Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, Tim Gagnon will facilitate a review of previously submitted questions. [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, July 20, 2017. I will now turn the conference over to Tim Gagnon, the Director of Investor Relations.

Thank you, Donna, and good morning, everybody. On our call today will be John Wiehoff, Chief Executive Officer; and Andy Clarke, the Chief Financial Officer. John and Andy will provide some prepared comments on the highlights of our second quarter results. We'll follow that with a response to the pre-submitted questions we received after our earnings release yesterday. Please note that there are presentation slides that accompany our call to facilitate the discussion. The slides can be accessed in the Investor Relations section of our Web site which is located at chrobinson.com. John and Andy will be referring to these slides in their prepared comments. I'd like to remind you that comments made by John, Andy or others representing C.H. Robinson may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I'll turn it over to John to begin his prepared comments on Slide 3 with a review of our second quarter results.

Thank you, Tim, and good morning, everyone. It was a challenging second quarter. We were able to continue to grow our volumes and achieve market share gains but our income and EPS results were disappointing and it finished below our expectations. Our results were significantly impacted by truckload margin compression as the North American truckload market transitioned from being relatively balanced to fairly tight driving purchased transportation costs up more than we expected in the quarter. Much of our customer pricing is committed and changes over longer periods of time. The margin compression in the North American market impacted our NAST and Robinson Fresh truckload businesses, and you’ll see that impact in the segment results. We have a strong history of honoring our customer contracts while adjusting to the market and I’m confident that we will adapt and execute in the months to come. We continue to execute against our long-term strategic initiatives to grow and diversify our business. The Global Forwarding business delivered strong results in the second quarter with both double-digit net revenue and operating income growth. Managed Services also had another strong growth quarter. Total revenues increased 12.4% in the second quarter driven by volume growth of 10% in our transportation services. Total company net revenues declined 3.4% in the quarter. The addition of APC Logistics accounted for approximately 2% of the total net revenue in the quarter. Income from operations was 182 million, a decrease of 22% and net income was also down 22%. We had diluted earnings per share of $0.78 in the second quarter compared to $1.00 last year. Our average headcount was up 8% in the quarter. The addition of APC added approximately 2% to the average headcount. After Andy goes through the financial deck, I’ll provide some thoughts on how we’re managing the business and approaching the back half of the year and beyond. So with that, let me turn it over to Andy.

Thank you, John, and good morning, everyone. As John mentioned, it was a challenging quarter for both income and earnings. We did grow top line, however, across the organization by taking market share but it didn’t translate into the results that we expect of ourselves. As I run through the numbers for the enterprise and the reportable segments, I will provide greater details on the results and how we are adapting to current market conditions, especially in the North American market. There are some positives in our results and we would be remiss if we didn’t recognize the efforts and the results of our Global Forwarding and Managed Services teams. So let me start with the summarized income statement on Slide 4. Operating expenses were $392 million in the quarter, an 8.7% increase versus last year. Personnel expenses increased just over 5% in the quarter primarily as the result of the 8% headcount increase. Approximately 30% of the headcount, as John mentioned, was the result of the APC acquisition. The remaining additions were across the various business units and shared services teams. Cash compensation for Robinson grew in line with headcount while variable compensation, including profit sharing and stock vesting decreased versus last year. SG&A expenses increased 19.4% to nearly 108 million in the second quarter. Claims were $8 million in the quarter, which is up nearly $6 million versus last year. We had a few contingent auto liability claims that we settled in the quarter that made up the majority of the increase. Acquisition amortization was up nearly $3 million as a result of the APC acquisition and allowance for doubtful accounts, warehouse expense and purchased services were up nearly $2 million each. As we move into the second half of the year and look to 2018, our entire…

