C.H. Robinson Worldwide, Inc.
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, Bob Houghton will facilitate a review of previously submitted questions. As a reminder, this conference is being recorded, Wednesday, May 2, 2018. I will now turn the call over to Bob Houghton, Vice President of Investor Relations.

[Robert Houghton:]

Thank you, Donna, and good morning, everyone. On our call today will be John Wiehoff, Chairman and Chief Executive Officer; Andy Clark, Chief Financial Officer; and Bob Biesterfeld, Chief Operating Officer and President of North America Surface Transportation. John, Andy, and Bob will provide commentary on our 2018 first 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 lists factors that could cause our actual results to differ from management's expectations. And with that, I will turn the call over to John.

[John P. Wiehoff:]

Thank you, Bob, and good morning, everyone. Thank you for joining our first quarter earnings call. We recently announced the formation of the role of Chief Operating Officer and Bob Biesterfeld's promotion. Bob will be working with the other divisional presidents and chaired services leaders to optimize the performance of all of our operating divisions. He will also lead our information technology and commercial go-to-market strategies to accelerate the digital transformation of our businesses around the globe. Bob will share some of his initial thoughts on these strategies later in today's presentation. In his new role as Chief Operating Officer, Bob will be a regular participant on these earnings calls. In my opening remarks, I want to highlight some of the headlining themes that you'll be hearing us talk about. First, we are in a unprecedented freight environment. The healthy economy and rapid growth in e-commerce is driving a significant increase in the demand for freight. At the same time, driver shortages and enforcement of the electronic logging device mandate is motivating carriers to be increasingly selective in the loads they are willing to carry, resulting in a tightened capacity environment. The result is a very fluid and dynamic market. To illustrate this point, costs in our North America truckload business increased 21.5% this quarter, the largest single quarterly increase in our 21-year history as publicly traded company. Pricing has continued to escalate from previous quarters. We delivered double-digit price increases across most of our service lines this quarter, including a 21% increase in North America truckload. Rapidly rising prices typically create incremental spot market activity and margin compression on committed pricing arrangements. We experienced both of these in our first quarter results. The strength of our business model over time is our ability to balance our portfolio of long-standing contractual relationships we have with our customers 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 a rapidly rising freight cost environment, shipper route guide performance deteriorates, which drives a shift in freight volume into the spot market. Our truckload transactional volume increased at double-digit rates during the quarter, but it was not enough to overcome the declines in our contractual volume. We continue to believe that the right business model is leveraging our people, process and technology to build long-term committed relationships with shippers and carriers around the world, while also fulfilling spot market opportunities when they become available. In a rapidly rising cost environment, the concept of award management honoring customer commitments is critically important. This is a core component of our account management practices that we believe are part of the foundation for long-term value creation. More to come on each of these topics, but with those introductory comments, I'll turn it over to Andy now to review our financial statements.

[Andrew C. Clarke:]

