C.H. Robinson Worldwide, Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Third 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, October 31, year 2018. I would now like to turn the conference 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 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 third 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:]

Thanks, Bob, and good morning, everyone. Thank you for joining our third quarter earnings call. In my opening remarks, I want to highlight some of the themes we'll be discussing with you today. First, we are pleased with our financial results this quarter. Truckload volume trends improved sequentially, and we delivered volume growth in many of our service lines. We generated another quarter of double-digit increases in both net revenue and operating income and a 270 basis point increase in operating income margin. This strong operating profit performance, combined with improved working capital performance and the benefits of U.S. tax reform, enabled us to generate significant increases in cash flow from operations and cash returns to shareholders in the quarter. Andy and Bob will provide additional context on our financial performance in their prepared remarks. We experienced double-digit cost and price increases across most of our service lines. In our North American truckload business, the rate of increase in cost and price did moderate a bit in the quarter, however, pricing still increased 14% versus last year. Our higher prices reflect a combination of spot market activity above year-ago levels and pricing reflective of market conditions across the majority of our business portfolio. Truckload price increases modestly outpaced carrier cost increases, leading to a 50 basis point increase in total company net revenue margin in the quarter. In periods of market dislocation, we experience higher levels of repricing activity across our portfolio. As freight costs decelerate, we typically see our volumes shift more heavily towards contractual business accompanied by net revenue growth and margin expansion. This outcome is reflected in our third quarter results and highlights the strength of our business model. Our business model allows us to effectively serve customers with committed annual pricing arrangements as well as those who prefer more fluid spot market pricing. We continue to believe managing this mix of pricing commitments is the best way to both serve our customers and grow our business. With those introductory comments I'll turn it over to Andy to review our financial statements.

[Andrew C. Clarke:]

