Tim Gagnon - Director of Investor Relations and Analytics John P. Wiehoff - Chairman, Chief Executive Officer and President Chad M. Lindbloom - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Good afternoon, ladies and gentlemen. Welcome to the C.H. Robinson Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, August 6, 2013. Now I would like to turn the conference over to Tim Gagnon, the Director of Investor Relations. Please go ahead, sir.

Thank you, Vince, and thank you -- and on our call today will be John Wiehoff, our Chief Executive Officer and Chad Lindbloom, our Chief Financial Officer. John and Chad will provide some prepared comments on the highlights of our second quarter and will follow that up with the response to pre-submitted questions that we've received after our earnings release this afternoon. If time allows -- I'm sorry, I was going to comment about opening up to live questions but with the number questions that we received, it's likely that it will be difficult for us to get to live questions. We also will be referencing prepared slides as part of the call today. The slides can be accessed in the Investor Relations section of our website, which is located at chrobinson.com. John and Chad will be referring to these slides in their prepared comments. I'd like to remind you that the comments made by John and Chad or others representing C.H. Robinson may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. Before I turn it over to John, I'd like to reiterate a couple of changes in the earnings release on the slide deck. First, we've separate our truckload and less-than-truckload services to provide more detail to the area we formerly called truck. We've also provided a schedule with historical perspective for LTL and truckload revenues as well as for customs, which was formerly bundled in the other logistics services line. That historical reference can be found in the Appendix C in the slide deck, the very last slide in the deck. Also with the impact of our purchase of Phoenix International and the divestiture of T-Chek in 2012, and similar to our quarter 1 earnings release, we have provided pro forma financial measures for net revenue and income from operations to provide meaningful insight and an alternative perspective of our results of operations. We believe that these pro forma financial measures reflect an additional way of analyzing aspects of our ongoing operations that, when viewed with our actual results, provides a more complete understanding of the factors and trends affecting our business. A reconciliation of actual results to pro forma numbers is provided in appendix A and B at the end of the slide deck. With that, I'll turn it over to John to begin his prepared comments on Slide 3 with a review of our quarter 2, 2013 results.

Thank you, Tim, and thanks, everyone, who's taken time to listen to the call today. As Tim suggested, on Page 3, we've got our enterprise results for the second quarter of 2013. For our total revenues, the increase for the quarter 11.3% to 3.2 [Audio Gap] both the income from operations and the earnings per share decreased a little over 1%. If you look at total revenues for the year-to-date for the first 2 quarters, they increased 14.1% to $6.2 billion. If you look at our gross revenue increase for the first half of the year, we increased roughly $775 million and we're reasonably happy with our top-line revenue performance and our market share gains, about half of that revenue growth came from acquired revenue and about half came from organic growth. Similar to the quarter, year-to-date both income from operations and earnings-per-share were down, rounded 1% down, and we're obviously less happy with our ability to increase our earnings off of those revenue and market share gains. Also on the first page, it highlights that we did have a auto liability settlement of $5 million in the second quarter that impacted our EPS by $0.02 a share. Turning to Page 4, as Tim mentioned, we have prepared pro forma results, given the materiality of the Phoenix acquisition and T-Chek divestiture from last year, and because of the fact that the Phoenix business is being aggressively integrated and is already being operated as one combined global forwarding business within C.H. Robinson, the only meaningful way to really create a pro forma analysis is to adjust to the prior year information to include the historical Phoenix information in it and to adjust out T-Chek from the history. So if you look on Page 4, what it is showing is our actual…

Okay, thanks, John. Moving to Slide 14, I will cover some information on our cash flow, balance sheet and capital structure. The second quarter of 2013 was a strong cash flow quarter. As you can see, year-to-date, the cash flow looks pretty low but it's important to remember, we talked about in the first quarter that we had an over $100 million income tax payment, which was a result of the divestiture of T-Chek last year. Our capital expenditures are within the plan that we outlined earlier this year. We expect our total to be about $55 million, putting the construction of another office building on our Eden Prairie campus, which we will move our IT department into. They are currently at a leased facility that we will be terminating at the end of this year or early 2014. You can also see that we have continued our share repurchase activity during the quarter. We repurchased 872,225 shares at an average price of $57.26. When you look at our share repurchases and our dividends combined, year-to-date, we have returned about $259 million to shareholders. We expect to continue returning this capital to our shareholders with a target of 90% to 100% as we discussed on last quarter's call. Thanks to our business model and the strong operating cash flows, we are able to return these levels of capital to our shareholders while maintaining the liquidity required to grow our business over time. We finished the quarter with $150 million in cash and $365 million outstanding on our revolving credit facility. With that, I will turn it back to John for some closing comments.