Thank you, John, and good morning, everyone. I would like to start by recognizing the hard work of the entire team in this volatile freight environment. We saw aggregate volume growth across all transportation services, a double-digit increase in net revenue, and increased operating profits. We did this while continuing to make significant investments for future growth. We also delivered operating margin expansion in both NAST and Managed Services. Profits did fall short of expectations, however, in our Global Forwarding and Robinson Fresh segments. Both teams are working hard to return to best-in-class results. Now, on to slide 4 and our financial results. First quarter total revenues increased 14.9% to $3.9 billion, driven by significantly higher pricing across all service lines, volume growth in LTL and Global Forwarding, and higher fuel costs. Total company net revenues increased by $57 million, or 10.1% in the quarter. Net revenue growth was led by truckload services, up $26 million and LTL services up $15 million. We saw the benefit of recent investments in our Global Forwarding air service line where net revenue increased 32%, or $7 million in the quarter. First quarter ocean net revenues increased $6 million. Total operating expenses were up $54 million, or 14.1%, driven by higher personnel and SG&A expenses. First quarter personnel expenses increased 13%. Total company average head count increased 5.7% in the quarter, led by increases to support volume growth, opportunities in our Global Forwarding and Managed Services businesses. Variable compensation also increased in the quarter. We expect variable compensation to be elevated for the full year, given our soft performance in 2017. SG&A expenses were up 17.7% in the quarter to $106 million. As a reminder, our last year first quarter results included a one-time favorable $8.75 million legal settlement. Excluding the impact of this settlement, our first quarter SG&A expenses increased 7.3%, primarily driven by the write-off of a supplier advance in Robinson Fresh and increased occupancy and depreciation and amortization expense. SG&A expenses declined 3% on a sequential basis. Total operating income was $192 million in the first quarter, up 1.9 % over last year. Operating income as a percentage of net revenue was 30.6%, 250 basis points below last year's first quarter. Our objective is to grow operating income at a rate equal to or greater than net revenue, so we still have work to do in this area. We will continue to invest while managing expenses and striving for greater efficiencies as we move through 2018. Bob will provide more context on what we were doing to drive operating margin improvement in his remarks. First quarter net income was $142 million, an increase of 16.6%, and diluted earnings per share was $1.01, up from $0.86 in the same period last year. On to slide 5 and other items impacting net income. The first quarter effective tax rate was 21.3%, down from 31.7% last year. The lower tax rate was driven primarily by the reduction in the U.S. corporate tax rate. Also, it is typical for our tax rate to be lower in the first quarter than the full year, primarily due to the tax impact of restricted stock delivery. We continue to expect our effective tax rate to be between 24% and 25% for the full year. In the first quarter, we adopted the new accounting standards update for revenue recognition. Starting with the first quarter of 2018, in-transit shipments will now be included in our financial results. We do not expect this policy to have a material impact on our enterprise operating results; however, within our Robinson Fresh division, our total revenues were negatively impacted by approximately $27 million. There was no impact to net revenue. Interest and other expense was $10.7 million, an increase of 15% in the quarter, driven primarily by increased debt levels and higher variable interest rates on our short-term debt. Changes in foreign currency did not have a material impact on our first quarter results. Our share count in the quarter was approximately flat as share repurchases were offset by the impact of activity in our equity compensation plans. Slide 6 outlines our operating cash flow and capital distribution for the quarter. Through a combination of improved working capital performance and increased earnings, we generated just over $200 million of operating cash flow in the quarter, a 116% increase over the prior year period. We returned $135 million to shareholders in the quarter, a 23% increase versus the last year period. In line with our stated policy, we continue to evaluate and deploy our capital in ways that both drive better performance and increase shareholder value. We will make the investments in people, processes, and technology that generate outstanding results for our customers and returns for our shareholders. We will look to acquire companies that fit our strategies, business model and culture. And we will reward our shareholders through buybacks and dividends. Capital expenditures totaled $15.5 million in the quarter. We continue to expect full year CapEx of $60 million to $70 million, with the majority dedicated to technology. Now, onto the balance sheet on slide 7. Working capital improved 1.4% versus the fourth quarter of 2017, driven by a reduction in accounts receivable, given the seasonal sequential decline in total revenue versus the fourth quarter of 2017. First quarter working capital, as a percent of total revenue, remained relatively flat versus the fourth quarter. The contract asset and accrued transportation expense lines on the balance sheet reflect in-transit activity in accordance with the newly-adopted revenue recognition policy. Our debt balance at quarter end was $1.4 billion. Across our credit facility, private placement debt and AR securitization, our weighted average interest rate was 3.3% in the quarter. On April 9, we issued the first public debt offering in our company history. The details are listed on slide 8. The offering consisted of $600 million of 10-year senior unsecured notes at a fixed rate of 4.2%. We received an investment grade rating from both S&P and Moody's, and are pleased with the successful outcome of the issuance. We used the majority of the proceeds to repay the outstanding balance on our credit facility. With interest rates expected to rise in the future, we believe locking in current rates for a 10-year period is a prudent decision from a capital structure perspective. This bond offering also provides us with greater flexibility in our capital structure to both fund future acquisitions and working capital needs. 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, and this April has one additional business day versus the prior year. April 2018 global net revenue per business day has increased 11%, while truckload volume has decreased approximately 6% versus the year ago period where volumes increased 10%. We are working closely with our customers to achieve pricing reflective of the marketplace conditions, while continuing to meet our volume commitments. We continued to see committed volume declines in April in North America truckload as we actively re-price business where appropriate. Our account managers are focused on award management, ensuring we honor our customer commitments, while also securing additional transactional freight opportunities. Our April performance includes strong double-digit growth in transactional freight. New carrier sign-ups in April were relatively consistent with the pace in the first quarter, so we are not currently seeing a negative impact from the April 1 hard enforcement of the ELD mandate. Thank you all for listening this morning, and I will now turn it over to Bob to provide additional context on our segment performance.

