C.H. Robinson Worldwide, Inc. (CHRW) Q1 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2019 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. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 1st, 2019. I would now like to turn the conference over to Bob Houghton, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, Donna, and good morning, everyone. On our call today will be John Wiehoff, Chairman and Chief Executive Officer, Bob Biesterfeld, Chief Operating Officer and Scott Hagen, Corporate Controller and Interim Chief Financial Officer. John, Bob and Scott will provide commentary on our 2019 first quarter results. Presentation Slides that accompany their remarks can be found in the Investor Relations section of our website at chrobinson.com. We will follow that with responses to the pre-submitted questions we received after earnings release yesterday. I would like to remind you that Robinson Fresh transportation results are now included in our North American Surface Transportation segment. The remaining Robinson Fresh results, which primarily include the sourcing and marketing of fresh produce, will be reported under the All Other and Corporate category. To provide a basis for comparison, we have provided certain historical segment information under the new segment organization in our press release issued on April 1st. I would also like to remind you that our remarks today may contain forward-looking statements. Slide two 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.

Thank you, Bob, and good morning, everyone. Thank you for joining our first quarter earnings call. For the quarter, we achieved high single-digit net revenue growth and double-digit growth in both operating income and earnings per share. Operating margin improved 250 basis points in the quarter. Our North American Surface Transportation business generated double-digit net revenue growth and we delivered significant operating margin expansion in both our NAST and Global Forwarding businesses. We also expanded our Global Forwarding presence in Spain and Colombia with the acquisition of The Space Cargo Group. We continued to make improvements in working capital, which combined with increased earnings, allowed us to generate over $250 million in cash flow from operations and increased cash returns to our shareholders. We feel good about our first quarter results and they are in line with our longer-term goals and expectations. I also would like to highlight a couple of the macro themes and how they impact our business. The first theme is around pricing. In the back half of 2017 and into 2018, we had meaningful price increases in all of our services, including unprecedented increases in truckload. So far this year, we are seeing pricing and cost declines in many of our service lines, including truckload. Many public data sources are indicating that we are in a softer market today than we were a year ago or even last quarter, and our view of the market is consistent with that public data. Demand has been softening and that has resulted in cost of hire declines and price declines. Although a growing percentage of our capacity is strategically planned and procured, we purchased the majority of our North American truckload capacity in the spot market. So our pricing is generally reflective of overall market conditions. We are also seeing a modest increase in truckload capacity. With less than 3% market share in each of our transportation service lines, we do not lead the market lower, but with meaningful scale, we are typically a reflection of the market, both in terms of pricing and in our contractual versus transactional mix. When markets are balanced, customers typically engage us in more contractual volume and when markets are tight, more of our volumes move to transactional freight. One of our network's greatest strengths is adapting to changing market conditions. We view it as our primary job to help our customers and carrier partners understand current conditions and manage through cycles with high levels of execution, and we feel good about how we are positioned to continue to do that. Regardless of the freight cycle, we are focused on taking market share, achieving operating leverage and improving cash flow. We are confident in our long-term value creation strategy and in our ability to continue to win in the marketplace. With those introductory comments, I will now turn it over to Scott Hagen, our Corporate Controller and Interim CFO, to review our financial statements.

Thank you, John and good morning, everyone. Slide four shows our financial results for the quarter. First quarter total revenues decreased 4.4% to $3.8 billion, driven by lower pricing across most of our transportation service lines and volume declines in air. Total Company net revenues increased 8.4% in the quarter to $679 million, primarily from margin improvements in our truckload service line. First quarter monthly net revenue per business day was up 9% in both January and February, and up 13% in March. Total operating expenses increased $20 million, a 4.6% increase when compared to the prior year. Personnel expenses increased 3.6%, primarily due to a 1.9% increase in average headcount as performance-based compensation, including equity and bonus were relatively flat compared to last year. The addition of Space Cargo contributed about 0.5 percentage point to the headcount growth. The organic headcount growth rate remained consistent with the growth rate in the fourth quarter. SG&A expenses were up 7.6% in the quarter to $114 million. The primary drivers were increased purchased services, particularly expenses related to the integration of purchased software and from claims and occupancy. These increases were partially offset by a reduction in bad debt expense. Total operating income was $225 million in the first quarter, up 17.2% over last year. Operating margin increased 250 basis points versus last year, representing our fourth consecutive quarter of operating margin expansion. Achieving operating margin leverage remains a top priority for C.H. Robinson. First quarter net income was $162 million, an increase of 13.7% versus last year. Our diluted earnings per share was $1.16 in the first quarter, up 14.9% from $1.01 last year. Slide 5 covers other income statement items. The first quarter effective tax rate was 22%, up from 21.3% last year. We typically experience the lowest quarterly effective tax rate in the first quarter of each year, primarily from deliveries related to our incentive stock program. We expect our full-year effective tax rate to be between 24% and 25%. First quarter interest and other expense totaled $17.1 million, up from $10.7 million last year. Interest expense was $13.7 million in the quarter, up $2.4 million from the prior year, primarily due to a higher weighted average interest rate. A majority of the remainder of the increase in expense is related to currency, with the biggest impact coming from revaluation of foreign working capital and cash balances to functional currency. The U.S. dollar weakened against several of our key currencies this quarter, including the Chinese RMB. Movements in currency will continue to have an impact on our quarterly net income and we will continue to break out of this impact in future quarters. Our share count in the quarter was down 1.6%, as share repurchases were partially offset by the impact of activity in our equity compensation plans. Turning to Slide 6, we had another quarter of strong cash generation. Cash flow from operations totaled $257 million in the first quarter, up 28% versus last year, representing the fifth consecutive quarter with double-digit growth. A combination of improved working capital performance and increased earnings drove the cash flow improvement. Capital expenditures totaled $13.9 million for the quarter. We continue to expect capital expenditures to be between $80 million and $90 million for the full-year, with the increased spending primarily dedicated to technology. We returned $146 million to shareholders in the quarter through a combination of share repurchases and dividends, a 9% increase versus the prior year first quarter. We will continue to evaluate and deploy our capital in ways that will add value to our network of customers and carriers and generate returns for our employees and shareholders. We will look to acquire quality companies that fit our strategies, business model and culture, and we will continue to reward our shareholders through buybacks and dividends. Now onto the balance sheet on Slide seven, working capital decreased 9% versus the prior year, driven by lower gross revenues and the resulting decrease in accounts receivable. Our debt balance at the quarter was down modestly to $1.34 billion. Across our credit facility, private placement debt, AR securitization and senior notes, our weighted average interest rate was 4% in the quarter. In the first quarter, we adopted a new accounting standard on leases. Starting with the first quarter of 2019, our future lease obligations and related right-to-use asset are now included on our balance sheet. This policy change will not have a material impact on our income statement. On to Slide 8. I will wrap up my comments this morning with the look at our current trends. Our consistent practice is to share per business day comparisons of net revenues and truckload volume. April 2019 Company net revenues per business day have increased approximately 5% and NAST truckload volumes have decreased approximately 4%. As a reminder, last year's net revenue per business day increased 15%, 14% and 23% in April, May and June, respectively. We appreciate you listening this morning, and I will now turn over to Bob to provide additional context on our segment performance.