Okay, I've got one more page of prepared comments and then we'll address some of the questions that were submitted. So on Page 15, a look ahead. I'll try to do the best I can to share what we're seeing and what we know from a look forward around the prominent themes. The first one is the divestiture of T-Chek and the acquisition of Phoenix. I know the last 2 quarters, there's been a lot of discussion about that and adjustments for the numbers. Given the materiality of those, we know that we're in for 2 more quarters of significant changes driven by the repositioning of the business through those transactions. So there will continue to be acquired revenues, purchase accounting, meaningful integration costs and dilution from the T-Chek earnings being sold throughout the remainder of 2013. We had the unusual costs and those transactions associated with that in the fourth quarter. So the one thing we know is that, as we plan for the third and fourth quarter, we'll continue to see effects in our results from that. As far as the North American truckload conditions go, through July and currently, we are not seeing any meaningful change or significant adjustments to the market conditions. The North American truckload market, for us, continues to be similar. Really, if you look at our first and second quarter results, they're fairly similar and we haven't seen any meaningful drivers to significant movements in the market at this point. Really, if you look at the factors that have been driving it, I talked about the customer approach and the significant cost reductions, while there's some discussion of maybe that's starting to run its course, it's not going to go away instantly and there's plenty of momentum to continue that through the remainder…

Thanks, John. And just before I get into the results-related questions, actually we've got a couple of questions also throughout the quarter on why the change in format? So I thought I would address that real quickly here and then get into the results-related questions. As John had just mentioned, over last few quarters it has taken us a bit more time to explain results and go through the slides based on some of the activity, especially in the fourth quarter. And that's made it difficult to get to many of your questions. We've -- the result after the calls has been a lot of people waiting in the queue and really not having the ability to get to all the questions that people have wanted to ask. And as we reflected on that, we've talked about the best way to try to get more content and more subjects onto the call. So this is an attempt to do that and we'll evaluate the results here. As John had mentioned, he did his best to weave into some of his prepared comments and Chad's prepared comments, some of the questions that we've we received. And now we'll build on those here. But it really is an attempt to try and cover as much ground and be as productive as we can on this call and informative as we can be on this call. So I hope that clears up a little bit of the intent of doing this and, again, we will continue to evaluate how we get the most productive forum out of the 60 minutes that we spend together here. I'd like to thank all of you that have submitted questions. We did get a lot of questions in, and we rallied to try to gather them into some themes here and we've got several that we'd like to respond to at this time. So what I'm going to do here is I'll serve the facilitation role and John, Chad and I will respond to some of the questions that have come in. So the first question, and actually several questions around productivity. In some instances I'll thematically roll these up, but on this particular one, one of the questions sized it up pretty well. So I'll refer to it specifically here. And the reference was in the first quarter call we had talked about productivity challenges and that we had initiatives underway to address the issues. And when we would start to see the results of our initiatives around productivity. And John's going to respond to that question now.

I think I set that one up a little bit around talking about the 3 variables that we look in our growth model, which is volume or market share gains, the margin management or preservation and then the labor part of it or the productivity side of it. I've described in previous calls how in a balanced competitive market like this, a very common tactic is rate pressure from the shippers and we continue to see that out for a number of years. And when we make that balanced approach decision towards taking market share that's profitable and how do we want to look at things, oftentimes, our network and our team is forced with making a choice around do you take flat pricing from a customer when you know that your cost of hire might be up a percent or 2. And the management decision that we've been making and we've been coaching our account managers to do is that, for the long-term and in this type of market conditions, that most often we need to accept that productivity challenge and make sure that we're improving our processes and streamlining things and eliminating our costs, just like all of our customers are being pressured to do, in order to try to preserve the long-term profitability ratios of our operating income and our growth for the business. So while at some point, we walk away from freight everyday and we have to be smart about the balance between pricing and margins and the labor resources and the cost that we have to commit to doing it, that we are very much, like our customers, in the mode of accepting the productivity challenge and working into that equation that we're going to automate things and we're going to look at process improvement. The challenge with it, as everybody knows, is those things come in small chunks and they come continuous. It's really part of a continuous improvement theme, where every quarter we do implement new releases in the system that automate some of our processes and we have longer-term plans and roadmaps to look at consolidation and process efficiencies, so that the results show up in a longer-term, more gradual way. But it's a very important part of how we're running the company.