[Robert C. Biesterfeld, Jr.:]

Thank you, Andy, and good morning, everyone. It's a pleasure to be speaking with you all today. I want to open by saying that I'm really looking forward to serving the over 15,000 employees of C.H. Robinson across our global network in this new role. As John mentioned in his introduction, my focus will be on continuing to drive the digital transformation of our business. Each of our business units are at a different stage in this journey, and we have an exciting roadmap ahead of us that will improve our customer and carrier experiences, accelerate the pace of innovation and technology deployment across our platform, and drive greater synergies between our operating divisions, leading to a more streamlined organization. One of the key ways we measure the dynamic nature of the logistics market is captured on slide 10. The light and dark blue lines on the graph represent the percent change in North America truckload rate and cost per mile to customers and carriers, net of fuel cost since 2008. The gray line is the net revenue margin for all transportation services. As John mentioned in his opening remarks, the change in the North America truckload rate per mile and cost per mile both exceeded 20% this quarter. Given the current dynamic of tight capacity and strong demand, we do expect freight market volatility and higher pricing to continue for the balance of the year. You can also see that despite the high level of volatility in a freight market, we are able to maintain our margins through these extended freight cycles. Our first quarter transportation net revenue margin of 16.4% is up slightly versus the same period five years ago and our annual net revenue has increased over $650 million during this five-year time period. One of the metrics we use to measure market capacity and volatility is the routing guide depth from our Managed Services business. In the first quarter, average routing guide depth was 2.0, representing that on average, the second carrier in a shipper's routing guide was executing the shipment. The quarter also included weeks where the routing guide spikes to 5 in certain parts of the country, indicating periods of localized significant type (16

[John P. Wiehoff:]

Thank you, Bob. Before moving to the questions, I'll wrap up our prepared remarks with some comments on our expectations for the balance of 2018. We do believe that the current freight market fundamentals will continue for the next several quarters. We expect demand for freight to remain high, with aging driver demographics and declining numbers of new truck drivers, we expect the driver shortage to continue. With the hard enforcement of ELDs taking effect on April 1, we expect industry capacity to remain tight. So given the healthy economy, high freight demand and tight capacity environment, we expect prices to remain elevated for the balance of 2018. We are focused on working closely with our customers to help them understand the market, to ensure we both meet our customer commitments and achieve pricing reflective of the market conditions. We will continue to leverage our digital transformation to provide our people with an expanding set of insights and capabilities to increase the value of the supply chain expertise we deliver to our customers and carriers, and we will remain focused on operating cost efficiency, driving higher levels of service execution, and increasing returns to our shareholders. Lastly, I would also like to personally thank the over 15,000 Robinson employees around the world for their hard work and effort this quarter. In a rapidly-changing freight environment, we were able to deliver double-digit net revenue growth, expand our digital capabilities, make significant investments in our Global Forwarding business, and deliver increased operating income. We also returned $135 million to shareholders this quarter and delivered a significant improvement in our operating cash flow. I'm 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 will turn it back to the operator to answer the pre-submitted questions.

[Operator:]

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

[Robert Houghton:]

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-up the question and then turn it over to John, Andy, or Bob for a response. And the first question is on operating margin and comes from Jack Atkins with Stephens. Chris Weatherbee with Citi, and Brian Ossenbeck with JPMorgan also asked about operating margin. John, we are in the most robust freight market in nearly 15 years, and C.H. Robinson was only able to drive a 2% increase in operating income on a year-over-year basis. What is the company going to do to improve profitability and how should we be thinking about net operating trends bigger picture?