Thank you, Andy. So moving to Slide 19. Consistent with past periods, I’ll start our final comments with some key performance metrics from the current month. July to-date, total company net revenue has increased approximately 2% compared to July of 2016. Truckload volume growth has slowed from the second quarter. The holiday timing makes precise comparisons difficult this early in the month but truckload volume growth has been in the low single digits. Our primary focus in truckload services is adapting to market conditions and I’d like to expand on what we mean by that. As a reminder, our approach to account management is very customized by size segment, vertical and specific business needs. We have a variety of customer commitments and unique contracts with thousands of our customers. We think that’s a big part of our competitive advantage in the marketplace and allows better customer service. When we experienced a significant shift in the market conditions, we do a number of things to react. All of them are guided by the overall principle of honoring our commitments and providing great customer service. Our reactions include things like; clarifying committed and transactional activity, reviewing tender acceptances and turndowns, discussing route guide compliance and where customers might be experiencing service failures, evaluating activity by lane, looking for alterative routing solutions and making price adjustments where appropriate. Our goal in this part of the truckload cycle is to provide great service, honor our commitments and adjust to optimum routing and pricing for our customers. We commit significant resources to these account management practices and believe in customized solutions. While there’s always some level of market adjustment occurring, we are several weeks into more active assessments. Our results in early July reflect some of the outcomes from those adjustments. Beyond adapting to the…

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

Thank you, Donna. Thank you to all the analysts and investors that shared their questions with us last evening. We have a lot of great questions and we’ll get right to them here this morning. I’ll start off the Q&A with Andy and our first question is, please provide context to the increases in claims expenses this quarter? Are they expected to be one-time or occurring? Do you expect increases in premiums, et cetera?

Yes, a little backdrop on the actual insurance. So we own the retention on the first $5 million. So any claim or contingent auto liability that occurs, we own the first 5 million of it. As far as the premiums, we’ve been able to keep those flat in our annual renewals. So we’re buying insurance better and keeping the amount that we pay for the premiums down. So in this quarter, we had three incidents that were settled during the quarter. These are incidents that go back several years. But they finally made it to the point where we were able to settle them for a total of $6 million. As a point of reference, last quarter we didn’t have any contingent auto liabilities that went against us and in fact we had a legal claim that we settled positively for us. So there is variability in that number and because of the level of variability, it really is hard to predict. And because it’s hard to predict, the accountants will not let you setup a general reserve for them. So while we’ve done a good job we think of managing those claims and we move millions of shipments a year, in other words something does happen and in a quarter like this, we settled three of them.

Thanks, Andy. Next question to John. Could you please elaborate on the increased focus on cost controls and SG&A expenses? What expenses categories you see opportunities? And how do you think about the rate of headcount growth going forward?

So I started to address this in the tail end of the prepared comments but I’ll go a little bit deeper into it. From our cost control standpoint, we do look at personnel and non-personnel costs somewhat separately. They’re obviously related but managed differently. There are some other questions that are more specific to the non-personnel SG&A that are directed to Andy that are coming up, so I’ll leave that to come. But obviously there’s opportunities in that category. The more significant operating expense is the personnel side of it. And in my prepared comments we talked about the implementation of segment reporting and as we grow and diversify why it’s important to look at where we’re adding those heads and how our business is growing and changing, we obviously have the acquired personnel from the APC acquisition as well as organic hiring and growth in Global Forwarding, all accumulating in results that we want to sustain along the business plan there. The growth in Managed Services, again there’s headcount additions in there and I commented about the headcount additions in the technology space where we are making some specific projects and some specific investments that we want or need to continue going forward to finish with over the next year or two. We have had a long-term growth expectation of adding people to our team at a pace slower than the volume growth that we’ve incurred. And we’ve been successful with that over the long end and we’ve been more successful with it the last couple of years. We obviously have to balance whatever cyclicality or secular changes are going on and make sure that we balance our overall business model or net revenue and personnel growth. So we will continue that. If our volume continues to taper off, we will see decreased hiring in the areas where we are driving hiring relative to volume. We already do see tapering off in some of our divisions where that occurs. So we adjust that fairly quickly. There are some fixed costs associated with adding to our team. And just like truckload pricing, it can take a quarter or two to cycle through. So we do expect the headcount growth to level off or even go down with attrition in some of the divisions through the remainder of the year. And we’ll get the personnel costs in line over the long term like we always have.