Thanks, John. And I'm going to kind of move quickly through these topics here and try to be productive with the time here. So the second theme, if you will, and there were several questions around this, really related to competition and pricing and, largely, these topics are covered in some of the prepared comments. But I'm going to take just a minute to give you a sense of how we think about competition and pricing. I don't believe this will be all that different than the way that we've talked about it in the past, but just try to build on it a little bit in the premise of the balanced marketplace and some of what has impacted our results. And speaking specifically to competition, clearly, it's a very competitive environment. We've talked a lot about that, I think, all of us in the industry are feeling this and exaggerated by the balanced marketplace and the fact that we're all competing for a pretty stagnant pool of demand. It's really hard to quantify the impact of competition. We've always felt a very competitive landscape with over 10,000 licensed freight brokerage companies and tens of thousands of asset-based carriers. It's really difficult to get your arms around the influence of competition. It's always been present. The way we measure it, there are a couple of things we measure, I'll speak specifically to the truckload marketplace, that's where most of the questions were centered, is in a couple of ways. But first is our volume growth. It's one of the reasons we highlight volume growth in our prepared comments, too, and there's a number of different resources that quantify volume growth on a month-in and month-out basis. So we pay close attention to our ability to grow our volume and our…

Okay, obviously this has been a topic of discussion that I covered a little bit in my prepared remarks as well. But I think all of you who have been following us for a while know we have a very long track record returning capital to shareholders. So when you look at our capital allocation of the cash flow the business generates, first and foremost, we invest in the working capital it takes to grow the business. We're constantly looking for the right acquisitions. We have a long-standing 45% dividend payout ratio target and we view share repurchases to distribute excess cash beyond that. We view our dividend policy as more of a fixed policy and the share repurchases as a more variable way to return some capital to shareholders. As we discussed in last quarter's call and earlier today, our current intention is to return 98% to 100% of our net income to shareholders through a combination of share repurchase and dividends on an ongoing basis. We believe this payout -- total payout target is possible in most operating environments but maybe adjusted for things like acquisitions or other capital requirements, including working capital growth, which we sometimes experience when we have significant gross revenue growth. When you look historically about the amount of capital we've returned to our shareholders, for the years 2008 to 2012, we've averaged 102% of net income being returned to shareholders. As we look at the strategy, we believe it has served us well and has allowed us to continue to grow the business, both organically and through acquisition, and allowed us to be flexible in the marketplace. We have adapted our capital structure to include debt while continuing to return these high levels of capital to our shareholders. We're constantly looking at our M&A pipeline, monitoring our stock in the debt markets and assessing our capital structure in relation to those. We will take future actions as we see appropriate.

Okay. Thanks, Chad. And I'm going to move now into a topic around kind of a capacity question and, specifically, a question around shippers' appetite for capacity risk and how shippers, their attitude towards the spot market and some comparisons to the way things were in previous quarters versus what we're seeing today in the contract versus spot market. John's going to respond to this question.

Yes, I would say probably one of the most prevalent themes in our customer interactions over the last couple of years is the combination of wanting to drive out any sort of expedited surge, seasonal premiums or costs as part of their cost-reduction strategies. And really trying to make sure that they secure and lock down capacity for a variety of reasons, probably some fear of limited capacity or this balanced market. But a lot of contributing things that, as I commented earlier, have really led to a reduction in spot market or transactional activity over the last couple of years. That is clearly a byproduct of the shipper attitudes and less appetite for their approach towards that. It's a good question as to whether or not that will sustain itself in the marketplace or not. That spot market or surge activity, as I commented earlier, is often driven by growth and lack of prediction around unanticipated needs. And right now, there doesn't seem to be anywhere near that level of it as we would see normally prior to the recession, 3 or 4 years ago. So I do think that's one of the most meaningful secular shifts, just driven by how customers are managing their supply chain and what their procurement attitude is towards transportation.

Thanks, John. Our next topic is going to be around operating expenses. And several questions around operating expenses and, specifically, why personnel expenses and SG&A expenses, outside of the unusual item in this quarter, why they grew faster than net revenue and Chad's going to respond to that question.