[John P. Wiehoff:]

The bigger picture approach around profitability when we do our long range planning and when we analyze our business has always been to kind of separate looking at net revenue growth and then the operating margins. It's the way we format this deck for the call and it's the way we do our long-range planning internally. Our goal has been, and remains that we believe we can grow our net revenue and our operating income at similar rates. That brings in all of the stuff that we've already discussed around volume and price at the gross margin level, and then it gets into the operating efficiencies and the scale lever points that we have at the operating income line item. If you look at Q1, we did last year discuss the legal settlement. If you adjust for that, we let you do your own pro forma calculations, but we, in a 10% net revenue quarter, grew our operating income adjusted for that legal settlement in the 6% to 7% range. But as we acknowledged in our prepared comments, on an overall basis, not where we want to be long-term, and what we're doing to improve that as 2018 progresses. Over the last five years, as we've invested significantly in our Global Forwarding network, one of the things we did a couple of years ago was move to segment reporting because we believe that understanding the various services that we offer and the different margin and growth dynamics are relevant. Within the NAST division, the high-level story around profitability is that we committed 20 years ago when we went public, that we were going to be more than a transactional truck broker and that we were also going to serve our customers the way they wanted to be as a Tier I common carrier to go after a lot of those committed freight relationships. While the truckload environment is growing significantly and prices are changing, we've been very transparent in our growth strategy around being a committed provider that also sources capacity on a transactional basis in the marketplace. If you look at our largest source of revenue being a mid-teens margin business that we source daily in the spot market, and those costs went up 21%, we had to re-earn and recommit to well over half of our portfolio in a very active marketplace. So, from the standpoint of we shedded some committed volume and the market was very active, but if you were within Robinson in the first quarter of 2018, you know that a lot of activity occurred and there was a lot of effort put forth to adapt to where the market is at. Despite that, in the NAST segment, we did grow operating income and net revenue at a comparable rate and adjusted for the legal settlement which is pushed into that segment, did show some of the operating leverage and some of the benefits of what a transactional market can give us during this period of time. We talked through, in the prepared comments, the challenges in the GF segment that we continue to grow, but we leaned in heavily on some network investments at the operating expense line item and we will continue to rationalize those quickly to make sure that the ones that are paying off are capitalized on and the rest of them are shut down or balanced accordingly. In Fresh, I think you see some of the segments and verticals where re-pricing is even more challenging, and the sort of net revenue compression that can happen where you're less successful doing that, and we also had some expense challenges that Bob talked about and we're addressing there. So overall, we're not happy with the operating income performance for the quarter, but we're on top of it. We believe that we have the right model and the right disciplines in place to grow our operating income more in line with our net revenue for the remainder of this year. And long-term that continues to be our growth strategy for value creation and growing the business together.

[Robert Houghton:]

Thanks, John. The next question is on volume and comes from Dave Vernon with Bernstein. Ken Hoexter with Bank of America Merrill Lynch and Brian Ossenbeck with JPMorgan also asked about volume. Bob, can you discuss the drivers of volume decline in the truckload segment? Is this loads you can't find capacity for and are turning away, or is this freight that is being booked away by shippers?

[Robert C. Biesterfeld, Jr.:]

So we talked about it in some of the prepared comments and the fact that our volume decline within North America transportation for Q1 was largely driven by declines in the contractual marketplace, while our spot market or transactional business actually grew double digits. We do see this happen typically in periods of rising rates, where that portfolio tends to shift a little bit. As we've talked about before, Robinson does tend to have a higher percentage of our total portfolio tied to those committed customer contracts. So we worked hard in first quarter to manage those commitments for our customers, ensuring that we met the awards that were given to us in the best of our ability. As we look forward and think about truckload volume, we do anticipate that volume to come back, both in the transactional and the spot market throughout the period of the balance of this year. Typically, when we're in environments like this, you might see shippers award heavy to contractual, but then see that some of those rates don't pay out, and we have routing guide degradation or routing guide failure. And in most cases, we may see opportunities come back to us in subsequent weeks, months, or quarters.

[Robert Houghton:]

Thanks, Bob. The next question is from Matt Young with Morningstar. John, could you please provide some color on the tradeoff between volume and core pricing within the NAST truckload business?