Thank you, Scott, and good morning, everyone. I will begin my remarks on our operating segment performance by highlighting the current state of the North America truckload market . On Slide 9, the light and dark blue lines represent the percent change in NAST truckload rate per mile billed to our customers and cost per mile paid to our contract carriers, net of fuel costs over the current decade. As a reminder, this Slide includes the impact of our truckload business previously reported in the Robinson Fresh segment. NAST truckload price per mile and cost per mile both declined in the quarter versus the year ago period, where both price and cost increased over 20%. We benefited from a market-based shift to contractual volume in a falling cost environment, as routing guide performance returned to a more normal depth of tender, resulting in improved truckload net revenue margin in the first quarter. And while changes in cost tend to lead changes in price, over time price and cost generally move together. One of the metrics we use to measure market conditions is the truckload routing guide depth from our Managed Services business, which represents roughly $4 billion in freight under management. In the first quarter, average routing guide depth of tender was 1.2, representing that on average the first carrier in a shipper's routing guide was executing the shipment in most cases. As John mentioned, we are seeing evidence of a softening demand and modest increase in capacity, as reflected by the reduction in price and costs shown on this Slide. We continue to set pricing that we feel best reflects the current freight market conditions, while maximizing our ability to drive net revenue growth. So with route guide depth moderating, we are adjusting our prices to reflect the current environment and to ensure we are near the top of our customer's routing guides. Moving to Slide 10, this graph shows NAST truckload average price per mile billed to customers and cost per mile paid to our carriers, net of fuel, since 2010, and represents the underlying data from the previous Slide. We have excluded the actual price per mile and cost per mile scale on this Slide to protect our proprietary information. While the absolute price per mile and cost per mile moderated versus last quarter and are below year-ago levels, they have returned to the trend line which averages about 4% annual increases in rate and cost over the current decade. Our non-asset-based business model combined with the largest network of customers and carriers in North America, gives us the flexibility to adjust our pricing in response to changing marketplace conditions. This chart highlights the strength of our business model over time and shows that we have maintained a consistent spread between price and cost, even in periods of high volatility in the freight market and periods of aggressive competitive activity. Turning to Slide 11, in our North American Surface Transportation business, first quarter NAST net revenues increased 11% to $487 million, led by double-digit growth in truckload. Our first quarter results also included volume growth in both truckload and LTL service lines and growth in market share, when compared to year-over-year changes in the Cash Freight Index. A shift in our business mix toward contractual freight in a falling cost environment drove a 230 basis point expansion in first quarter NAST net revenue margin. Truckload net revenues increased 14.7% to $359 million in the quarter, driven by the margin expansion we typically see as we transition to a more balanced freight market. Our shift toward contractual volume resulted in approximate mix of 65% contractual and 35% transactional volume in the quarter versus the 55%, 45% mix in the year ago period. Our first quarter results include the impact of reprising activity to reflect current market conditions, including modest price declines in contractual awards with several of our customers. First quarter NAST truckload volumes increased 0.5% versus last year, and increased 2% on a per business day basis. This volume growth includes the impact of approximately 60% reduction in our negative loads associated with contractual shipments. Profitable volume for NAST increased at a mid-single-digit rate for the quarter. We continue to add new carriers to our network, driving further expansion of the largest fleet of motor carriers in North America. We added approximately 5,000 new carriers in the first quarter, a 19% increase over last year's first quarter. Carriers are increasingly relying on C.H. Robinson to provide freight that enables them to be successful business owners. This also allows us to provide our customers with additional capacity solutions that help them more effectively execute their supply chains. First quarter LTL net revenues increased 3.6% to $115 million, led by growth in our consolidation and temperature controlled LTL businesses. Despite weather disruptions in the Midwest and one less business day, we were able to deliver 1% volume growth in the quarter. We expect our LTL volume growth to accelerate in the second quarter as we continue to add new customers and renew awards with existing customers. In our intermodal service line, net revenues decreased 3.9% in the quarter. Intermodal volumes declined 33% as a combination of lane reductions related to precision scheduled railroading and a decline in truckload pricing drove an industry shift from intermodal to truckload. This decline in volume was largely offset by higher pricing and a change in customer mix for the quarter. Slide 12 outlines our NAST operating income performance. First quarter operating income increased 17.6% to $211 million. Operating margin of 43.4% improved 240 basis points, driven by the combination of double-digit net revenue growth and a modest increase in headcount in the quarter. This strong operating performance reflects the benefits of our continued investments in technology. Our investments in artificial intelligence and machine learning are providing expanded capabilities and insights to our customers and our carriers. Our advanced algorithms and data advantage are further improving the ability for our employees to profitably match shipper demand and carrier supply and increasing the level of automated interactions across our network. These technology investments have helped us generate four consecutive quarters of year-over-year operating margin expansion in our NAST business. Over the balance of 2019 and beyond we'll continue to accelerate our digital transformation efforts to provide benefits to our network of customers and carriers and to drive process efficiency for our employees. We expect that our NAST headcount will be flat to down slightly for the year. Turning to Slide 13, and our Global Forwarding business, first quarter Global Forwarding net revenues increased 3.4% to $127 million. In our ocean service line, net revenues increased 4% for the quarter, mostly driven by margin expansion. Ocean volumes were flat in the quarter. First quarter air net revenues increased 0.4%, as margin expansion was largely offset by a 4% decline in shipments. We believe that our first quarter volume performance in ocean and air was negatively impacted by increased shipments in the fourth quarter of 2018, as many of our customers worked to build inventory ahead of anticipated tariffs enacted in the first quarter of 2019. Customs net revenues increased 5.9% for the first quarter, driven by customs transaction growth of 2.5%, as we continue to expand our customs presence around the world. Our first quarter also includes one month of results from our acquisition of The Space Cargo Group, a leading provider of international freight forwarding, customs brokerage and other logistics services in Spain and Colombia. We have an extensive operating history with Space Cargo as our agent in Spain, and we feel great about the cultural compatibility and the talented team that we have brought on to Robinson. The integration is off to a great start. As the acquisition closed on February 28th, Space Cargo's results did not have a material impact on our overall Global Forwarding or Enterprise results for the quarter. In our conversations with our global customers, these companies are continuing to plan for tariff activity and potential implications and the redesign of global supply chains. We are actively engaged with our Global Forwarding customers to help them understand and quantify the impacts of the changing tariff landscape. We are benefiting from our strong presence in Southeast Asia, where first quarter net revenues grew well ahead of our total service line growth for both ocean and air. Given our broad portfolio of service offerings, we continue to believe that we are well positioned to help our customers win in an ever-changing global trade environment. Slide 14 outlines our Global Forwarding operating income performance. First quarter operating income increased 72.8% to $14 million, operating margin of 11.2% increased 450 basis points versus last year, driven by higher net revenues and a 1.3% decline in average headcount. As a reminder, the first quarter is typically our smallest net revenue quarter for the year, so our first quarter operating margin is typically well below the average for the year. We continue to see significant opportunities to drive scale and geographic reach in our Global Forwarding business. At the same time, we will increase our level of technology deployment to make our processes more efficient. Moving forward, we expect to deliver operating margin expansion through a combination of volume growth that exceeds headcount growth and investments in technology to drive operating cost efficiency. Over the long-term, we remain confident that we will deliver operating margin performance, consistent with other leading companies in the global forwarding segment. Moving to our All Other and Corporate businesses on Slide 15. As a reminder, All Other now includes Robinson Fresh, Managed Services, surface transportation outside of North America, other miscellaneous revenues and unallocated corporate expenses. First quarter Robinson Fresh net revenues were $29 million, down 5% from last year. Case volumes declined 7%, primarily driven by weather related crop reductions. Managed Services' net revenues increased 10.9% to $20 million in the quarter, driven by a combination of selling additional services to existing customers and new customer wins. Customers continue to value our transportation management system offering, which allows them to manage their carrier selection process in complex supply chains without the required fixed investment in people or technology. We have got a strong pipeline of new business opportunities in our Managed Service business and we expect continued net revenue growth as we move through the year. Other Surface Transportation net revenues increased 0.7% in the quarter to $16 million, primarily driven by mid single-digit volume growth in European truckload. During the first quarter, we were able to deliver market share gains in NAST truckload and LTL, double-digit net revenue growth on a per day basis and net revenue margin and operating margin expansion in excess of 200 basis points. We also generated over $250 million in cash flow from operations and increased our returns to shareholders. These strong results reflect the continued ability of our employees to successfully navigate an ever-changing marketplace where both market dynamics in the competitive landscape continues to evolve at a rapid pace. Our people are focused on creating unique value for our network of customers and carriers and keeping them at the center of our focus. Because of this focus on accelerating commerce for the companies that engage on our platform, we continue to win in the marketplace. To ensure we deliver continued strong financial performance moving forward, we remain committed to three core objectives. First, we are committed to taking market share. Over time, we have taken market share in each of our largest service lines and we expect to continue to expand our market share gains in 2019 and beyond. Second, we'll continue to automate our core processes and reduce our cost to sell and cost to serve, while also providing excellent service to our customers and our carriers. And third we are intently focused on improving operating leverage across our businesses. We remain committed to the long-term targets we shared at our Investor Day in 2017. Over time, we expect to deliver annual net revenue growth of 5% to 10%, with operating income growth that exceeds net revenue growth. We are firmly committed to operating margin expansion and believe our continued investments in technology and process automation will help us to achieve this objective. We are also committed to strong cash returns to shareholders and expect to deliver annual double-digit growth in earnings per share over time. Moving forward, I'm confident that we'll continue to deliver industry-leading capabilities and solutions to the over 200,000 companies that conduct business on our global platform. I'm also confident that we'll continue to provide rewarding career opportunities for our employees and generate strong returns for our shareholders. Thanks for listening this morning. Before I turn the call back to John, for the last time, I wanted to take a moment in this forum and thank John for his leadership of this great organization over the past 17 years. Under John's leadership, C.H Robinson has evolved from a leading US truck brokerage and produce Company to a global supply chain Company, powered by people, process and technology. Together under John's leadership, our team has created tremendous value for our customers, our carriers and our shareholders, while providing opportunities for all of our employees around the globe to learn, to grow and to serve. On behalf of all the 15,000 people around the globe, I want to say, thanks for all you have done John. I'm honored and excited to lead Robinson into the next chapter with your support as Executive Chairman and to build upon our strong foundation of success. And with that, I will turn it back to John.