Thanks, John. And the next question, Andy, on SG&A expenses. You noted higher bad debt and warehouse expenses in the second quarter which negatively impacted G&A expenses. Can you quantify those and help us think about a normalized G&A run rate going forward given the volatility in that line over the last several quarters?

Yes, that allowance for doubtful account was different than bad debt. We had very low actual bad debt experience during the quarter and year-to-date. But the way the accounting works for that particular number, it’s up $2 million versus last year. But remember, Q2 of '16 was down 2 million – approximately $2 million from Q2 of '15. So it’s a formula driven by the amount of receivables that you have. And if you think about our 12.5% top line growth, clearly that means that we’re going to have more revenue and therefore more receivables from our customers. And the formula is driven by the amount of receivables that you have as well as the amount that’s beyond 60 days. So in a period where as I mentioned in my prepared remarks where revenue is growing, you’re going to continue to see not only receivables increase but certainly that allowance receipt. So that’s that particular part of it. We’ve talked about the warehouse expense being up $2 million and that’s primarily in the Robinson Fresh division although there’s a little bit in the NAST division. But that will lap and normalize at the end of the third and the beginning of the fourth quarter. There’s another expense that’s in there that will lap at the end of the third quarter, which is the $3 million of amortization expense from the APC acquisition. So if you take all of those up and including the one that I mentioned in my previous answer, which is the $6 million of claims, you got the $2 million of the allowance for doubtful accounts, you got the $2 million for the warehouse, you got $3 million in amortization; that’s $13 million that to a degree is driving a lot of the variability of the 107. So when we think about more normalized rate, we certainly believe that there is areas that we are going to continue to focus on and continue to drive better results. As John and I both mentioned; John in his answers, me in my prepared remarks, clearly our objective is to drive down the SG&A costs both as a percent of revenue but also as a percent of the personnel.

Thanks, Andy. Next question to John on pricing. What percentage of your truckload brokerage business was exposed to contract pricing? How does that compare to second quarter 2016 levels? Do you not anticipate the tightening of – I’m sorry, did you not anticipate the tightening of supply and demand that was experienced in May and June? Are you now inclined to ratchet down the percentage of contract business exposure going forward?

So the answer to the first part of the question is that our committed truckload pricing was about two-thirds or 65% is our best estimate of the business that happened during the second quarter of this year. That is fairly consistent with the second quarter of last year but I think the important point there is that if you’re to go back a long time, 15 to 20 years ago, that was single digits or closer to zero. So the longer term trend in our business has been a steady increase of more mix of committed and contractual freight as we’ve grown with large customers and as we’ve expanded our service offering more into core lanes and core committed services with those largest customers. So in terms of where we see this headed and do we want to ratchet down the percentage of that contractual business, whenever we go through a market adjustment like we are now, there is some natural attrition of those committed prices where when we do have to raise that certain customers won’t renew. When the market moves this aggressively, there will naturally be more spot market opportunities. So it is not a steady liner increase of committed activity. It does cycle up and down and we would expect to likely see some increase as the entire market perhaps moves more transactional that our mix of business will as well too. From a long-term trend though, we do not have goals to drive that down. The best estimates are probably that 80% of the overall market is committed and we do feel that it’s served us well in the long run and it is an important capability that we have to participate in that committed freight. And as I said in my prepared comments, it’s a…

Thanks, John. Next question, Andy, on personnel. Why was personnel expense so high as a percentage of net revenue per employee typically that as more variable?