[John P. Wiehoff:]

So Bob addressed what's happening in the current marketplace. I want to try to build a little bit on the volume/pricing tradeoffs in terms of our go-to-market strategies and how we think about this longer term. There is no question that over the longer period that the gains in market share and increases in volumes are what drive a lot of the value creation in Robinson. So many of our core business practices are about go-to-market sales activities, targeting different regions or segments, and making certain that we're very aggressively going after volume in the aggregate to expand our network and continue to grow our market share. On a year-to-year basis, in terms of how we're thinking about pricing and volume tradeoffs, because of the fact that we source all of our capacity in the marketplace, we don't really get to decide exactly what that tradeoff of volume and margin is going to be. It's a very iterative process with our customers during the bids. While we believe we're the largest truckload provider in North America, it's most common to have several hundred participants and bidders in a large contract bid. And those bid processes are really settling through what that shipper's particular view may be around price increases and how they're approaching the market, and comparing and contrasting what we and the other providers sort out. So even though we're a large provider, it's a very fragmented market, and we do not have the kind of market share to sort of command exactly where we want to end up in that volume and pricing tradeoff in each particular committed relationship. I think what you're seeing in the current market is that we believe that the material or significant price increases are going to stay with us for the remainder of the year. Some of the repricing that occurred last year has proven to be inadequate, and some of the pricing that we're applying in the marketplace today is not being accepted by those shippers who are trying to take a different approach in terms of how they route their freight. So we do accept the fact that there are volume and price tradeoffs, and it just becomes a byproduct of how we enter into each bid arrangement and the results of each of those shipper interactions.

[Robert Houghton:]

Thanks, John. The next question is from Fadi Chamoun with BMO. Bob, can you grow volumes in NAST without adding head count? Maybe thoughts on the operating leverage opportunity you see in the segment as you continue to benefit from favorable market conditions.

[Robert C. Biesterfeld, Jr.:]

Yeah, absolutely. We've shown in the last few quarters that we can grow volume at a rate ahead of head count growth, and that is our plan moving forward. Our head count mix is a little bit more complex than it appears at the summarized level that we report at due to the fact that we're organized within the business into specific functions. So as we introduce more process automation, more digital trading with our customers and carriers, we're able to grow both volume and revenue, without adding head count within certain functions. This still allows us to invest in head count that drives top line revenue growth in roles such as sales and account management.

[Robert Houghton:]

Thanks, Bob. The next question is from Ben Hartford with R.W. Baird. Andy, any reason to believe the 2018 Q1 bad debt expense provision for doubtful accounts will remain elevated for the balance of the year, or was it simply a first quarter issue given the supplier advance write off?

[Andrew C. Clarke:]

Yeah, thank you. One of the highlights of the first quarter was actually the really strong cash flow performance where we generated just over $200 million in cash flow from operations. If you compare that to Q1 of last year, that was $92 million, and if you compare that to the fourth quarter of 2017, it was $165 million. So really strong cash flow performance driven by strong earnings performance as well as strong working capital performance. The allowance for doubtful accounts was down 5% from the end of the year. So the team out there and broadly speaking the business, finance have done a wonderful job of driving the order to cash cycle. And the improvements that we made in the first quarter of this year, we would expect to see continue throughout 2018.

[Robert Houghton:]

Thanks, Andy. The next question is from Bascome Majors with Susquehanna. Bob, are you still seeing customers eager to lock in committed truckload rates with Robinson despite today's elevated market? Or are your customers becoming more willing to take on spot rate risk looking into the second and third quarters?

[Robert C. Biesterfeld, Jr.:]

So I think it helps with this question to think about kind of the macro environment around truckload in terms of what freight typically moves in the contract versus spot. And if we think about the normal marketplace, typically 80% to 85% of freight is going to move in that contractual marketplace and 15% to 20% moving in transactional. So if we think back to last year at this time when spot rates really lagged contractual rates, we actually saw shippers withholding some portion of their total freight from their bid activities so that they could capitalize on that spot environment. Today in this rising cost environment, where the spot rates are more of a leading indicator to higher contractual rates, shippers are really working to maximize the amount of freight that they're allocating into that contractual marketplace. The reality, though, is many of these awarded rates don't necessarily hold up in rising markets. And what was originally planned as contract or committed ends up being tendered in a secondary market of some sort. That could come either at higher and non-awarded rates or in the true open spot market. So I don't know that shippers necessarily plan in this environment to have more freight enter the spot market. The freight that goes into the spot is typically more of an outcome of a plan that maybe didn't execute at the level that was planned for.