Thank you, Bob. I will wrap up our prepared remarks with a few final comments. Our core go-to-market strategy has always been to help our network of customers and carriers understand and adapt to the cyclical nature of the freight market. We remain focused on working closely with our customers to help them understand the market, to ensure we can both meet our customer commitments and achieve pricing reflective of the marketplace conditions. We will continue to invest in our people, processes and technology to increase the value of the supply chain solutions we deliver to our global legal system of over 200,000 companies . We will also leveraged our digital transformation to provide our customers, carrier partners, and our people with an expanding set of insights and capabilities, and we will remain focused on operating cost efficiency, driving higher levels of service execution for our employees and increasing returns to our shareholders. Our team and our platform are the competitive advantages that will allow us to win in the marketplace and they continue to get stronger. We have a great future ahead of us and I'm highly confident in our ability to continue to create value for all of our stakeholders. As Bob referenced, in February of 2019, I announced my intention to retire as Chief Executive Officer of C.H. Robinson. As part of a long-planned succession process, we also announced that Bob Biesterfeld will become the next Chief Executive Officer of our Company. I will remain on the Board of Directors as Chairman. Both moves are effective next week on May 9th. During his almost two decades as C.H. Robinson, Bob has consistently demonstrated deep industry knowledge, strategic vision and a passion for delivering results. He has been the driving force behind our digital transformation efforts, accelerating the pace of innovation and technology deployment across our organization. Bob's an exceptional leader, who is committed to C.H. Robinson's culture and core values and I'm highly confident in his ability to extend the C.H. Robinson's long track record of success. As I reflect on my 17-year tenure as Chief Executive Officer of Robinson, I'm very proud of what we have accomplished. We have aggressively expanded our service offerings and network to become a comprehensive global third-party logistics Company. Over this period, we have increased our total revenues fivefold and returned over $6 billion to shareholders through share buybacks and dividends. But overall, I'm most proud of the winning culture we have created in the over 15,000 employees who continue to drive our success today. To all our customers, contract carriers and suppliers, thank you for your business and for trusting us to help accelerate your global commerce, to our shareholders, thank you for your investment in C.H. Robinson, and to our employees around the world, thank you for the hard work you demonstrate every day and congratulations on your achievements. I take immense pride in our results over the last 17 years. And I'm very excited to see the next chapter of growth at C.H. Robinson. I remain as confident as ever that we have the right people, the right processes and the right technology to continue to win in the marketplace. That concludes our prepared comments. And with that, I will turn it back to the operator, so that we can answer the submitted questions.

