Good morning ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2020 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, April 29, 2020.I would now like to turn the conference over to Bob Houghton, Vice President of Corporate Finance.

Thank you, Donna and good morning everyone. On our call today will be Bob Biesterfeld, our Chief Executive Officer; and Mike Zechmeister, our Chief Financial Officer.In order to devote as much time as possible to the Q&A portion of our call, we are implementing a couple of changes this quarter. First, we will not be covering a review of our segment performance in our prepared remarks, as this information is included in both our presentation slides and in our press release. We have also made the decision to no longer include the truckload volume growth per business day and total company net revenue growth per business day for the current month. Bob and Mike will provide brief commentary on our 2020 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 their comments with responses to the pre-submitted questions we received after our earnings release yesterday. I'd like to remind you, that our remarks today may contain forward-looking statements.Slide two in today's presentation list factors that could cause our actual results to differ from management's expectations.And with that, I will turn the call over to Bob.

Thanks, Bob and good morning everybody. I'd like to start my remarks today by recognizing over 15,000 C.H. Robinson employees around the world for their tireless efforts during these unprecedented times. Every day, I see examples of how they're stepping in and delivering excellence to the nearly 200,000 customers and carriers across our platform in order to keep commerce flowing and helping businesses stay open. We're delivering critical and essential goods and I'm thankful for everything that they're doing.Since the beginning of the COVID-19 pandemic, our team has focused on three key pillars as guideposts for our decision-making. First, ensuring the health and the safety of our employees; second, providing supply chain continuity for our customers and carriers; and third, protecting the economic security of our people to the greatest extent possible. We believe that these pillars are the right way to evaluate our decisions and to keep our focus on the long-term health of our organization.Given the global nature of our business, we gained early visibility into the disruptive nature of the COVID-19 virus. Because of these insights, coupled with the output from our investments in technology, we were able to effectively convert to a remote workforce, without disruption to our customers or carriers, while enabling our employees to work safely from home.Today, over 90% of our global workforce is working remotely. And we have ample bandwidth to move to 100% remote work if needed. Our teams are experienced in managing through crisis situations and are committed to ensuring that our customers' supply chains continue to move. Whether it's facilitating the global movement of personal protective equipment, leveraging our expertise in produce distribution to help retailers meet the surge in demand for fresh food items or simply providing truckload capacity to customers when they need it the most, our…

Thanks, Bob and good morning. I'd like to begin my comments by adding some color to Bob's remarks about our solid liquidity position. At the end of Q1, we had $1.22 billion in liquidity, which was comprised of $929 million of committed capital under our $1 billion credit facility, which matures in October of 2023.In addition, we finished Q1 with $295 million in cash. Our business model continues to deliver solid operating cash flow including $637 million over the past four quarters and $59 million in the difficult Q1 environment. Our model also benefits from very low customer concentration with our top customer representing less than 2% of our net revenue.Slide 4 shows our Q1 income statement summary. As a reminder, our first quarter results contained one extra business day versus Q1 last year. Our first quarter results also included one month of contribution from the acquisition of Prime Distribution Services. First quarter total gross revenues increased 1.4%, driven primarily by higher volumes in our truckload and LTL service lines mostly offset by lower pricing in truckload.Total company net revenues decreased 16.3% in the quarter led by margin compression in our truckload service line. A decline in Q1 truckload net revenues per shipment was largely anticipated as the first quarter last year benefited from expanding margins in our contractual truckload business due to rapidly falling carrier costs.Q1 net revenues per business today were down 17% in January, down 14% in February and down 21% in March, when compared to the same periods last year. For reference, in 2019, total company net revenues per business day increased 9% in both January and February and increased 13% in March.Total first quarter operating income was down 51.3% versus last year. Operating margin declined by 1380 basis points compared to Q1 last year, driven…