[Robert Houghton:]

Thanks. The next question is also for Bob, and comes from Todd Fowler with KeyBanc. How is bid season progressing and how much of your contract book has repriced 2018 to-date?

[Robert C. Biesterfeld, Jr.:]

So John made some comments in an earlier question about the bid activity and the number of participants in the bids that we participate in. We stated in fourth quarter that we repriced a portion of our contractual business. As I think everyone knows, repricing activity is typically highest in the first quarter, but given the market dynamics over the past few months, repricing has been much more fluid than in more normal cycles. And bids and repricing has tended to happen a little bit more on the fly as these original plans fail to derive expected results. So even though typical cycles are annual and bidding, our research shows us that the average age that a load actually moves at is closer to six to eight months versus annual, due to both customer and carrier networks changing. So this question of how much of our book has been repriced is a difficult one to answer. When we get the opportunity to reprice existing business in these bids, we also get the opportunity to price business that we previously haven't had the opportunity to participate in as a contractual provider. So when we see these bids, we typically see a rebalancing where we win some lanes that we previously didn't have and we lose some lanes that previously we may have had in the past period as a contractual provider. Overall, we see the opportunity to bid on tens of billions of dollars of available freight on an annual basis that in this market shippers would prefer to assign as contractual. As John said earlier, we work leveraging our analytics and our processes and our pricing data to look at where we believe the market is going to go and represent the overall macro pricing environment in the marketplace. And shippers then make that decision on where to route us as either a contractual or committed provider, or leverage us in more of a backup or spot market environment.

[Robert Houghton:]

Thanks, Bob. The next question is on the competitive environment, and comes from Ravi Shanker with Morgan Stanley. Ken Hoexter of Bank of America Merrill Lynch also asked about the competitive environment. Andy, have you seen more or less of tech entrants competitors in the marketplace given current market conditions?

[Andrew C. Clarke:]

Yeah, the short answer is not really. So in terms of pure tech entrants, 2018 isn't any different than really the news that's been out there for the last several years. But I guess we'd like to take this opportunity to maybe broaden that out a little more in terms of, we face thousands of competitors every day in all parts of our business. And our go-to-market has been based on our people, our process, and our technology, and we have a great technology team. We invest a lot of money in our technology. And so we really want to make sure that when we talk about that, both internally as well as with our customers as well as our investors, we just think it's a combination of all three of those that differentiates us in the marketplace. If you just then begin to think about if you came into the marketplace and purely as a tech play, when the market dislocated as much as it did at the end of the third quarter and into the fourth quarter and now continuing into 2018, we just don't think that that's a competitive advantage or a competitive edge when you're going and talking to our customers. And we do – John, Bob, I, our business leaders, our account managers, are out there every day, talking to our customers and they're looking for technology. They all want that technology and we believe that we're bringing it to them. But it's more than just technology. As Bob and John mentioned in their remarks as well as in their answers, you've got to be able to cover the freight, you've got to be able to help them manage very complex global supply chains, and you do that with technology, but you also do it with your people and your processes.

[Robert Houghton:]

Thanks, Andy. The next question is for Bob. A number of analysts asked about operating margin in Global Forwarding. Can you describe the investments you are making in this business, and at what point would you expect to see margin improvement?

[Robert C. Biesterfeld, Jr.:]

Thanks, Bob. So since our acquisition of Phoenix International in 2012, we've stated that our operating margin expectations are to be in the range of the industry leaders and close to or exceeding 30%, excluding acquisition amortization. So we still believe this is our target in a realistic case over time. If we look back at the past several quarters, we've invested in head count and facilities to drive revenue growth, specifically in the area of air freight. We feel really good about our growth in air freight over the last couple of quarters, as well as the top line growth in our other Global Forwarding services. But we realize we've got some work to do to catch up on our forward investment and expenses. So related to the Milgram acquisition, we also added some heads in Asia ahead of transitioning agent (47

[Robert Houghton:]

Thanks, Bob. The next question is for John. Several analysts have asked, what is fundamentally different about the Global Forwarding business that makes it a lower margin business than NAST?