Thank you, John, and good morning, everyone. During the third quarter, we've achieved record levels of net revenue and operating income and drove significant expansion in operating income margin. In our North American Surface Transportation business, we delivered double-digit net revenue growth and a 380 basis point improvement in operating margin. Additionally, our Robinson Fresh team generated impressive growth in operating income and operating margin, despite a challenging fresh produce environment. Our great results in this quarter reflect our ongoing efforts to profitably expand our business through a focus on growth, while maintaining strong operational excellence. Now onto slide 4 and our financial results; third quarter total revenues increased 13.4% to $4.3 billion. These increases were driven by higher pricing across all transportation service lines, volume growth in LTL and Global Forwarding, and higher fuel cost. Total company net revenues increased over $100 million or 16.9% in the quarter to $694 million. Net revenue growth was led by truckload services up $78 million and LTL services up $21 million. We continue to see the benefits of our investments in air and customs service lives where combined net revenues increased over $10 million in the quarter. Total operating expenses increased $49 million, a 12.2% increase versus the prior-year period. Personnel expenses increased 14.4% primarily as a result of increases in variable compensation that reflect our improved financial performance. We believe performance-based pay is the best way to align the interest of our employees with our shareholders. Total company average head count increased 2.6% in the quarter, led by increases to support growth opportunities in Global Forwarding, which was partially offset by declining head count in Robinson Fresh. Sequentially, our head count decreased by approximately 1% from the second quarter of this year. SG&A expenses were up 6.2% in the quarter to $113 million, primarily driven by increases in purchased services and occupancy cost. These were partially offset by a decrease in equipment rental and maintenance and insurance expenses. Total operating income was $246 million in the third quarter, up 26.5% over last year. Operating income as a percentage of net revenues was 35.4%, up 270 basis points versus last year's third quarter and 280 basis points sequentially. Our teams did an excellent job of achieving operating margin leverage in the quarter, and this remains a top priority in the fourth quarter and into 2019. Third quarter net income was $176 million, an increase of 47.6%. These results include a $16.9 million benefit from the U.S. Tax Reform Act passed in December of 2017. Our diluted earnings per share was $1.25 in the third quarter, up from $0.85 last year. Slide 5 covers other incomes impacting net income. The third quarter effective tax rate was 26.5%, down from 35.2% 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 24.7% and we continue to expect our effective tax rate to be between 24% and 25% for the full year. As previously noted, 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 for the year. However, it does significantly decrease gross revenues in our Robinson Fresh sourcing business, including a $29 million reduction in the third quarter of this year. Third quarter interest and other expense totaled $6.5 million, down from $10.5 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 continued to strengthen this quarter as it has all year against several of our key currencies, most notably the Chinese RMB resulting in a $7 million gain from currency revaluation. Movements in currency valuations will have an impact on our quarterly net income and we will continue to break out the impact of our foreign currency revaluation in future quarters. The gain in currency valuation 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, we had a very strong quarter for cash generation. Cash flow from operations totaled over $220 million in the third quarter, up 223% versus last year. For the nine months of this year, cash flow from operations increased 142% to $529 million. A combination of improved working capital performance and increased earnings drove the third quarter and year-to-date cash flow improvement. Capital expenditures totaled $19.5 million for the quarter. For the full year, we continue to expect capital expenditures of $60 million to $70 million with the majority dedicated to technology. Our capital distribution is summarized on slide 7. We returned $151 million to shareholders through a combination of share repurchases and dividends in the quarter, a 19% increase versus the year-ago period. Year-to-date, we have returned nearly $422 million to shareholders, a 24% increase. Moving forward, we will continue to evaluate and deploy our capital in ways that add value to our network of customers and carriers and generate returns for our employees and shareholders. Additionally, we will acquire companies that fit our strategy, business model and culture, and we will reward our shareholders through buyback and dividends. Now onto the balance sheet on slide 8; working capital increased 12.4% versus the fourth quarter of 2017, driven by higher gross revenues and the resulting increase in accounts receivables. The contract assets and accrued transportation expense line items on the balance sheet primarily reflect in-transit activity in accordance with the adoption of the revenue recognition policy. The increase in accounts payable reflect higher purchased transportation costs. Our debt balance at quarter-end was approximately $1.3 billion. Across our credit facility, private placement debt, AR securitization and senior notes, our weighted average interest rate was 4% in the quarter. On October 25, we completed an increase in our revolving credit facility from $900 million to $1 billion and extended the maturity date to October of 2023. The amend and extend of our credit facility as part of our normal course of business to optimize our capital structure and provides us with additional flexibility to invest in our business, to fund acquisitions and return cash to shareholders. 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 and volume. This October has one additional business day versus the prior year, translating to one additional business day for the fourth quarter. October 2018 global net revenues per business day have increased approximately 9%. October North America truckload volume has decreased approximately 2%. As we look ahead to the balance of the fourth quarter, we wanted to highlight a couple of items from our 2017 fourth quarter results. Driven by the impact of the two hurricanes in 2017, we saw sequential acceleration of our net revenues from 6.3% in the third quarter to 12.5% in the fourth quarter of 2017. Our 2017 net revenue per business day increased 10% in October, 13% in November, and 14% in December. We also had two non-recurring tax items which lowered our 2017 fourth quarter provision for income tax by $31.8 million. We appreciate you all listening this morning and I'll now turn over to Bob to provide additional context on our segment performance.

[Robert C. Biesterfeld, Jr.:]

Thank you, Andy. Good morning, everyone. I'm pleased to have the opportunity to speak with all of you today and to provide an update on our operating segment performance. I'd like to begin my remarks by highlighting the cyclical and ever-changing nature of the logistics market. On slide 10, the light- and dark-blue lines represent the percent change in North America truckload rate per mile charged to our customers and cost per mile paid to our contract carriers, net of fuel costs since 2008. The gray line represents our net revenue margin for all transportation services. While the rate of growth in North America truckload price per mile and cost per mile declined sequentially during the quarter, both rates and cost increased at a double-digit pace this quarter versus the third quarter of last year. You can also see within the graph that despite the high level of volatility in the freight market, we are able to maintain our margins over time and generate margin improvement when costs moderate. Our third quarter transportation net revenue margin of 16.6% increased 40 basis points sequentially from the second quarter of 2018. One of the metrics we use to measure market conditions is the truckload routing guide depth from our Managed Services business. In the third quarter, average routing guide depth of tender was 1.7, representing that on average the second carrier in a shipper's routing guide was executing the shipment. And while routing guide depth did moderate sequentially versus the second quarter, we remain above the average truckload routing guide depth experienced in a balanced market. Costs remained above year-ago levels, up 12% in the third quarter, excluding the impact of fuel. In our contractual business, we have pricing in place reflective of the current environment, and at the same time we continue to help our customers secure capacity within the spot market. Turning to slide 11, this graph shows North American truckload average price per mile received from our customers and cost per mile paid to our carriers since 2010 and represents the underlying data from the previous slide. We've excluded the actual price per mile and cost per mile scale on this slide to protect our proprietary data. While the year-over-year change in price and cost moderated versus last quarter, the absolute price per mile and cost per mile remain above year-ago levels. The chart on the slide 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 spread between price and cost even in high inflation periods. Despite significant levels of volatility in the freight market, both customer and carrier costs have increased at roughly 3% annually over this time period. Turning to slide 12 and our North America Surface Transportation (sic) [North American Surface Transportation] (00