Mr. Houghton, the floor is yours for the question and answer session.

Thank you. Donna. First, I would like to thank the many analysts and investors for taking the time to submit questions after our earnings release yesterday. For today's Q&A session, I will frame-up the question and then turn it over to John, Bob or Scott for a response. Similar to earnings calls over the previous years, we have received both secular and cyclical questions regarding our business performance. This morning, we will begin with a few secular questions and then transition to topics that are more cyclical in nature. Our first question comes from several analysts, Bob, regarding the recent announcement by Amazon to enter the truck brokerage space, how does this impact your business in the short term? And longer term, how might the Company react to a competitor willing to do business for no profit?

Thanks, Bob. So good morning again everybody, I guess to start, I haven't actually seen any announcement directly from Amazon that they are doing anything new. There was an industry trade publication that stated this as something new last week, but we have actually assumed or known Amazon to be in the space for quite some time, as they work to optimize their internal network. So I would look at this as another step in what is been a rapid change in the competitive landscape over the last several years. To the question around competitors being willing to do business for no profit, since we have been public, we have never really seen that play out as a value creating approach and it's certainly not going to be our approach in this market. If I look back over the past 20 years of my tenure here at Robinson, we have really seen several instances of disruption in our competitive landscape. And really with each instance of disruption in our history, the bare case on Robinson has always been that these new entrants, who are going to disintermediate our model and drive margins down or to zero. And so through each of these phases we have stayed true to one of our core values, which is evolving constantly and managing our business for long-term value creation. But in the early 2000s, it was the advent of the Internet. The arrival of the load board that was going to bring price and cost transparency and disintermediate brokerage. In the mid 2000s, we had upstart 3PLs actively pricing freight below market rates in order to take share with large shippers, either in order to sell or to go public. We have seen roll-up strategies launched, fueled by a near zero cost of capital targeted directly at disintermediating Robinson. And recently, we have got numerous of these tech start or tech first brokerages promising low or no margins, reducing friction and improving efficiency. And these have really been high on the hype curve as we have seen, again fueled by what seems to be an endless source of private equity. But through this whole long range cycle what Robinson has done is maintain our margins relatively consistent. We have increased our share of the market. We have diversified our business and we have increased our return to shareholders. So it's not to say that we are ignoring competition or the evolving competitive focus, we have actually got tremendous respect for the competitors that have come into this marketplace and the incredible levels of talent that are entering our industry today. We think that this infusion of talent, and new ways of doing business has really been a positive catalyst for us and for the entire industry. We are just not really conceding at this point that the success that some of these competitors have had across other industries is immediately transferable and assurance of success in our industry.