[John P. Wiehoff:]

So for those of you who have followed the Robinson story over the 21 years of us being publicly traded, you know that we started shortly before going public around our Global Forwarding diversification, and are 21 years, 20-some years into it. And I've confessed for the majority of that time that we weren't profitable or weren't successful until that tipping point of our acquisition of Phoenix 5.5 years, 6 years ago where we reached a certain level of scale. Throughout the last couple of decades, we've had the opportunity to do due diligence on a couple dozen different investment opportunities and have completed a couple of transactions, including the Phoenix investment. Over that time, I guess we've become reasonably confident in our assessment of kind of the industry benchmarks and what our goals are and how they compare and contrast to our NAST or our other emerging businesses. At the gross margin level, Global Forwarding is a higher-margin business than our North American truckload. Both the air and ocean margins, from a percentage standpoint, are actually higher than our North America Surface Transportation. They're unique in that they require scale more so than the truckload. There really isn't that same opportunity to transactionally go after a single ocean box or some air freight. It's much more complex in terms of how you build corridors and how you contract with a more limited number of providers to make sure that you have the right scale and density in certain corridors. As you can tell by this quarter's results, we continue to learn and invest in certain corridors and air freight and building out the maturity of our Global Forwarding network. But at the gross margin level, it actually can be higher than our North American Surface Trans, and that's what our experience has been the last five or six years. When you look at operating margins, we have articulated, and Bob restated that 30% growth goal, because we've acquired some businesses we exclude amortization, but from an operating standpoint, the operating income target of 30% of net revenue is lower than our mature NAST business, which has been in the low 40s. We also have some emerging businesses and Managed Services in Europe where we're in the double-digit, low double-digits or high single-digits where those are more maturing businesses. In Global Forwarding, because you have businesses in a number of countries, you have local statutory and compliance requirements, you have overhead associated with at least two countries in every transaction, you have a lot more compliance costs around border clearances and different things, it is just a more cost-intensive and a more mature competitive global business that brings different cost structures with it. So, when we benchmark and look around, we feel fairly confident that that's an aggressive healthy target for us. And when you combine all of that, we feel like the returns on capital and the growth opportunities for value creation in Global Forwarding are comparable to those in our North America Surface Transportation and the other business units that we're transacting in.

[Robert Houghton:]

Thanks, John. Andy, a few analysts have asked about the Milgram acquisition. Bobby Termone (51

[Andrew C. Clarke:]

Yeah, I'm going to dovetail both John and Bob's comments. And when we started with the Phoenix acquisition, continued with the APC, and now Milgram, these are all important steps in our strategy in our global expansion, and our go-to-market with our customers. So, we've been really exceedingly pleased with all of them. To dive right into Milgram, at the end of the first quarter, we had converted about 80% of that agent business. So we expect by the end of the second quarter to have converted 100% of it. Bob mentioned some of the investments that we're making in Asia and we've got a great team in Canada that are really helping us grow our presence there. And just having completed that acquisition at the start of the fourth quarter of last year, we feel really good about the progress the entire global team is making. If we go back, we ended last year with over $2 billion of gross revenue, and I think the Global Forwarding team is really starting to hit its stride, both in terms of its ability to serve its customers across the globe. And we think Milgram is an important part of that.

[Robert Houghton:]

Thanks, Andy. Todd Fowler with KeyBanc and Brian Ossenbeck with JPMorgan asked about our digital transformation. Bob, please elaborate on the comments around accelerating the digital transformation. Is this in response to increased competition in the marketplace relative to recent quarters or to improve employee productivity or for some other reason?

[Robert C. Biesterfeld, Jr.:]

We've been on the path of this digital transformation really for years, if we think back to the fact that we were one of the first 3PLs to really leverage the web and mobile applications to communicate with both customers and carriers while also being focused on enhancing internal processes to be more automated. In terms of the current context, what I would think about in terms of our digital transformation is really this concept of journeys, and thinking about our customer journey, thinking about the carrier journey, from an order-to-cash cycle, as well as the employee journey and how they get work done. So, we're focused on how we can reduce and remove as much friction from these journeys as possible, while still meeting the customers and carriers where and how they want to interact with us. So, we're looking at how we can enable trade by using advanced analytics and science in areas where historically we've relied on human decision support and manual processes. And this isn't about replacing all the personal interaction that so many of our customers and carriers appreciate, but really building better workflows for all stakeholders in a manner that reduces costs, increases efficiency, and improves quality. So, this isn't about just the next great mobile app. It's more about reengineering how we get work done in the context of leading-edge technology really enhancing the work of our people and our processes.