[John P. Wiehoff:]

Thanks, Bob. Before we move on to the pre-submitted questions, I'll wrap up our prepared remarks with a few final comments. We understand there are a lot of questions and analysis around where we are in the transportation cycle, so we wanted to summarize some of the key metrics that we've shared to assess that question. First, as we covered in our pricing chart, while we did see a deceleration in the rate of growth in cost per mile and price per mile, absolute cost and price remain meaningfully above year-ago levels. Second, we discussed the shift in our truckload business mix towards more committed volume. Third, routing guide depth moderated slightly versus last quarter, so routing guides are functioning more efficiently at levels of higher demand and higher prices. Fourth, our U.S. GDP did increase 3.5% in the third quarter, reflecting a continued increase in overall business activity. And lastly, in our business review, shippers are generally planning for continued growth of freight volumes in 2019. Markets can change quickly, but that's a quick recap of some of the key metrics around what we are seeing in the current market conditions. Regardless of the freight environment, we focus on building long-term committed relationships with shippers around the world and fulfilling spot market opportunities when they become available. We provide 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 focus on operating cost efficiency, driving higher levels of productivity and increasing returns to our shareholders. The strength of this business model is reflected in our third quarter financial performance. Tariff activity is escalating. In our conversations with carriers and global shippers, companies are increasingly planning for the ramifications of tariffs activity and demand implications in the redesign of global supply chains. We are actively engaged in conversations with our customers to help them understand and quantify the impacts of both enacted and potential future tariffs. The current set of tariffs in place has not had a material impact on our financial results, and given our broad portfolio of service line offerings and strong presence in key markets like Southeast Asia and India, we believe we are well positioned to help our customers win in an ever-changing global trade environment. Lastly, I want to personally thank the over 15,000 C.H. Robinson employees around the world for their outstanding efforts and execution this quarter. In a fast-changing freight environment, we delivered double-digit growth in net revenues, operating profit, and earnings per share, and accelerating expansion in operating margin. We returned $151 million to shareholders in the quarter and delivered a significant improvement in our operating cash flow. At the same time, we continued to invest in the digital transformation that enables us to deliver increased value to our customers, carriers, employees, and shareholders. We delivered another quarter of strong operating results, and I'm confident we have the right people, processes, and technology to continue to win in the marketplace in the future. That concludes our prepared comments and, with that, I will turn it back to the operator so we can answer the pre-submitted questions.

[Operator:]

Thank you. Mr. Houghton, the floor is now yours for the question-and-answer 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 comes from Chris Wetherbee with Citi. Jason Seidl of Cowen & Company and Tom Wadewitz with UBS also asked similar questions. Andy, can you break down the 9% net revenue growth in October between NAST, Global Forwarding, and Fresh?

[Andrew C. Clarke:]

Yeah. I think given the variability that we saw by segments in both the third quarter and thus far in October, we thought it would be helpful to break out October-to-date performance by each of those reportable segments. So, NAST is up approximately 12% per business day thus far in October, Global Forwarding is up approximately 2% thus far, and Robinson Fresh is up approximately 12% as well, and that would be categorized as continued strength, as Bob mentioned, in the transportation business, which has offset that continued softness in our sourcing business.

[Robert Houghton:]

Thanks, Andy. The next question comes from Jack Atkins with Stephens. Ravi Shanker with Morgan Stanley also asked a similar question. John, can you provide your updated view on the overall freight environment? Are you seeing any signs of slowing economic activity in 2018? And given your market share, would be curious to get your thoughts on the market into 2019.