Thanks, Bob. The next question is for John from Ravi Shanker with Morgan Stanley, Jason Seidl with Cowen and Company, asked a similar question, John, how would you characterize the competitive environment in the space, both among incumbents and with new entrants? Are you running into tech focused brokers more and if so, are they being more aggressive on price than traditional brokers?

So, I will build a little bit on Bob's comments and maybe just by backing up and reminding everybody that from an overall standpoint, when we look at the competitive landscape and how we monitor our position in it and what we are doing across our various segments and geographies, we do have a very diverse list of competitors. In our European business, in our Managed Service business in our fresh business, there is a completely different set of competitors. When you get within North America Surface Trans, even within the different services, the LTL world and a lot of the various services, have different competitors. When you get down to our largest source of revenues, the North American truckload business, there still is somewhere around 20,000 licensed brokers and over 100,000 carriers out there. So when you get into that core source of revenue for us that most of our shareholders, analysts are focused on, it's a very fragmented, highly competitive landscape that we have been a part of for the last several decades. There is also a fair amount of churn within that competitive landscape. In good times and in bad, we see thousands of new entrants and thousands of people leaving in relatively short periods of time. Bob mentioned that throughout the decades, we have seen a variety of ways that people have entered into this space, including relationships, including programs to buy market share, if you will, or come in and being much more price-competitive. If you think about how this broad fragmented marketplace evolves, there is a variety of ways that you can join and try to be competitive. Many of the large asset-based carriers who have gotten into the brokerage business over the year, start by leveraging their available capacity and their dense lanes to try to market that capacity in broader, more direct brokerage ways. You see shippers who try to leverage some of their high spend areas to get more involved in optimization with other shippers and try to manage. That typically in a start-up mode, in a pure start-up, price or relationship, are the two things that you would try to leverage to compete. Bob commented on more tech start-ups and over the last four, five years, especially with the explosion of digital capabilities, there are more start-ups, we are seeing more start-ups in tech focused sales mode. And I would say that some of the themes around there are the desire to get the scale faster because we all acknowledge, some of the benefits of scale in a digital world, and also maybe creating a different experience with digital connectivity with some of the carriers or some of the information that might be available back and forth. So, we do see a change in those competitive landscape in terms of some of the start-up capital and some of the technology focus of some of the start-ups. But if you really step back from it, overall, it remains a very large fragmented, high churning industry that those of us who are investing in the digital platforms and really trying to take it to a new level of performance and scale are making some serious changes in our models to go with that. But overall, it remains somewhat similar in terms of it being a broad, fragmented, competitive landscape that we continue to monitor.

Thanks, John. The next question comes from Jack Atkins with Stephens, Todd Fowler of KeyBanc and Scott Schneeberger with Oppenheimer, ask similar questions. Bob, the adoption of technology in the brokerage market seems to have been accelerated with additional options for digital freight matching now available on the market. For C.H Robinson, where do you guys stand in terms of offering a digital solution for customers? What percentage of your loads is booked through a digital platform and what is your goal for this metric over the next few years?

There is no doubt that technology has been more broadly accepted in the marketplace. And I think the greatest shift in adoption that we have seen more recently is from the small carrier community, which is really great for us as the small carriers are starting to see the use of technology be a win for them versus a burden. And so, as we and others become more tech enabled and provide value creating offerings for carriers via mobile or the web, we are seeing those small carriers really gravitate toward that, both here in North America as well as in Europe and other parts of the world where we do business. Our digital focus on customers has really been about meeting customers how and where they want to engage with us and we are really proud of Navisphere, but we are also somewhat platform agnostic when it comes to customer engagement and connectivity. Our real focus is on automating that customer journey and ensuring that it is frictionless as possible. As, I think, you all know, we have greatly increased our investment in technology in this space. We have spent about $1 billion on tech over the last decade and we would expect that we are going to spend about $1 billion on tech over the next four to five years. And so, we are accelerating the pace in which we develop this digital platform for our customers. In terms of the direct question of kind of where we are at in that journey? Today, about 75% of our load tenders are automated with our customers, so you could say that about 75% of our shipments are fully digital on the front end. About 50% of the shipments that run through our system are fully automated from end to end. And then, John mentioned the scale in this digital era, that's really driving for us about 650 million digital imprints every year which are data points that we can use to further tune our algorithms, to drive matching algorithms, to understand supply chain disruption in new and important ways. As I mentioned that meeting our customers' how and where they want to buy, we have really created unique value streams for our smaller customers through our freight quote Navisphere platforms, for those infrequent shippers that just want to come in online and get pricing for LTL or truckload, book a shipment and swipe a credit card and have a fully automated experience, that lives today for many of our infrequent shippers. And for our larger shippers, we have got that fully automated end to end process, real-time visibility of inventory in motion and at rest, and some of the largest companies in the world are using Robinson for that digital supply chain experience. On the carrier side, we are continuing to evolve and advance in the process of digital freight matching and digital booking. We are seeing a nice uptick there from carriers coming into Navisphere, and whether it be transactionally booking loads, self booking loads or in the dedicated space of doing tours and multi-stop earnings. So across all of our portfolio, we are seeing improvements in this automated and digital booking. We are really happy with where we are today, but we are going to continue to invest and drive forward.