Thank you, Mike. As Bob indicated on his opening, I will not be going through all of the segment slides on today's call but I do want to touch on the state of the truckload market during the quarter, since it is our largest service line and represents about half of our net revenues.On slide 8 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 excluding fuel costs over the current decade. During the quarter, price per mile billed to our customers declined 8.5%, while cost per mile paid to our contract carriers net of fuel declined 2.5%. The rate of cost decline moderated on a year-over-year basis versus the fourth quarter, resulting in net revenue margin compression.However, first quarter truckload net revenue per mile was very much in line with levels experienced during the balance freight market in 2016. As we've indicated in past earnings calls, we experienced historically high net revenue per load for NAST truckload in the first two quarters of 2019 and this will continue to serve as a headwind through the first half of 2020.At C.H. Robinson, we talk a lot about our E.D.G.E. values. E.D.G.E. is an acronym for evolving constantly, delivering excellence, growing together and embracing integrity. One way that our customers experience these values is through our focus on honoring our customer commitments, even when markets are disrupted.Throughout the first quarter, we continue to meet and exceed our commitments on our contractual pricing agreements with our truckload customers, despite instances where the cost of purchase transportation exceeded our customer pricing. This resulted in an increase in negative truckload files for the quarter.We believe that honoring these commitments during difficult times is just…

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

Thank you, Donna. First, I'd 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 Bob or Mike for a response. Our first question is for Bob from Jack Atkins from Stephens. Scott Schneeberger with Oppenheimer, Todd Fowler with KeyBank, and Ken Hoexter with BofA asked a similar question.Bob, this was the lowest quarterly net operating margin in C.H. Robinson's history as a public company. What steps are you taking to balance cost containment initiatives given the slower macro versus investments in the business to meet your long-term strategic goals?

Hey. Good morning. And thanks for the question gentlemen. So there's no question that the macro environment is being impacted by COVID-19. And that impact to our revenue has definitely put pressure on our cost structure. The duration of that impact is unknown but we have taken several steps already to address cost containment in the near term.So to recap a few of the decisions that we've made, we made the very difficult decision to implement furloughs across portions of our workforce. The implementation of these are underway now and will directly impact about 7% of our workforce and none of that work is represented in our first quarter results.Earlier in April, we shared that we'd temporarily suspended the match to our retirement plans for our U.S. and Canadian employees and the executive team had taken temporary reductions in pay starting with a 50% reduction in my compensation and 20% for my direct reports. Additionally, our directors, our Board of Directors have taken reductions in their cash retainers of 50%.Prior to the COVID outbreak, we'd already started to limit non-essential business travel. And that obviously, was expanded through the quarter. And at this point we've limited virtually all domestic and international travel and associated expenses. Furthermore, we've implemented a hiring freeze through the balance of this quarter and given our expected attrition rate this will also drive some cost savings.So these steps along with several others that are smaller in nature should drive savings of around $60 million between personnel and SG&A in the next three quarters. These are short-term savings, but they are incremental to the $100 million cost savings target that we've previously discussed.As we reported in NAST, we had an extremely strong quarter of volume growth in both truckload and LTL. We did this with 7% fewer…

The next question is from several analysts. Mike, net revenue per employee is down 17%, while personnel cost per employee is down only 3%. Historically that relationship has been more in line. Can you talk to why the traditional shock absorber in the business has not kicked in and whether we should expect this to be a temporary dislocation or a more permanent change?

Yes. Thanks for the question. The increased volatility in the freight market in recent years has made the alignment between personnel expense and net revenue more difficult than it has been historically. The additional $60 million in short-term cost takeout will certainly improve that cost versus net revenue alignment this year.As Bob pointed out historically, our personnel expense was more heavily weighted to variable cost components like bonus, commissions and performance based equity. While that enabled our personnel expenses to more closely align with changes in net revenue, it also meant that in a softer freight cycle, our employees saw significant reductions in overall compensation and we experienced talent retention issues. Over the past several years, we have brought our compensation programs more in line with the overall market from a fixed versus variable standpoint.To provide some additional clarity on how our long-term commitment to technology investment plays a role, our increase in IT headcount has grown more than 30% in the past two years. These folks play a critical role in unlocking value for our customers, carriers and cost structure but their compensation is more fixed than our customer and carrier-facing employees.

Our next question for Bob is from Jack Atkins from Stephens, Matt Young with Morningstar, and Chris Wetherbee with Citi asked a similar question. Can you provide any color on trends you are seeing thus far in April? Are you seeing some relief in your purchase transportation costs given the changes in the spot market? And has your strong truckload volume growth and outperformance relative to the broader market continued into April?