[John P. Wiehoff:]

In the wrap-up of the prepared comments, we hit on a few of the metrics that kind of summarized the view that we do see demand remaining fairly strong. In that supply and demand relationship, demand is the more volatile part of the equation. So, when we're thinking about how the market may move and what's going to happen in the fourth quarter or next year around that supply and demand relationship, demand does become the harder part to predict. There's less conversation about it already, but when you look back on 2018 and think about the supply and demand relationship, that hours of service impact in the beginning of the year did end up changing a lot of the routing and a lot of the pricing across the capacity that really did add some added strain into that supply and demand relationship. So, again, demand is the more volatile part of the equation, supply is adjusting. 2018 was probably impacted more significantly just because of all the changes in the supply side around hours of service, but from all the metrics that we see with route guides and overall economic growth and the anecdotal customer reviews that we're a part of, we do see a continued strong demand at this point.

[Robert Houghton:]

Thanks, John. The next question is for Bob and is also from Jack Atkins of Stephens. Brandon Oglenski with Barclays and Scott Schneeberger with Oppenheimer asked similar questions. C.H. Robinson has done a great job in improving productivity in the NAST segment over the last 12 months. Are there more levers to pull to extract more leverage in the model? And as a follow-up, as volume growth re-accelerates, will you need to increase head count, or will further productivity gains help?

[Robert C. Biesterfeld, Jr.:]

So, at our Investor Day last year I talked about how NAST was really in the early stages of our journey to improving productivity and into the digital transformation of our business. Since that time, we've continued to introduce and institutionalize more digital processes that have really helped to drive efficiency for our customers, for our carriers, and for our employees. And also, since that time we've introduced digital freight matching and the ability for our carriers to now self-book loads in a frictionless environment, both online and through our mobile application. We've more than doubled the automated truckload events that flow through our system, and we really continue to extend that electronic ecosystem to shippers, carriers, and suppliers within the supply chain. We've also then focused internally in terms of digitalizing our processes there and taking unnecessary steps out of the work that our people do. So, I've talked about the digitalization of our customer journeys in the past, we're making headway there. In short, we think there is a lot more leverage in our NAST model and we anticipate head count remaining flattish, while we continue to pursue market share gains across all of our services.

[Robert Houghton:]

Thanks, Bob. The next question is for John. Several analysts asked what are your expectations for contract pricing in 2019. Lapping the strong increases from this year, do you see a scenario where contract rates are up mid-single digits again next year, or does that seem too optimistic?

[John P. Wiehoff:]

Our best sense of the contract pricing at this time is kind of what we'd characterize the range as low to mid-single digits, so maybe the mid-single digits question would be the high end of the range of what we're seeing. I would remind you again, maybe very obvious, but it's an incredibly fragmented market. We don't have an overall company tariff or pricing target. For us, whatever contracted price average we achieve, it's the blend of tens of thousands of lanes and a lot of mixture that comes together. We've said throughout the year and still believe that a lot of the price increase and dislocation from this year was somewhat of a makeup from a couple of years of price declines that you see on the chart that is in our deck that Bob talked you through. So, that coupled with some of the dislocation and efficiency around hours of service, we believe that a lot of the extraordinary price increases this year were more a function of some of those factors. As demand continues to remain strong as I've mentioned in the previous question and supply continues to adjust, we do feel that low- to mid-single-digit increases in committed pricing for 2019 is a reasonable estimate at this point.

[Robert Houghton:]

Thanks, John. The next question for Andy is from Chris Wetherbee of Citi and Matt Russell of Goldman Sachs. What drove the accelerated operating leverage in the third quarter from an operating margin standpoint and is that sustainable in the fourth quarter?

[Andrew C. Clarke:]

We've talked at length on these calls and in our investor presentations about how, as a company, we make investments in our people and our process and our technology throughout all the different economic cycles. So, when you think back to 2015 when margins were expanding, we were making investments in all of those areas and we had leverage in the model. We hit a bit of a challenging economic cycle in the end of 2016 and the beginning 2017, and we continue to make those investments. And clearly, we were confident that those investments would show both positive results as well as leverage. It did have a bit of a challenge, though, on our results, and as we came into the latter part of 2017 and then all of 2018, we've been very consistent about those investments and yet, here we are today with a 270 basis point improvement on a year-over-year basis, 110 of that came from personnel, despite the fact that we have more people today which is great and 160 basis point improvement in our SG&A. And, again, I think that just speaks to the power of the work that our people are doing out there every day and the leverage that they bring to the organization. As far as what our expectations are, I would say given the backdrop what we see out there today, we expect for continued leverage in our results as we go into the latter part of the year.

[Robert Houghton:]

Thanks, Andy. The next question for Bob comes from Matt Young with Morningstar. Is the acceleration in year-over-year NAST gross margin expansion more a function of contract pricing gains or an incremental softening in spot rates?