Okay. John covered the personnel, I think, pretty well in his opening remarks. We've continued to invest into the future of the business, the branches have continued to add people to help them with future growth. Although part of that increase in the heads was offset by some reductions and some of the incentive programs. When you look at other SG&A expenses, there's -- for the quarter over last year's quarter, there's 2 real drivers of it. One, we've talked about already, which is the law suit. And if you look at our provision for doubtful accounts, was the other significant variance compared to last year. In the second quarter of 2012, we recovered some receivables that had previously been written off and actually had a negative expense or a credit in our provision for doubtful accounts of about $1 million. This year, we had what is more normal, maybe slightly on the high end of our provision for doubtful accounts, of $3 million. So when you look at just the swing in the provision for doubtful accounts, that's about $4 million. And you take the $5 million and the $4 million, it's pretty much the whole increase of year-over-year growth in the quarterly operating expenses. There are some other increases and decreases mixed in there. The other, probably, area of biggest increase, but to a less magnitude is travel. Some of that travel has to do with the Phoenix integration and some of it has to do with the global manager meeting that was held in April of this year to introduce the Phoenix managers to everybody else and to cover some key initiatives with our leadership team.

Okay. Thanks, Chad. We're kind of winding down here with a few minutes left. We're going to try to get a couple more in here. I'm going to quickly respond to questions around hours of service. This is obviously more of a Q3 topic with the fact that the regulation went into effect on July 1, and really don't have all that much different to say than a lot that's been said in the industry. We did a lot of work and planning around this topic with our customers, especially as it related to long-haul freight that was most affected by the new rules. And a bit too early to tell in terms of the impact, but when we have talked about this in the past in the various forums that we've been in, we don't expect it to help at all in terms of the results. It's another challenge for carriers in terms of their productivity and availability and already a difficult climate for them. So we expect to add -- after the third quarter, we'll be better able to quantify this as more time plays out in our truckload business, and in looking at some of the measures that we look at pretty typically. But in general, difficult for us to comment, specifically, at this time. We don't believe it'll be a helpful factor in the challenges that we face today, but that being said, really too hard to tell right now or quantify specifically the impact. So I'm going to move on to kind of a couple of questions that I'm going to combine into one and ask John to close our responses here with this topic and I'll do my best to paraphrase it here. And they really talk about our growth and whether our growth, our earnings growth trails or meets our expectation. And then also, comment about with the slower growth in the U.S. economy, maybe more in the lower single-digit area. And I'll read here verbatim a little bit: can our business model achieve double-digit growth in earnings sustainably? So I'll turn it over to John to talk a little bit about our earnings results here and our view of growth going forward with the current economic environment.

So when we look at our earnings growth and our performance and try to address this topic as best I can. For the first question, we are disappointed this year in the earnings growth. Some of the things we anticipated, the headwinds of T-Chek and some of integration spending. I would say that integration spending has been as meaningful as we expected, maybe a little bit more. Margins are difficult to predict, but we really haven't seen any relief there. And we've had some unusual expenses in the first 2 quarters that we've highlighted and talked through that Chad just discussed in others. Did we expect, at the beginning of the year, that 2013 would be a great year or the high-end of our performance? No. Has it been a little bit disappointing than what we thought at the beginning of the year largely around expenses? Yes, it has been. When you step back and look at it, longer-term, around our growth rates and our long-term expectations, the primary way that we think about it, if you look at that sort of ground level of GDP growth or inflation or some sort of economic growth in the 3% to 4% range historically, maybe being less than that the last couple of years or going forward. That would be the foundation of growth and pricing and margins that we would go after. Longer-term, we still believe that our volume and our net revenue is what will drive similar to our earnings growth, that those, over time, while they're going to fluctuate, should stay together. If you look at a foundation of GDP growth, we, as Tim highlighted earlier, we feel pretty good about our ability to take market share and our ability to continue to do that in the future. In…

Thanks, John. And I think that will close out the hour here and we did our best to cover as many of the questions that were submitted as possible. I know there were a lot that we were unable to get to. And if you would like to schedule some time with us, as is always the case, feel free to reach out to me. My email is on the website and we'll try to coordinate some time to follow-up on some of your questions. I'd also like to remind you that there's a replay of the call available on our website, and that replay will be available shortly. It's available by dialing (800) 406-7325 and entering the pass code 4630440. And that'll be available, I guess, about 7:00 Eastern. So just in -- well, actually I should probably change that. Within the next 60 minutes or so, it should be available to you through the website. If you have additional questions, as mentioned, feel free to reach out to me via email or by phone at (952) 683-5007. Thank you for participating in the call.