Thanks, Bob. We will now transition to topics that are more cyclical in nature. The next question is for John from Dave Vernon of Bernstein. Are the volume declines seen in April in the contract brokerage business or the spot business? How is mix shifting?

Maybe expanding a little bit, we have consistently shared kind of a current month's data points around what we are seeing in terms of overall net revenue growth and volume activity and we shared those for April with net revenue being up 5%, and North America truckload volume being down 4%. The shift in the business, I will refer you back to Slide 9, where we have laid out the last decade in terms of the cyclicality of our truckload business and how we are seeing price and activity changes across the market. No question that we have seen a decline in spot market activity. That is where the volume changes are coming from. Over the last year and a half, we have talked and executed our changes through the pricing dynamics of our committed freight. If you go back to that Slide nine and look at that unprecedented run-up of pricing, during that period of time the spot market activity becomes a much bigger component of the mix. And you see over the last couple of quarters now the kind of steady decline of demand and pricing, where the market will become much more committed. We have shared our route guide metrics that freight will execute along those route guides in a much more compliant way and then the declines that we see now come in the spot market era. Our truck business really through April is functioning and our net revenue growth is fairly similar to the first quarter. We are shedding some volume and we are reoptimizing for a net revenue growth. Our April change really versus the first quarter has more to do with drop-off in growth in some of the other services that we think is part of just being early in April and being a little bit choppy. So it's always a little bit risky like we say to share that mid-month activity. We have Easter comparisons and other things that can make a difference as well, but the overall market environment, I think, the highlights that we shared earlier are that demand is softening, we are seeing high route guide compliance and high execution around committed freight levels and a decline in the spot market due to the price changes.

Thanks, John. The next question is from Ravi Shanker of Morgan Stanley. Bob, why are volumes continuing to decline, is this part of the long-term strategy to prioritize pricing over volume growth?

Thanks, Bob. So the short answer on that is that, at least, for the quarter volumes didn't decline, right. On a per business day basis truckload volumes were up 2% in first quarter and profitable volume growth when you consider - eliminating some of the negative loads, was in the mid single-digit. So I think I have been clear in a lot of different forms about our key areas of focus, around taking share through volume growth, decoupling headcount growth from revenue and volume over time and improving our operating margin. I think the key words there are over time, and so any 30-day period may not represent that result, which is why we don't measure our business in 30-day periods or that short term. If we think about April, and John mentioned it, we had a little bit of a comparison due to Easter, we had a softer-than-expected market. But profitable volume growth is going to be a key component to NAST's success in 2019, as well as in our other services. So we look back our historical volume growth over the past number of years has been about 4% on average and that's really the range that we would expect volume to be in the second half of the year. And so, to answer the question directly, our long-term strategy is not to trade price for volume. We are volume-oriented and volume focused.

Thanks, Bob. The next question comes from Chris Wetherbee of Citi. Scott Schneeberger of Oppenheimer and Brian Ossenbeck of JPMorgan, also asked similar questions. Bob, net operating margins expanded 250 basis points versus last year in the first quarter. Can you talk about the opportunity for further operating margin expansion as the year progresses? And do you see opportunities to optimize the operating expense structure?

Sure. So net operating margins in the second, third and fourth quarter of last year were 32.6%, 35.4%, 35.8% sequentially compared to 33.1% in Q1 of this year. So across each of our business units, if you talk to any one of the Divisional Presidents they would tell you that they have an extreme focus on expanding their operating margins. And that's going to come through, again, growing our market share and associated net revenues, against modest headcount growth. In our largest segments of NAST and Global Forwarding, we are expecting headcount to be flat to down for the year as we implement further technology enabled productivity initiatives, against planned increases in revenue and additional wins in our core services. The offset to that is that we are continuing to add heads ahead of growth in Managed Services, we have talked about our technology investment that's going to come with additional heads in IT, development, engineering and data science. So our investments in technology at the core are really focused in three core areas: it's our customers; it's our carriers; and it's in our employees and our workflow. And much of that technology investment is what is going to drive greater efficiency internally as we refine business processes, eliminate redundancy and non-value added steps within our workflow.

Thanks, Bob. The next question is for John from Jack Atkins of Stephens. Chris Wetherbee also asked a similar question. Please talk about trends in global forwarding? What did you see in the ocean and air markets during the first quarter, and how are you thinking about the performance of the forwarding business for the balance of the year?

So the big picture on Global Forwarding at Robinson, as you all know, six or seven years ago when we doubled down and made our largest acquisition of Phoenix, since then we have been continuing to invest in the division with follow on acquisitions, and did that again this quarter with Space Cargo. And overall, feel very positive and some really strong momentum around our pipeline and our capabilities as we continue to build out our global network and gain more and more confidence in the competitiveness of our Global Forwarding all around the world. We did see, as we mentioned in our prepared comments, some potential tariff pull forward. It's really hard to quantify that because shippers are all making a lot of subjective decisions. And I did mention earlier that we see some chop in the first part of April around our ocean activity, that we think will normalize as the year goes on. So, little bit of a bumpy start in 2019 in terms of some of the Global Forwarding volumes and activities, but overall, our expectations for the year, and more importantly, the long-term going forward are that we feel great about our offering, our network, our competitiveness and the things that we are doing to continue to take market share and grow Global Forwarding as a more and more relevant part of the C.H. Robinson network.