[Robert C. Biesterfeld, Jr.:]

As John said, in the back half of last year we really saw unprecedented increases in the cost of capacity that was tied to a number of factors, including the pending implementation of ELDs as well as the disruption caused by the weather events. Those events, coupled with continued tight capacity into 2018, really moved the market up and drove the need to increase customer pricing to ensure that freight continued to move in the marketplace. We continue to reprice contractual bids throughout each quarter of the year, and so we're reading where we see those markets and making our forward-looking commitments to our customers. So, I think that drives some of the sequential improvement in pricing year-over-year, in pricing and gross margin. Specific to pricing and where we're at today, we believe that we're really well positioned in our contractual portfolio for where we are at in the cycle and we continue to manage the spot market business to meet the needs of both customers and carriers.

[Robert Houghton:]

Thanks, Bob. The next question is for Andy. Todd Fowler with KeyBanc asked, comment on the strength in cash from operations during the quarter. Is there more opportunity to improve working capital?

[Andrew C. Clarke:]

Yeah. We're really pleased with the cash flow generation year-to-date at Robinson, and if you look at that one line, the cash flow from operations, it's up over $300 million. The biggest of the factors that impacted that, the biggest one was obviously net income which was up $120 million on a year-to-date basis. But the second biggest driver has been our focus on the working capital. And, again, if you think about on a year-to-date basis, the net benefit of the working capital change was over $70 million versus last year. So, pretty strong effort on all of our teams in terms of driving order to cash. And so, sticking with that theme, that is a key focus for us for the remainder of 2018 and into 2019. And we're going to look to continue to improve on those results.

[Robert Houghton:]

Thanks, Andy. The next question for Bob comes from Bruce Chan with Stifel. In the third quarter, you added 5,000 new carriers. Is that solely due to your efforts? Is that symptomatic of increasing capacity in the marketplace? Or is that conversion of company drivers and exclusive owner-operators as they see more opportunity in the brokered market?

[Robert C. Biesterfeld, Jr.:]

So, it's difficult to answer this question with 100% certainty, but the answer probably has components of each of those factors in it. We do put a lot of effort into attracting new carriers to the Robinson and Navisphere platform. We feel really good about the affinity programs that we offer carriers, how we provide them earlier access to freight and the fact that we do have the largest network of freight in North America. And when we talk to our carriers, they tell us that they appreciate the dedicated account management that we provide them, unique customer solutions that they're able to participate in, and they find that our investments in technology really help them to run more effective and efficient businesses. So, I can't give you 100% confidence as to why we added 5,000 carriers over the course of the quarter. I can offer that even in an environment where there's more competition from other companies looking to add capacity in the small carrier segment, we continue to see more carriers choosing Robinson. And those carriers are doing more business with us in a more automated manner than they ever have in the past.

[Robert Houghton:]

Thanks, Bob. The next question for John comes from Ben Hartford with Robert W. Baird. Brian Ossenbeck with JPMorgan also asked a similar question. What do you believe drove the moderation in spot truckload pricing during the third quarter of 2018? Has incremental supply been added to the space? Or is it simply a moderation in activity following record second quarter levels? And any initial thoughts on the industry's supply/demand balance looking into 2019?

[John P. Wiehoff:]

When you drill into the supply and demand relationship and look at the spot market versus committed metrics, maybe a basic reminder is that in that spot market component of it, there's probably two main feeders of it, right? In any given year, you have planned freight or committed freight that all shippers would be working through and a certain amount that you can't plan for either because it's more seasonal or it's more fragmented. Or oftentimes you'll have incremental shipments than maybe what you've planned for, and that's where excess demand would really drive increments to the spot market. The other big feeder of the spot market is committed freight relationships that don't execute, where the freight falls all the way through the route guide and for pricing reasons or service reasons doesn't get executed. I think most of the metrics show that a lot of the spot market increase came from the fact that with these price adjustments, route guides were failing at a higher rate and that the committed freight relationships were breaking down. So, while we had these meaningful price increases – there is a strong economy and probably some demand in excess of overall planned levels, but the transitions of pricing and the changes in the committed route guide are probably the key thing that is causing the spot market to settle down as route guides perform more efficiently at higher price levels and the market comes back a little bit more into longer-term balance of committed and spot blends.