Yes, personnel expenses are up as a number because its headcount is up. So personnel expenses are up 5.5% and headcount’s up 8%. The cash compensation per person is flat on a year-over-year basis but broadly speaking performance-based compensation including equity, including profit sharing is down double digits versus last year. So the average headcount – total compensation per person is down 3% when you factor those two in. And so when you have top line margin compression that we saw particularly in North American truckload but in all of our businesses, it will negatively impact that ratio. I’d also like to maybe dovetail onto what John just mentioned in terms of personnel and address that. I think the ATA came out yesterday, the day before, and talked about how they anticipate truckload volumes to grow at 3.5% per year until 2023. And if you just do kind of assuming which by the way we’re not assuming, assuming we don’t take any market share, if you just use that figure and you extrapolate it out, that’s well over 1 million additional loads that we would be doing in the outer years. And so we, as a senior leadership team, particularly a NAST organization, Robison Fresh in that area, think about how do we continue to grow for the long term. And part of that which we’ve done is invest through cycles, invest for good cycles, invest for challenging cycles when it comes to thinking about the long-term strategic plan and strategic priorities for the organization. So we just want to make sure that we communicated effectively to people on this phone and obviously to people in our organization to let them know that we’re thinking about things in the short term and making the adjustments that we need to make. But there’s also a long-term gain that’s out there.

Thanks, Andy. Next question to John also on personnel. You’ve been steadfast in your strategy to higher employees to support future growth. Are employee hiring plans expected to be tempered given the second quarter of 2017’s net revenue contraction?

As I stated earlier, the headline answer to that is yes. However, one of the things I do want to clarify is that we are very well aware of how the world is changing and the impact of technology and the fact that more and more in almost every industry you cannot just throw bodies at things to solve problems. The thing that we try to emphasize and differentiate is that while there’s a lot of automation and change in our industry, we do have 4% or 5% of our freight that is completely automated and we’re investing to try to drive up and increase the digital processes across all of our freight. But at the same time we believe in account management. We believe in the value that our people can add. Our customers tell us that all the time. We know that a lot of our gains and a lot of opportunity to continue to grow in the marketplace is driven by having what we think are the best people in the industry. So we want to make sure that we combine our belief in sales and account management with everything that we can do to automate and improve our processes and leverage our productivity in the future. And the last part around that is because we do have a heavy balance of proprietary technology, even our investments in that area show up in the personnel line more so than the SG&A line item because we are building a lot of our own code. So we are managing and adjusting to how our industry is changing and how the marketplace is changing and we do have a commitment to our employees that we think they are a key part of our success and will be in the future as well too. But we’re also focused on leveraging technology and productivity gains for the future.

Thanks, John. Next question to Andy on competition. Was any margin pressure a function of extra brokerage capacity brought into the market by Uber, Amazon or any of the other venture capital funded start-ups?

I would I guess maybe answer that question by clearly the margin pressure that we are experiencing and quite frankly everybody is experiencing is brought on by a challenging pricing environment and increased competition broadly speaking. I’m not sure in terms of the question of the extra brokerage capacity and how that relates. But there certainly is – in environments like this, people tend to obviously react as we’ve done it and become very competitive in the marketplace. And so we’re reacting as we need to in that area.

Thanks, Andy. Next question to John. Can you please discuss net revenue growth excluding APC Logistics July to-date, year-over-year?

So I’ve talked about this in the prepared comments a little bit but I’ll clarify a little bit further. So July to-date, net total company net revenue we’re up 2%. We have shared and been consistent that the acquisition of APC has contributed about 2%. The APC acquisition closed right around October 1st or the beginning of the fourth quarter. So there is one more quarter. And including these early results in July, we are getting a little bit of tailwind from the APC acquisition that would show up in the Global Forwarding segment. The changes that I discussed around adapting to the market are driven towards the truckload services in both NAST and Fresh. So really when you look at our second quarter results of total company net revenue being down 4 versus the plus 2% for the early July, virtually all of that changes in the truckload services net revenue for the first couple of weeks of July.

Thanks, John. Next question to Andy. Global Forwarding organic net revenue growth of roughly 12% year-over-year, any specific verticals, regions or other sources of this growth does it reflect share gains or underlying market improvement?