Related to truckload growth, first off, I'm obviously proud of the growth that the team delivered in first quarter. I think, it's important to point out that volume grew in each of the three months of the quarter and in a fully remote environment we honored our commitments and delivered when our customers needed us the most.Industry-wide pricing if you compare it to Cass or DAT was down about 7% or 8% and our pricing was down in a similar range. So we're pricing rationally with the market. We did see through the quarter significant, albeit short-term spikes in the cost of purchase transportation both as we started the year as we're coming out from the disruption of the December holidays, and then again in March as retail restocking was extremely robust.During those times this led to our negative files exceeding 10% of our shipments during those periods. And that had part of the contribution of the wide spread between the change in rate and cost for the quarter.In terms of April, I realized our decision to suspend providing month-to-date April truckload volume and total company net revenues is not appearing to be a popular one amongst the analysts and investors on the call. But we made this decision, not with the intent to limit visibility that you all have, but to try and provide information that's more relevant to the state of the business. Given the large variations and market dynamics that have occurred between the beginning of April and the end of April, simply providing an average of the two halves given all the other uncertainties in the marketplace just didn't seem prudent or reliable. I made a couple of comments in the prepared remarks but I think it's important to reinforce what we saw in the quarter…

The next question for Mike comes from several analysts. Please provide an update on your previously announced $100 million of cost reductions. Were any of the cost reductions realized in first quarter 2020 earnings? If so, how much? And how much do you anticipate to realize in 2020? How should we think about the cost reductions relative to the increased SG&A to reduce costs longer term?

We continue to expect one-third of that $100 million cost savings benefit to be realized in 2020 having the least impact on Q1 and increasing as we move through the year. Most of that benefit will come to NAST and be realized through projects designed to enhance efficiency. We also referenced an increase in SG&A for technology and purchase services to help accelerate growth and cost savings initiatives. These expenses should not be considered ongoing. Once those projects are completed the associated expenses will go and of course the savings are ongoing.And as Bob mentioned earlier, we expect the near-term cost takeout initiatives to yield approximately $60 million of personnel and SG&A costs over the next three quarters. For clarity, these are short-term steps and incremental to the $100 million long-term cost reduction initiatives that we announced in late January.

The next question for Bob is from Bascome Majors with Susquehanna.

There are a number of substantial cyclical challenges facing Robinson today. But as investors try to set realistic expectations for what your business looks like on the other side of this, are there one or two more structural changes from your historic model, either financial or strategic that we should be prepared for?

Thanks, Bascome. So we've been going through a tremendous amount of change in the past couple of years much of which we've talked about on these calls and other forums. Some of that's been pretty apparent and clear and other parts has been more subtle, if you're looking from the outside in. We're in this process of making large-scale changes to our global network in terms of how it's structured, how our teams collaborate and work together, the speed and the manner in which decisions are made and how we capitalize on the strength of our people in order to deliver services to our customers and carriers and how we leverage the scale of our model even more effectively through process automation and digitalization.Our future model will be much more connected, much more deeply integrated with our customers. It will be more platform enabled and digital in nature. Our model will be fueled by a lower cost-to-serve, but we will continue to be driven by a network of global supply chain experts. We're a fair ways down this path already and there's a number of initiatives that come together to deliver value in this future state. Some of these initiatives have crossed the finish line already and are already creating value. Some will deliver in the next couple of quarters and some are longer term in nature.As our continued -- as our industry continues to evolve, we plan to continue to lead that evolution, as we have throughout the history of our organization. Our strategy is the right one. We're pursuing it aggressively and we're moving faster than any time we have our past in order to reach those targets.

The next question for Bob is from several analysts. How would you describe the current competitive environment in brokerage? Have the digital freight brokers begun focusing more on increasing gross margins?

So the truckload market is always competitive. And given our mix of 65% contractual, 35% spot for the quarter and how we ebb and flow there, I still tend to think that we compete as much with large asset-based trucking companies within many of our customers as much as we compete with other brokers. The market has loosened further in April as I said as the economy has slowed and routing guides are literally performing almost perfectly. In many lanes and in many regions supply seems to be exceeding demand. In terms of the digital brokers, I really don't have a perspective on their go-to-market. We're continuing to stay focused on the things and the variables that we can control and ensuring that the service that we stand up for our customers is holding strong and that we're continuing to earn their business through cycles.

The next question is from Ravi Shanker from Morgan Stanley. Todd Fowler with KeyBank asked a similar question.

Mike, can you clarify your plans for long-term leverage, and how you are thinking about liquidity at this point? Can you lay out your priorities for capital allocation?