[Robert Houghton:]

Thanks, John. The next question is for Bob. Several analysts have asked how does Robinson prioritize volume growth versus pricing growth in North America truckload into 2019. Which of these levers should drive the bulk of your revenue growth? And how confident are you in your ability to profitably gain share in a more balanced truckload market?

[Robert C. Biesterfeld, Jr.:]

So, clearly, volume and pricing are the two main levers that can drive the truckload results, and we consistently talk internally about the theme of balanced growth. Within our office network, we're constantly talking about how we drive balanced growth in our organization. And we also are tuning our pricing algorithms and our tools to help achieve that. Looking at 2019, we expect to grow truckload volume on a year-over-year basis. There's no question the past several quarters have been volatile. Pricing and costs have moved at unprecedented levels. And we've worked to be balanced between honoring our contractual commitments and managing spot market activities as routing guides have been disrupted. Looking back at the past several years, many of which have been "balanced," we've demonstrated the ability to consistently grow volume and earnings, and we expect that to continue into the future. So, we're really confident in our ability to adjust to market conditions, as we depicted in the earlier slides in the deck that showed both rate and cost over time and the impact to our gross transportation margins.

[Robert Houghton:]

Thanks, Bob. Todd Fowler of KeyBanc and Matt Russell of Goldman Sachs asked about M&A. Andy, what are areas of strategic focus for the company from an acquisition standpoint, both from a service offering and geographic perspective? And how do valuations currently look?

[Andrew C. Clarke:]

Yeah, thanks. We continue to evaluate multiple opportunities both in North America and Europe across several different service lines, most of which we're already into, to one degree or another. I think if you look historically at what we've done, we've done a good job of growing our business both organically and augmenting it with acquisitions where it made sense, and Milgram being the most recent one. Valuations have been healthy for some time, but we've always paid fair value for well-run organizations. That's been something that I think – if you think about how we've done acquisitions, we've really looked at and sought well-run organizations to bring into our organization because culture really does matter. And as far as what we see going forward, I think it'll be interesting of what valuations do, particularly if you think about the number of PE-led deals that are out there, as interest rates continue to rise, we're obviously watching closely the impact, if any, it'll have on those buyers and what they're willing to pay.

[Robert Houghton:]

Thanks, Andy. The next question for John is from Fadi Chamoun of Bank of Montreal on volumes. While your truckload volume trends are improving, they are still down versus last year. Can you help us make sense of the continued volume declines in truckload?

[John P. Wiehoff:]

I think the answer here kind of piles onto Bob's messages around balanced growth over time. We certainly understand that over a longer period of time, over many years, the real foundation of value creation at Robinson is market share gains and expanding our volumes and growing those shipper relationships. Along that journey of balanced growth, we always have and still today optimize our performance around net revenue. It's the blend of volume and margin and returns to shareholders that we focus on. And I understand that in other environments, a pure growth model or different metrics around constantly chasing share would make you go after growth in all environments. But we still believe that the right way to balance our stakeholders and to create returns for our shareholders is to balance that growth. And when you think about at times 20% year-over-year price increases and a lot of committed customer relationships where we're sourcing that capacity mostly transactionally, it's not unexpected that we would live through a pretty heavy transition of repricing and rebalancing that portfolio this year that would result in shedding of some volume. So, we feel pretty good about the results this year. We feel good about the transition that we're living through, and we understand that over a long period of time, continuing to demonstrate that we are able to gain market share and grow our business is at the core of that value creation.

[Robert Houghton:]

Thanks. The next question is also for John from Jack Atkins of Stephens. How are you guys thinking about freight flows in early 2019 as the 25% tariffs go into effect in January? Have your customers said anything about pulling freight forward at the end of this year?

[John P. Wiehoff:]