Well, clearly the market is up a little bit as others have reported but we’re also taking market share in our Global Forwarding operations. As I’ve mentioned in our prepared remarks, the team has done a wonderful job across the board, its ocean, its air, its customs. As it relates to trade lanes, again I mentioned that we’re now the number one NVO from all of Asia to the United States whereas previously we were the number one NVO from China. And so as we’ve expanded over the last several years into more southern Asia, our team has done a great job here and there to grow the volumes and grow the net revenues in that trade lane. And I would offer that the opportunity that APC has brought is also helping us drive organic growth, because we do have more of a presence and now business that we had not seen from Asia and from Europe to Australia and reverse are the results of that acquisition. So there’s really good organic growth in terms of industry verticals. And by the way, our freight’s all over as well with a large portion of it coming from Asia to the United States, as I mentioned, our gateway consolidations. As far as verticals, again I think our team has done a great job of diversifying across many different verticals and being able to provide solutions for those customers. The one that I would highlight is the efforts that we’ve had around the semiconductor industry.

Thanks, Andy. Next question for John. John, given your tenure and expertise in transportation, how would you characterize the current freight environment? We have heard that the market tightened significantly during June and that seems to be supported by spot rate data. Would you characterize this as a strong seasonal uptick or do you believe we are on the cusp of a recovery in the freight market after a challenging prior 18 months?

Given the earlier comments that I’ve already discussed around how we are adapting to the market changes, we do believe that there is more than just a seasonal uptick and that this is reflective of a trend and that’s why we are adapting to the market and making some of the changes that we are. Thinking about kind of where we’re at – overall, where are we at in the market, several years ago we added Slide 8 to our presentation deck and again Andy’s made some comments on it. But I would like to refer everybody back to that for just a moment, the slide that has the two blue lines on it that shows our average cost of price to customers as well as our average cost of hire and then what that does to our net revenue margins. Obviously, majority of the questions this quarter are around this. How could this happen? Didn’t you anticipate it? Where’s it going to go? And those are all fair questions. When you look at Slide 8 and you look back over the last decade around how our business has evolved, how our pricing has evolved and start thinking about what does this quarter mean, where do we go from here? I do think studying that is very helpful and probably is what I or most of us would look at in terms of kind of making the decision around adjusting to the market conditions and thinking about what the remainder of the year or next year is likely to look at. When you look at the last decade through this pricing, you see those lines go all over the place. They’re up double digits at times and down high single digits at times during that 10-year period. Lots of data…

Thanks, John. The next question for Andy and it’s going to be a couple of parts here. Can you give us a sense of the monthly net revenue growth progression through the second quarter of 2016 and then also the net revenue growth per day in the third quarter of 2016 by month, and then also the monthly net revenue trend during the second quarter of 2017?

Yes, so I’ll bracket into – just to do the Q2 numbers both '16 and '17. So the second quarter of '16 went April was up 9%, May was flat and June was down 3%. So that’s Q2 of '16. Q2 of '17 was minus 3, minus 5 and minus 3. As we look at the Q3 of 2016, so the comp that we’re coming up against, July was minus 3, August was minus 7 and September was minus 5.

Thanks, Andy. And just a reminder, those are all per business day percent changes. The next question for John on intermodal. What contributed to accelerate – the acceleration in the rate of intermodal volume growth?

I believe we’ve talked about this in the past couple of quarters where we’ve started to see some growth in our intermodal volume. Historically, we have been more of a transactional intermodal provider where we’ve worked across our customers to try to find opportunities where we could apply intermodal when the market conditions were suited to that. As truckload pricing has softened and as the intermodal world has changed, we’ve moved more towards bigger, more committed or permanent intermodal shipping customers and we have had some wins in that area. So as Andy stated, it’s sometimes coming at lesser margins than historical spot market intermodal activity but we do feel good about the direction that we’re headed with regards to bigger wins and more volume increases in our intermodal capabilities.

Thanks, John. Next question for Andy. With Europe’s economy rebounding nicely, are you finding increased demand for your services on the continent?