Thanks, Ravi. Our balance sheet remains healthy. As we mentioned in the prepared remarks, we have ample liquidity at over $1.2 billion. In Q1, we borrowed from our $1 billion credit facility and ensured it was working properly. We have plenty of clearance on our debt covenants. Our leverage continues to be low finishing at 1.8 times at the end of Q1, which included the impact of the Prime acquisition in early March.From a refinancing and ongoing liquidity standpoint, our credit facility matures in October of 2023, our $600 million unsecured note matures in eight years and the majority of our $500 million private placement matures in more than eight years. As I mentioned earlier, out of an abundance of caution, we have temporarily suspended our share repurchases. That said, we remain committed to opportunistic share repurchases to enhance shareholder value over the long term. We will also maintain our quarterly dividend and manage to an investment-grade credit rating on our corporate debt.

The next question is for Bob from Jack Atkins.

Can you talk about what you are seeing in the forwarding market in April? Have you been able to benefit from the surge in airfreight activity that we have seen over the past six to eight weeks?

We've had several quarters in a row here of really strong sales activity in our forwarding business and we've added many new customers across air ocean and customs. During the first quarter and into April, we have been able to help our customers secure air charters and capacity on air charters to meet their unique demands as manufacturing in China continues to come back online. Our April ocean volumes are being driven largely by a mix of backlogs in the ocean shipping industry as well as existing -- with existing customers as well as a nice mix of new customer additions.

The next question comes from Allison Landry with Credit Suisse. Jack Atkins with Stephens asked a similar question.

Mike, are shippers looking to extend payment terms? And could you speak to any customer liquidity concerns?

Yes. We have seen an increase in the frequency of requests for terms extensions over the past several weeks. In total, these requests represent less than 1% of customers in the U.S. and Canada. As a general practice, we don't accept requests for extensions and payment terms. In certain circumstances, we may entertain extensions when they are accompanied by a firm exchange of greater value.We continue to monitor our receivables by customer and by category across a variety of key metrics. We are utilizing internal and external credit and risk data to enhance our credit and collections results. And we have recently tightened credit limits across a wide range of customers with a focus on higher-risk categories and we've put additional safeguards in place.As an example early on, when customers began converting to remote workforces, we proactively moved targeted customers to electronic invoicing and converted customers to electronic payments to help facilitate collections. From a liquidity concern standpoint, as you would expect we're having conversations with a variety of higher-risk customers to better understand their liquidity outlook and moving terms requirements and credit limits accordingly.

The next question for Bob is from Brian Ossenbeck with JPMorgan.

What are you seeing on the capacity front? Have you started to see small carriers exit or park capacity yet, or is it too early to tell?

I do think it's too early to tell. I think we put in our slides that we added about 4,000 new carriers to our contract carrier program in the first quarter. And these were virtually all small trucking companies. I don't anticipate that these are all new adds to the industry, but they're new to Robinson. Typically, when we see balanced markets and freight slow down, we see a bit of a retreat to quality. And we see carriers come towards Robinson because we do have more truckload freight than anybody else in the industry.In terms of them exiting, we're working really hard to keep these small carriers in business, right and keep them moving goods across North America, helping them to eliminate waste in their networks, getting the miles and helping them to improve their yields. These small carriers are a critical part of our economy and they're critical to our success.As an example, one of the steps that we took in the quarter to help small carriers was to extend some of the benefits of our Carrier Advantage Program to all carriers that work with Robinson, which allows them to capitalize on some of our affinity programs, specifically our fuel program that allows them to save up to $0.30 a gallon on diesel and we extended that to them through the end of May.

The next question is for Bob from Jordan Alliger with Goldman Sachs.

How does the bid season look from a contract perspective? Is it on hold or is it proceeding? And how do contract prices look relative to a year ago?

This one's a little bit of a moving target and it obviously varies from customer to customer. I think, it's fair to say that bid activity did slow over the past month or so as companies have been dealing with their own challenges with COVID-19, but we do expect activity to pick up as businesses come back online more fully. I expect a little bit of a forward look. I expect that many of our customers and we've heard from many of our customers that they intend to stick with their annual bid cycles.I think as the economic picture becomes clear though there will likely be some occurrences of renegotiations mini bids pulling bids forward out of the cycle. I think a lot of that will be dependent on how far the market moves and for how long. Given some of those uncertainties, I want to be a little bit careful not to guide where we see pricing moving.

The next question for Mike is from Dave Vernon with Bernstein.