We mentioned a few comments around the tariffs. I would characterize this last quarter as things moving from, wow, do you think those will really happen and kind of planning for what tariffs might mean to pretty broad-based acceptance that they're likely going to happen. I mean some of them are obviously already in place, but the more meaningful ones that are coming, what we're seeing across that shipper and carrier base is much more meaningful planning to enact them. So, yes, on conversation about accelerating any amounts that you can, I don't know how much flexibility, it kind of varies by product or by shipper as to how much more you can actually produce or import prior to the tariffs taking impact. But that's certainly one lever. Maybe the most significant theme around planning for tariffs that we've heard is sort of the acceleration of long-range plans in global supply chains. Many shippers had existing strategies or plans to migrate more of their sourcing to lower-cost regions, particularly across Asia, so maybe moving out of China to Vietnam or other low-cost regions in South Asia or India. So, we have been working with shippers for a while at a much more gradual pace on different sourcing transitions like that and probably, again, the most prevalent theme is just really the acceleration of some of those plans. We think we're in a pretty good spot to help those customers that are able to do that around moving their sourcing patterns to other parts of the world, and so we're optimistic that we can work through that. Probably the scenario that often gets mentioned where maybe everybody loses is if the trade wars just deteriorate into recessions or in lost volumes and declines. Obviously, that's probably not good for either of the economies or for those of us that are making a living off of moving it around. So, right now as we've said a couple of times, overall demand remains strong and we're generally preparing for change much like we were a year ago on the domestic side with ELDs and the pending rules. We know that there's going to be some change and we're going to do the best that we can to get our customers through it and to grow our business as well.

[Robert Houghton:]

Thanks, John. Now to Bob, a number of analysts asked about head count. Please provide some color around head count expectations for the fourth quarter of 2018 and into 2019.

[Robert C. Biesterfeld, Jr.:]

So, relative to NAST, Global Forwarding, and Robinson Fresh, the expectation is that over time we're going to grow volume ahead of head count growth, and we're continuing to be focused on digital transformation of those businesses and redefining how and where we get work done. When we think about Europe and we think about Managed Services, they may be at a little bit different point in their growth curves, and we would expect that head count there is going to more closely mirror volume and revenue growth. So, I guess the way that I'd think about this is if you look back in the past and you saw when we were a $10 billion company, we had 10,000 people, at a $15 billion company we had 15,000 people. As we look forward to being a $20 billion company, $25 billion company, the expectation is that we're not going to be at 20,000 people or 25,000 – 20,000 people at $20 billion or 25,000 people at $25 billion. We expect that head count growth to moderate and us to really grow through the head count that we have given the work that we're doing. The other thing that I would add is that the makeup of our workforce continues to change and evolve. We've got fewer people pointed at task-oriented work and more people really focused on knowledge work, which changes the capacity of the workforce to execute the business that we have.

[Robert Houghton:]

Thanks. The next question is also for Bob from Scott Schneeberger of Oppenheimer. Please discuss some of C.H. Robinson's internal technology advancements, particularly relating to automated freight brokerage.

[Robert C. Biesterfeld, Jr.:]

So, we're really excited about the position of technology today and where we're at at Robinson. We've got a great team of over 900 IT professionals around the globe and we've got new leadership with our CTO Mike Neill. And we continue to attract and add great external talent in a really challenging IT labor market. We're also proud of the people that we've developed and promoted internally as well. So, we're delivering a lot of new innovation and a lot of new products every day. For us, the agile has really evolved from being a way that we develop software to really how we think about managing business and bringing teams together across the enterprise. As I've said in previous comments, we're really committed to this digital experience across our customers, our carriers, and our employees. And that's really where we're investing our IT dollars today. Related to the specific question of automated truck brokerage, that is a functionality that we have live today within our Navisphere platform in North America. So, we've got carriers every day automatically booking loads through our mobile application or through the web in a complete frictionless environment. So, we're pretty excited about that. Carriers appreciate that ability and customers really appreciate the fully automated experience that they have with the Navisphere platform providing them frictionless transactions and real-time visibility to their inventory in motion. We've got over 40,000 users per day between our web and mobile applications that are managing their supply chains and finding efficiency in their businesses. So, we feel really good about the IT innovation, development, and the life cycle of our products and where we're at in that today.

[Robert Houghton:]

Thanks, Bob. Andy, a number of analysts have asked about the ocean and air markets. What are the expected market conditions for air freight and ocean freight in the fourth quarter of 2018? How is this year's peak shaping up relative to last year?