We are. Our volume’s up in Europe 10% versus last year, so again the team’s done a great job of going in there and getting more committed in contractual business with our customers just like in North America. There’s a bit of margin compression but they’ve done a wonderful job of growing with some e-commerce as well as some new retail accounts that we have over there.

Okay. Thanks, Andy. Next question for John again on the topic of contractual and transactional truckload business. Did you change to more contractual versus variable on relationships with customers or is the ratio in line with historical comps?

I did address this earlier. Here it’s probably worth repeating. Year-over-year, not a significant move but the long-term trend is towards having more committed freight. And again that’s a combination of us expanding our presence with our larger more integrated customers and participating in the broader portion of their freight, which is the more committed stuff. But year-over-year, not so much a big change but the obvious difference is that the increase in the cost of hire accelerated this year and made the consequences of those committed relationships different than a year ago.

Thanks, John. Next question for Andy on pricing. You mentioned customer pricing is committed at relatively flat prices. Does this imply that average pricing across all truckload contracts was flat on a year-over-year basis, or that actual contract renewals were flattish? Could you provide color on truckload contract re-pricing trends during the first half 2017 bidding season?

Pricing to all customers committed and spot were flat during the quarter. And as John and I and all of us have mentioned numerous times, there’s a mix. We had more customers in the committed/contractual business where the pricing was slightly down. Pricing to customers in the spot market was up. We just had less of it and as a result overall that number is flat. If you think about the compression that occurred, I talked a little bit about it during my prepared remarks, but it accelerated during the quarter to where it ended – for the quarter, it was up 4 on the cost to hire and June ended at plus 6 and that was something that we didn’t expect and quite frankly I don’t think anybody else out there expected. Because when we were having conversations with our customers as it related to pricing both at the end of 2016 coming into the first half of '17, we and everybody else and our customers assumed that pricing was going to be flat to slightly down and that’s what we had predicted, and it made those investments and those customer relationships based on that and it turned particularly towards the latter part of the second quarter.

Thanks, Andy. Next question for John. How should we think about operating expense growth for the remainder of the year? Should current freight market fundamentals persist? Would you expect operating expense growth to outpace net revenue growth?

So again, I started to touch on this earlier. We have not given up our long-term goal that net revenue growth and operating expense growth would stay variable together and over time grow at the same pace, given the periods of time that it can take a quarter or two to adapt to market pricing or to adjust our hiring practices. Unfortunately I do think for the next quarter or two, while we’ll see improvement what we’ll be seeing is that expense activity coming in line with net revenue activity probably not getting in line or crossing over until 2018. We’re managing it every day. There’s a lot on the table. The market conditions can change every day and every week. So we’ll be on top of this doing the best that we can. But that’s where we’re at in our cycle and that’s where we’re at in terms of managing our resources for the current environment.

Thanks, John. Next question for Andy. How could the Amazon-Whole Foods deal impact your produce business? Will it be a help or a hindrance?

The good news is we are a valued provider to both companies. So we obviously have talked about our relationship with Amazon as well as Whole Foods. So we believe that when we continue to execute in the ability that we have, we’ve carved out for a long time – as I mentioned, our produce business is how we got started. So we feel pretty good about our team’s ability to execute on produce. And the retail industry broadly speaking is one of our largest verticals. So we think we’ve got a pretty good expertise from that area. So the team is thinking about and obviously it’s yet to be closed, but we are planning on presenting our ability to add more value to those combined entities.

Thanks, Andy. And that will take us to the bottom of the hour and unfortunately we’re out of time. We apologize that we couldn’t get to all the questions that came in. We appreciate your participation in the call this morning. The call will be available for replay in the Investor Relations section of our Web site at chrobinson.com. It’s also available by dialing 1-877-660-6853 and entering the pass code 13664562#. The replay will be available at approximately 11.30 Eastern Time this morning. If you have any additional questions, please feel free to give me a call at 952-683-5007 or by email as well. Thank you. Have a good day.