[Robert Houghton:]

Thanks. The next question is also for Bob. Ben Hartford with R. W. Baird asked how quickly do you expect Robinson Fresh EBIT margins to normalize after the first quarter customer loss and margin pressure?

[Robert C. Biesterfeld, Jr.:]

Much of the Robinson Fresh transportation business was repriced in the first quarter and will be implemented throughout the course of the second quarter. We expect this to have positive impact to EBIT margins; however, I think it's important to point out one of the differences between Robinson Fresh transportation and NAST transportation, and that's that they tend to have a much more concentrated customer base, and tend to lean more heavily towards contractual relationships when compared to the broader NAST business. So, given a continuing rising rate environment and expected increase in costs and purchase transportation, this will serve as a headwind to Robinson Fresh in the coming quarters. As we stated on the call, we have also exited a couple of facilities, which will drive down cost savings in that business. And we've implemented some pretty stringent cost controls around our variable expenses within Robinson Fresh. Related to the specific customer loss that we mention in the release, this will lapse during the second half of the year between Q3 and Q4. And, overall, will have less than a 1% impact on Robinson Fresh total net revenue for the year.

[Robert Houghton:]

Thanks. One more question for Bob, from Ken Hoexter with Bank of America Merrill Lynch. What is leading LTL growth within transportation? Are you offering new services?

[Robert C. Biesterfeld, Jr.:]

LTL has been a great story in North America. And, frankly, one that we probably don't talk enough about. In 2015, we acquired Freightquote in order to gain more efficient access to that small and micro segment of customers that focus on LTL shipping. And since that time, we've combined the strengths of the legacy Robinson business, as well as the legacy Freightquote business, to really build an industry leading platform for LTL shipping that meets the needs of a full spectrum of customers, from the smallest micro shipper to the large global companies. Through technology and process integration, we've made it really easy for our customers to manage their LTL business with Robinson, whether that customer that ships once per quarter or the most complex global companies. So, our customer mix and our service mix within LTL spans the size segments and also spans the service continuum. So we think that our ability to blend really compelling common carrier LTL service, as well as our own consolidation network and temperature controlled LTL, as well as parcel, continues to be a really nice differentiator for us in that business. It's a highly automated and highly efficient business for Robinson.

[Robert Houghton:]

Thanks Bob. Next question is from Scott Schneeberger with Oppenheimer. Andy, in Managed Services, what were the primary drivers of the 40-basis point operating margin expansion in the quarter?

[Andrew C. Clarke:]

Yeah, our Managed Services business, which the brands are TMC and Freightview, they've done a great job and are an important part of our go-to-market strategy with our customers. As Bob mentioned, it's a SaaS based business, and they grew their freight under management to nearly $1 billion in the first quarter. So they're performing really well. Because of their processes that they put in place, they're able to bring on customers and grow revenue in a pretty efficient manner because it's longer-term contracts with recurring annual revenue of once you bring them in, you're able to operate that business more efficiently. So, both of those teams, TMC and Freightview have done a great job of bringing in customers in a very cost-effective manner.

[Robert Houghton:]

Thanks, Andy. And our last question is from Ben Hartford of R. W. Baird. Bob, what are your expectations for head count across NAST, Global Forwarding, and Robinson Fresh for the balance of 2018?

[Robert C. Biesterfeld, Jr.:]

So, I think I stated it on the call that we anticipate NAST head count to be flat for 2018 compared to year-end 2017. Global Forwarding head count will show up continuing to be inflated due to the Milgram acquisition and other investments, but we do anticipate that as we look forward sequentially, that will flatten out or decline throughout the balance of this year. Within Robinson Fresh, we look for Robinson Fresh head count to be down on a year-over- year basis throughout the balance of 2018.

[Robert Houghton:]

Thanks, Bob. That concludes the Q&A portion of today's earnings call. A replay of the call will be available in the Investor Relations section of our website at chrobinson.com at approximately 11

[Operator:]

Ladies and gentlemen, thank you for your participation.