new and innovative ways.

And while I can't project exactly to Bascome's question, where is -- what C.H. Robinson will look like in 3 years? What I can commit to is that we're going to be continue to be focused on customer centricity, expanding our advantage in technology and leading in the areas of advanced analytics, artificial intelligence to improve our customer and carrier experiences. So our growth in the future is going to continue to be fueled by mix of organic as well as strategic acquisitions that add to our geographic footprint or add to enhanced services within our portfolio. So we're going continue to lead by having the most capable and committed staff of supply chain experts in the industry. And I do believe that this is a people-oriented business, and we're going to keep investing in great people.

Thanks, Bob. The next question is for John. Several analysts asked how much of your contract book of business has repriced this year? Is this the point in a cycle where you will begin to favor volume over price consistent with your long-term strategy to drive market share gains?

Our historic metric that we've shared around our committed business is that more of it reprices in the first half of the year, generally 2/3 and 1/3 in the latter half of the year. Also in our prepared comments, we shared that a substantial portion or likely more than half of it has repriced and is more reflective of kind of the current market conditions. I think that guidance is still probably about right. We've got a significant portion, maybe 2/3 of it, repriced, but there clearly is still more work to do. Bob referenced some of the Fresh activity, and there is still a lot of activity in the network around account management and activities that continue to require analysis and adjustment to the market.

Thanks, John. Ken Hoexter with Bank of America Merrill Lynch and Jason Seidl from Cowen and Company asked about personnel expense. Andy, personnel cost ramped up in Q2, rising 120 basis points year-over-year. Is there any catch-up incentive comp in the second quarter results? If so, should we see a sequential deceleration in Q3 in personnel costs?

I think we've talked often and at length about our incentive compensation, and it's important to our values and our culture. And as we've often talked, it aligns our incentives with that of our shareholders. So specifically, we accrue those expenses on a quarterly and year-to-date basis. So in periods where you see performance accelerating, like we did in Q2 of this year, you would see you there will be a slight amount of catch-up Q1 versus Q2. And conversely, we experienced the opposite last year as our performance in Q2 of '17 decelerated, and there was a bit of a take back in from what we had in Q1. Nothing that we would consider or an investor would consider material. One of the things that I'd like to point out is, despite the fact that we saw a sequential increase in our Q1 to Q2 compensation as we talked about it, there's only 4% headcount growth, and that was driven in large part by the Milgram acquisition, the amount of that compensation that was fixed quarter-to-quarter actually decreased. So there was more of variable compensation based on our performance in Q2 of this year versus Q1. And we think that's reflective of our values, of our culture and in alignment with our shareholders.

Thanks, Andy. The next question for Bob comes from Fadi Chamoun of BMO. The current trucking market is proving exceptionally tighter compared to recent history. Does it change how you think about your exposure mix of spot versus contractual freight?

About 20 years ago in truckload, we made a conscious decision as part of our strategy, that as 3PL, we wanted to participate in much more than just the spot market that brokers were traditionally focused on. And at the time and today, we really believe that our ability to participate with our customers in their overall transportation spend is an important ingredient to our success. And so today, we're really able to wear 2 hats for the same customer, one that looks and feels much more like a dedicated fixed-asset committed carrier, and one that's much more flexible and allows shippers really efficient access to the spot market when routing guides and plans fail. So when markets stabilize, we tend to see a higher percentage of our business lean towards contractual. And when markets are changing rapidly, we tend to see our business lean more towards transactional. The mix between contractual and transactional is not necessarily a conscious choice or decision that we make. It's much more of a by-product of the overall marketplace and the decisions that our customers make on how they choose to engage us. Over time, our goal is to continue to grow volume at a rate ahead of overall marketplace growth, and that growth will become both from contractual as well as spot market rate.

Thanks, Bob. Chris Wetherbee of Citi asked the next question for John on the competitive landscape. Ravi Shanker of Morgan Stanley and Todd Fowler of KeyBanc also asked about competition. Can you provide an update on the competitive landscape in truckload brokerage? And are newer tech-based competitors more active? And are you seeing any impact to pricing?

One of the things that remains most true is that our industry is incredibly fragmented. There still are more than 10,000 members of the TIA Association, or more than 100,000 motor carriers. And while we know that we're substantially larger than anybody else, we know that we can't move pricing and that we don't have the sort of clout to impact things. So the answer is no. We don't really see any specific start-ups or the evolution of the competitive landscape causing a measurable impact on pricing. Obviously, in this current environment, the cyclical impact is trumping any kind of secular changes around digital transformation or how the competitive landscape might be evolving.

Now all that is not to dismiss what Bob shared, in a lot of ways, we're big believers in some of the new tools that are coming to the market. I know that there is better than ever menu of competitors, who are working on mobile apps and location services, but we think our Navisphere platform is really at a different scale and a competitive differentiator, and we're going to keep investing in it to make sure we stay ahead in that competitive landscape. So lots of change. It's more competitive than ever, but it's as fragmented as it's always been. And therefore, it's really not likely to see measurable impact from one or a handful of new entrants.

Thanks, John. Todd Fowler of KeyBanc asked about Milgram. Andy, please provide an update on the Milgram integration? Are there duplicative cost associated with integration during the quarter? And if so, can you quantify? At what point will the integration be complete?