[Andrew C. Clarke:]

Yeah, I think our characterization of, from a macro perspective, both on the air and the ocean, it's a healthy market. It's been healthy this year, it's been healthy thus far in Q4. And we always talk about how the crystal ball is a bit cloudy. We don't see anything out there that would change our characterization of a healthy peak market, both in the air and ocean. I think I'd use this opportunity, though, to maybe expand a little bit around as it relates to us. So, if you think about ocean net revenues being down, well, pricing and volume were both up in the ocean, so the gross revenues were up. We're continuing to grow that business. I think much like what happened in air last year, ocean got pinched because the carriers started taking up rates in advance. As customers started moving more volumes, carriers took up the rates, underlying rates, and I think much like we did with the air market, we got that corrected. And I think our talented Global Forwarding team will continue to correct rates to customers that are reflective of what happened with carriers. On the air side, again, versus last year, we're seeing it as more balanced in our business on both the supply and demand. So, we feel really confident in the work that our team is doing. And, like I said, we've worked our way through the negative impacts that it had earlier this year. We expect – and our team out there in the Global Forwarding is a doing a great job, we would expect that to correct itself as well.

[Robert Houghton:]

Thanks, Andy. Next question for John on Robinson Fresh is from Brandon Oglenski with Barclays. Robinson Fresh results improved sequentially compared to second quarter weakness as better margins offset lower top line. Can you provide an update on the strategy for this segment going forward?

[John P. Wiehoff:]

If you look at our Fresh division at, again, a very high level, there's two main things that we do in that division. We do the perishable transportation for fruits and vegetables, and account management would have a lot of the large retailers that we have those perishable relationships with. So, it's a component of our transportation services very similar to NAST that is focused on the perishable stuff. We also source and distribute, buy and sell fresh fruits and vegetables under the Robinson Fresh brand and other brands that we work with. When you think about most of our discussion today around committed pricing and how the market has escalated from a pricing standpoint, all of those factors really hit the Robinson Fresh transportation in an even more accentuated way. The customer base in the Fresh division is typically much more of a committed pricing relationship from retailers that have promotions and yearlong standard costing where they need those fixed pricing arrangements. The supply base for that perishable transportation is generally smaller, more fragmented owner-operators that were probably impacted even greater from an ELD standpoint in supply. So, a lot of what you see in the Robinson Fresh transportation is really just the accentuated impact of a lot of the items that we've been talking about in the NAST division. On the product sale and distribution, a lot of times that is bundled service and our ability to execute is impacted by having access to capacity. And as we've said many times, we honor our committed relationships. And when more of that capacity is going to committed freight relationships and serving the accounts in that division, it really puts a challenge on the amount of available capacity to serve spot market opportunities. Combined with some dislocation and product-specific stuff in different fruits and vegetable categories, it just put a lot of strain on the division. So, the long-term strategy is fairly similar. We want to continue to leverage the tools and the platform of Navisphere, and a lot of the effort that's being put into the overall freight management. We want to make sure that those perishable customers and that fresh transportation service benefits from that as well. So, as we manage the continuity of all of those services, you'll see more alignment across those divisions in terms of what we're working on, but overall the combination of providing products and transportation will be at the core of that division strategy.

[Robert Houghton:]

Thanks, John. And also from Brandon Oglenski, a question on Milgram for Andy. With more than 12 months of operating Milgram, can you provide an update on integration and strategy? Your air and customs segments both continue to show strong growth trends.

[Andrew C. Clarke:]

Yeah, the update on the strategy is exactly the same. I mean we continue to grow our business organically and then complement that organic strategy with nice tuck-in acquisitions. And Milgram fits really nicely into that category. So, if you think about like phase one was bringing them in, that worked great. The agent business is fully transitioned, and we are really pleased with the results of the agent transition. I would say the next phase that we're working into right now is to expand more of our traditional services into their existing customer base. And the Holy Grail of acquisitions is, of course, cross-selling and it takes a long time because these relationships go back quite a ways, particularly with our Canadian customers up there. After that, we would expect to add additional trade lanes into that beyond the ones that are in existence right now and then really begin to focus on the efficiency. So, really pleased with the acquisition. The team up there has just done a wonderful job, and so very, very happy.

[Robert Houghton:]

Thanks, Andy. And our last question is for Bob from Ben Hartford of Robert W. Baird. How did your number of negative loads associated with contractual shipments trend in the third quarter of 2018 versus a year ago and against an average third quarter historically?

[Robert C. Biesterfeld, Jr.:]

Negative loads decreased sequentially from Q2 to Q3 as well as year-over-year within both our contractual and transactional business. So, we factor in the impact of the volume of negative loads and the decreases there. Our actual profitable truckload volume growth in Q3 2018 was actually positive in the low-single digits on a year-over-year basis. So, negative loads are still trending slightly above historical averages for a more traditional balanced market and it's a key metric that we continue to watch.

[Robert Houghton:]

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

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.