Net headcount is down 5% while volume is up 7.5%. Is this the early signs of technology paying off, or is it that productivity is going up as a result of shallower routing guide depth?

Thanks for the question. The short answer is yes. The improved productivity is an indication of the success we're seeing with technology investments. As we've talked about, one of our key non-financial productivity metrics is volume per head count. Historically, volume and headcount have been correlated. We're now a year into our increased tech investments and you're seeing a shift change that we've been expecting and will continue.As for your question on routing guide depth, average routing guide depth has been 1.2 for the last five quarters. So that would not be contributing to the favorable year-over-year volume to headcount comparisons in NAST.

The next question for Bob is from Scott Schneeberger from Oppenheimer.

How are you balancing volume and price in the current environment?

Thanks, Scott. As you saw in the first quarter, our pricing to our customers largely moved in line with the movements in the market. And I've said it before, market share is really key to our future growth and we're focused on growing our market share across all of our services and this market is really no exception.

The next question is from Chris Wetherbee from Citi.

Bob, volume growth returned to truckload in Q1. Should we read this as a more sustainable move towards capturing market share in a weaker environment?

It's a similar question to the one that Mike just addressed. I look at this and the results in Q1 as us executing the plan that we've laid out around taking share and becoming more efficient in terms of that relationship between volume and people. Truckload volume is up 7.5% in an environment where volumes are down in the industry I think speaks positively for the output in Q1.When you look at our volumes, we make up, I don't know somewhere in the area of 15% of the brokerage market, which continues to expand. And we're somewhere in the area of 3% of the total for hire marketplace. So there's a ton of room for us to continue to grow share through cycles. And as we demonstrated in the quarter, we were able to do that with around 450 fewer people in NAST than we had at the same time last year.

The next question for Bob is from Allison Landry from Credit Suisse.

Can you talk about headcount plans? Is there the ability or willingness to lower headcount sequentially?

Allison, headcount has come down in each of the past three quarters in NAST as we've implemented structural changes and launched new technologies. Annualized, this amounts to about a $40 million positive impact to personnel expense on a go-forward basis. Because of the current market dynamics, as I said, we've made that difficult decision to begin implementing furloughs that are going to impact about 7% of our global headcount.We made the decision to use the approach of furloughs though and in some case our reductions, because we felt it was the right thing to do to align our workforce to the demands in different parts of our business. To be really clear though, these furloughed employees are still employees of C.H. Robinson. We're going to continue to support them through this time of their unplanned leave of absence, covering their medical insurance and other benefits and we will work to bring them back as soon as the demands of the business dictate.In terms of the overall macro, we're going to continue to monitor the health of the business and the demands across different divisions and shared services. And we'll continue to evaluate staffing levels as we always have as we move forward.

The next question is from Chris Wetherbee with Citi for Mike.

Are there interesting M&A opportunities for Robinson in 2020? Do you think you are in a strong enough financial position to consider M&A?

Our balance sheet and liquidity are solid and that gives us capability. However, given the uncertainties in the marketplace, we are taking a more conservative approach. We'll continue to evaluate acquisition opportunities that can generate strong risk-adjusted returns. As you know we prefer opportunities with a compelling strategic and cultural fit and a proven non-asset-based business model.We are also excited about the prospects of the transformation office initiatives in NAST and we would hesitate before making an acquisition that would distract us from those critical initiatives. That said, we'll continue to maintain a pipeline of opportunities and remain disciplined about value creation and capital deployment.

Our final question for Bob is from Allison Landry with Credit Suisse.

Given the deceleration in spot rates and loosening truckload capacity, do you expect sequential improvement in NAST net revenue margins in Q2?

In the short-term given the mix of our business between contract and spot on the customer side coupled with the dynamics we're seeing on the supply and the cost side, I would expect improvement in our net revenue margins. And to see them return to more normal levels from where they were in a depressed state that we saw in first quarter.The duration of that improvement is a bit unknown given all the market factors in play including any depth or length of any potential recession, the speed in which the economy restarts and then demand accelerates across different industry sectors as well as the underlying health of the capacity network and the pace of repricing activity that may occur on the customer side. So a lot of convergence of different factors there. But in the short-term, yes, we would expect our net revenue margins to return to more normal levels.

That concludes the Q&A portion of today's earnings call. A replay of today's call will be available in the Investor Relations section of our website at chrobinson.com at approximately 11:30 a.m. 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 2020 conference call. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and have a wonderful day