Thanks, John. The next question also comes from Jack Atkins. Dave Vernon of Bernstein and Fadi Chamoun of BMO, also asked similar questions. John, now that we are in the heart of bid season, how have you seen contractual pricing trend on average this year compared to 2018? Have you noticed anything different about bid season this year compared to prior bid cycles, given the current freight market backdrop?

I would say, nothing too significant. Referring back again to a chart that I think is most helpful on the cyclicality in the year-to-year, that Slide nine that's in our prepared deck that shows the significant ramp up and the significant ramp down. If you really go back the last 20 or 30 years, we have used the term unprecedented, that there hasn't been that kind of 20% price increase year-over-year. And then, the sort of decline that we have seen over the last four or five quarters. So because of that, I would say, if there is anything different that in bid processes there certainly is a fair amount of questioning and concern as to where prices are going and where the bottom is and kind of what the market will look like. We have shared a number of times that it still remains true that over a decade or so these price and cost increases have averaged in the 3% to 4% range and that when you look at it over a longer period of time the cost changes are fairly rational. But in a short period of time, we are seeing an increase in volatility, which probably has something to do with digitalization and the rule changes around ELDs a year ago, that probably put some preventative pricing in place and maybe there is some improvement around that. So the process for bids has gone very similar in terms of high volumes of participation, very competitive, very fragmented, again, processes remained fairly similar and probably just a heightened level of dialog around where prices are headed and how are we going to come out of this greater volatility of price increases and declines over the last couple of years.

Thanks, John. The next question is for Bob from Matt Young with Morningstar. NAST gross profit margin percentage increased a meaningful amount on both a year-over-year and sequential basis. Should we expect truckload margins to normalize as the year progresses and perhaps sell rate declines to begin to catch up to the recent fall in rates paid to carriers?

So, I would go back again the Slide nine in our deck that shows that change in rate and cost over time. And what you see there is that cost is always the leading indicator to price, right, cost leads price. And then, if you take that a step further, the transactional market for price typically leads the contractual market and it will pull it either up or down. The gross margin expanded in Q1 as decrease in price lagged that decrease in cost. If we look at the market indicators it would say that likely the contractual markets would be pulled down by the decreasing or the declines in the spot market. In the past decade, we have seen the change in rate and cost move up about 4% a year on average. Given the markets that we are in, I would expect that the market is going to somewhat fall back to that trend line. It's never linear, but as we think about the Slide nine, I think it would be realistic to expect we are going to get back to that average. Looking at Slide 10, you can see that our spread has been relatively consistent over time, and we still include the gross revenue margin in the appendix in Slide 19, which shows that really they are pretty tightly bound over the last decade. We tend to manage the business, as we have said before, to net revenue dollars per load versus net revenue margin, and we have certainly seen that to be on the high side of average over the course of the first four months of 2019. And we'd expect that as we go through bid season and reprice, that that's going to come back to a more normal range, which is why frankly volume is such an important part of the second half of the year for us.

Thanks, Bob. The next question is for Scott and comes from Chris Wetherbee with Citi. Personnel expense growth decelerated to the lowest level since 2016. Can you talk about the outlook for growth of this expense category in 2019, and what are your expectations for headcount relative to net revenue growth or volume?

Sure. We expect NAST headcount to be flat to down for the year, with a forecast of positive volume growth for the year. Global Forwarding is also expected to be flat to down for the year based on productivity initiatives within that business. Robinson Fresh will likely be down year-over-year basis, with the work done to improve their operating margins. The other business units, IT, and other shared services will likely increase for the year. So, overall, I would expect headcount to be flat to plus or minus 1% for the entire year. The variable components of compensation will be determined on the performance of the business units and the overall enterprise.

Thanks, Scott. The next question comes from Todd Fowler with Keybanc. Bob, how do you think about acquisitions in the current environment? Please provide an update as to what service lines or geographies are attractive? And would C.H. Robinson consider something on the final mile side or more specific to e-Commerce outside of line haul?

So we really like our current approach to M&A. And I mean hopefully it's been a theme that starts to develop here over the course of the last six or seven years or beyond that we really like founder-led businesses that are really healthy, that are a cultural fit, that are profitable, that fit nicely and complement our existing foundational services. We are going to continue to look in the Global Forwarding space as we have for deals that fill in a geographical space for us, with strength and scale or expand our services. Across the entire portfolio, we are looking for really those same characteristics. In terms of the question around final mile and e-Commerce, we are certainly exploring that space. Valuations are extremely high in that space. We really want to be mindful of the short and long-term impact of doing deals in that area, but we are certainly active in looking.

Thanks, Bob. Todd Fowler of KeyBanc and Brian Ossenbeck with JPMorgan asked about market share. Bob, please expand on the outlook comments around increasing market share in 2019 and beyond? Is this primarily North American truckload share and measured by volume growth or is this referencing another segment with a different metric for measurement?

So, I think part of what excites me about being at Robinson today is, while we are the largest in a number of our services, whether that be LTL or truckload or ocean and transpacific eastbound, we are no more than 3% of the overall market in any one of those spaces. So, we have got tremendous upside for growth regardless of the cycle that we are in. Volume growth and taking share is really important to us across each of our modes and services. But as you know, truckload, LTL, and ocean are really the needle movers for us organizationally and we are certainly focused and taking share in that space, whether it be through new bids, RFPs or growth within existing customers. The other thing that we talk about internally at a macro level is that, in this digital era, the concept of freight under management is a really important metric for us to look at. So Jordan certainly looks at freight under management specific to the Managed Services business. We also look at that across the overall enterprise, because of the value that we are able to gain from the data that we can collect across the global supply chain. And it gives us really an advantage to again address the algorithms and the work that we are doing, so that we can take that data advantage that we accumulate and turn it around and use that to help our customers to solve their most complex supply chain issues. At a more micro-grain, as we think about our account managers and our account teams, they are thinking about share of wallet or addressable market within each one of their customers. So they are actively measuring what that opportunity is at a customer level and working to cross sell all of our core and emerging services into those customers and measuring their share of wallet or their market share growth with the customers that they serve.