Yes. We're pleased with the integration efforts on behalf of all of our teams, starting with APC in '16 and most recently Milgram in '17, and I would offer that they've done a great job of integrating those organizations into the overall Global Forwarding platform, which is driven, as I referenced earlier, significant both operating income as well as net revenue growth. There are a few duplicative costs that are still there, nothing that's material. We've done a great job of integrating the agents into our organization. And you see the tremendous updraft in some of the performance there. I would say that as we get into the latter part of this year and going to '18, when we finally put Milgram on to the Navisphere platform, you'll see a few more synergies picked up just in terms of our overall efficiency and performance there.

Thanks, Andy. For John from Scott Schneeberger of Oppenheimer. How much of an impact does the ELD regulation having on supply in your view?

It's interesting, prior to the ELD implementation, a lot of the projection and speculation around what impact it would have was thinking about what if any percentage of trucks might exit the market or not renew their registration and whether 2% or 3%, 5% of capacity would leave the marketplace as a result of the requirement. As we've shared, we haven't really seen any of that. We continue to have very healthy sign up of new capacity, and we really anecdotally don't know of a much meaningful capacity leaving the marketplace. I think the other impact, which has been meaningful that we've shared in a variety of ways is that the pricing and the uncertainty that has come with those [tweener] lanes and the repositioning of networks and how a lot of the capacity has changed their behavior around what freight is preferable and how they're pricing, especially certain corridors or certain types of freight like the Fresh division that was referenced. So there's definitely been a meaningful impact because of the types of ways that has changed, it's really hard to quantify and know what it is, but clearly contributor to part of the current cycle and the tight side of the supply.

Thanks, John. The next question is also for John from Matt Reustle of Goldman Sachs. Are you seeing your customers act differently than in previous cycles? Are contract terms changing in any way?

The overall answer to that is no. When you think about the current environment, it's been a while since we've had this kind of route guide deterioration and price inflation in the supply chain. So whenever we have an escalation of costs like this, it puts a lot of pressure on all of us in the industry, and especially on a lot of the shippers. So we're definitely seeing with this type of price increase, the aversion to the spot market, refocus on contractual compliance to committed relationships, all of those things with greater emphasis, just like we would have seen in this portion of cycle in the past. So maybe a renewed spirit of emphasis and kind of some new reactions compared to the last 5, 6 years. But overall, probably a predictable reaction and adjustment to this part of the cycle.

Thanks. The next question is from Brian Ossenbeck of JPMorgan. Andy, what was the year-over-year impact of changes in fuel surcharges on net revenue margins in the first and second quarters?

Yes. Recall that fuel is a cosmetic impact to our net revenue margins. In Q1 of this year, it had a drag of 40 basis points on our net revenue margins. And in Q2 given the increase in fuel, it had a drag a 55 basis points on the net revenue margin percentage.

Thanks, Andy. Now to Bob, Jason Seidl also asked, is the improvement in July truckload volume declines as a function of easier comps, more favorable direct results of C.H. Robinson or a combination?

It's really a function of both. Looking back at 2017, we had much stronger volume growth in the front half of the year than we did in the back half of the year with fourth quarter last year even being negative in terms of volume growth. If we look at the first 7 months of 2018, we see sequential improvement in total volume on a per day basis every month. So while July volume is up on a per day basis sequentially compared to June, we do have easier comps on a year-over-year basis in the second half of the year.

Thanks, Bob. Another question for Bob from Allison Landry of Crédit Suisse. With truck orders that remain elevated, do you anticipate capacity coming online in any meaningful way?

We mentioned in our prepared remarks that we continue to add new carriers to our network at an accelerating rate, but we don't necessarily see this as meaningful new capacity coming into the overall North America network as much as like the company drivers or leased drivers that are expanding out on their own to start businesses and act as owner operators. If you think about the carriers that we added last quarter, the average fleet size of those carriers that we on-boarded is right around 1.5 trucks per fleet. So these are truly owner operators that are either new to the industry, new to Robinson or both. So given the driver shortage at all the mid-sized and larger trucking companies that I talked to report and the challenges of recruiting and retaining drivers in an environment of nearly full employment, I don't see a meaningful increase in overall capacity entering the market.

Thanks, Bob. Our last question is for Andy from Ken Hoexter of Bank of America Merrill Lynch. What are your thoughts on debt paydown? Now that you have $1.4 billion in debt, would you look to pay down the AR securitization and credit facility? Or would you like to increase your debt exposure to keep leverage just below 2x debt-to-EBITDA?

One of the things that we continue to be proud of is the strength of our balance sheet and our ability to access capital in a meaningful way, as evidenced earlier this year when we took down $600 million of investment-grade debt. If you think about the rates that we're paying on our current facility just under 3.3% and the AR securitization at 2.9%, we wouldn't have envisioned paying those down, just given the relatively lower rates at which we borrow. Our comfort level, and we've talked about this, is at between 1 and 1.5x net debt to EBITDA, absent any other strategic opportunity that came our way.

That concludes the Q&A portion of today's earnings call. A replay of today's call will be available in the Investor Relations section of our website at chrobinson.com at approximately 11:30 a.m. Eastern Time today. If you have additional questions, I can be reached by phone or e-mail. Thank you again for participating in our Second Quarter 2018 Conference Call. Have a good day.

Ladies and gentlemen, that concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.