Thanks, Bob. The next question is for Scott from Dave Vernon of Bernstein. How should we be thinking about net revenue growth for this fiscal year, should we be bracing for a slower second half?

Well, its, obviously, difficult to predict the future and we do not provide guidance. Our overall comparisons do become more challenging in the second half of the year and we believe volume growth across all of our services will be key to growth in the second half of the year for us.

Thanks, Scott. The next question for John is from Scott Schneeberger with Oppenheimer. Please compare your viewpoint of this year's freight brokerage conditions relative to other years of this current cycle?

I talked earlier about the unique pricing environment and the changes that we have seen over the last couple of years that kind of may make things different. Maybe a few other data points to touch on that, overall, while demand is softening and declining, we would echo the fact that most of the customer reviews that we have been a part of - we are seeing customers that have a fairly positive outlook and do continue to see normal levels of freight activity. Maybe some of the capacity additions, as well as some of the maturity of the ELD implementations and pricing strategies from a year ago, all that's contributing to a more balanced, or more normalized environment currently. Maybe the other thing that bears mentioning, when you think about sort of the overall freight and brokerage environment is that, as we swing back and forth between secular and cyclical topics is that, there is probably never been greater receptivity to the business model and our presence in the marketplace. Our teams are seeing tremendous amounts of opportunities and bids to participate in, our outsourced solutions and integrated offerings are as popular as ever and growing. When you think about some of the competitive threats in the secular changes, it's always good to remember the positive side of that, that the addressable market for third-party logistics and some of the things that we are doing is as big as ever, and it has as much momentum as ever. So, while there are uniqueness’s around volatility, and pricing and some of the regulatory changes, maybe the biggest call out is that we continue to see an ever expanding universe of opportunities around the types of services that we are providing and the types of opportunities that they would apply to in the marketplace.

Thanks, John. The next question is for Bob from Brian Ossenbeck with JPMorgan. Scott Schneeberger asked a similar question. Could you please provide comments on truck brokerage capacity trends and drivers and provide an updated view point of ELD impacts now that the regulation has been in place for over a year?

Sure. So, we mentioned in our prepared remarks, we had about 5,000 new carriers join network in the first quarter which is about a 20% increase during the quarter. And if it does seem like the industry has added incremental capacity as well, and it's coming mostly in that small carrier space. In terms of the impact of ELDs kind of a year or so post implementation of ELDs. I think I would describe the environment that I think the bad actors have adjusted and by that, I mean, drivers have accepted the electronic logging devices, particular shippers or lanes that were problematic for the use of ELDs have adjusted their behavior or their expectations as well. And so, in general, it feels as though the market has kind of come back to an equilibrium. They've learned how to work within the new constraints of the electronic logging devices. And it's really not a topic of conversation when we talk to carriers or shippers today to any great lengths. I think, again, if anything, the data and location services associated with ELDs are giving us real opportunities to think differently about matching and data aggregation and location services and providing more real-time information to shippers, as well as communicating with carriers. So in general, we have seen the positive impact to the overall business.

Thanks, Scott. The next question is for John from Scott Schneeberger on tariffs. Please share your view of the recent U.S. China tariff dynamic and its influence on C.H Robinson's Global Forwarding business?

The tariffs are driving probably three specific things, one is really an elevated focus on compliance. So these tariffs have to be calculated and applied properly and to the right things and our team has been very busy working with our customers to make sure that all the tariffs are properly applied and that compliance is in place. I mentioned earlier, the potential acceleration to get some product shipped before those tariffs would apply. So that's been an impact as well. And probably the third leg is just really the longer-term supply chain consultation and planning around will the tariff stick and what long-term impact, will they have on sourcing patterns and shipping patterns for the customers that we are working with. We don't believe at this point that there is been a lot of impact to our volumes, or freight forwarding business based on those long-term redesigns. I think most people are holding their breath and waiting for resolution of what those tariffs might look like on a more permanent basis, but there certainly our discussions and planning exercises going on to what if scenario and think about what the future may look like from a supply chain design standpoint, which could have a very material effect on freight flows and kind of where things move to. We are working to make sure that wherever sourcing origins and international freight moves to that we have capabilities there and that we can evolve with our customers through these issues and challenges, but I would say, those are probably the three main impacts that tariffs have had on our Global Forwarding business to-date.

Thanks, John. And our last question is for Bob from Bascome Majors with Susquehanna. Chris Wetherbee asked a similar question. Can you provide an update on your CFO search?

Sure. So briefly on that, as expected, we have engaged a search firm in that space. I think we have shared that before. I would describe our process as in the early innings. I feel great about our finance team today, extremely strong leadership and talent going across the entire organization, they are doing really good things. And Scott's doing a great job in the interim. We are evaluating a really diverse slate of talented candidates across multiple industries today, both internally and externally that we think would each bring unique strengths to the next -- to the role of CFO at C.H Robinson. As you guys know, we have got aggressive growth plans and we are going to continue to accelerate the pace of change. So I'm looking for the right leader to partner with me and the rest of the senior leadership team that can help us to do that most effectively.

Thanks, Bob. 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 chobinson.com at approximately 11:30 AM, Eastern Time today. If you have additional questions, I can be reached by phone or email. Thank you again for participating in our first quarter 2019 conference call. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.