Q2 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the CH Robinson second 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.

If anyone needs assistance at any time during the conference. Please press the star followed by the zero on your telephone keypad.

As a reminder, this conference is being recorded Wednesday July 31st 2019.

I would now like to turn the conference over to Bob Houghton, Vice President of Investor Relations.

Thank you Don and good morning, everyone.

On our call today will be Bob Easter felt chief Executive Officer, and Scott Hagen, corporate controller, and interim Chief Financial Officer.

Bob and Scott will provide commentary on our 2019 second quarter results.

Presentation slides that accompany their remarks can be found in the Investor Relations section of our website at CH Robinson dotcom.

We will follow that with responses to the pre submitted questions. We received after our earnings release yesterday.

Starting with this quarter, we will be shortening our prepared remarks to devote a larger portion of the call to the question and answer session.

I'd like to remind you that our remarks today may contain forward looking statements slide two in todays 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 Bob.

Thanks, Bob and good morning, everyone. Thanks for joining our second quarter earnings call for the second quarter, we achieved 3.5% net revenue growth versus the year ago period, where net revenues increased 17%.

We delivered our fifth consecutive quarter of operating margin expansion and an 8% increase to earnings per share.

Our north American surface transportation business generated 6% net revenue growth in the quarter and we delivered operating margin expansion in both our Nast and Robinson fresh businesses.

In global forwarding the integration of the space cargo group is off to a strong start.

We also expanded our Europe surface transportation business with the acquisition of demo services.

And we continue to make improvements in working capital, which combined with the increased earnings allowed us to generate nearly $200 million in cash flow from operations and increase cash returns to our shareholders.

Within our North American business. There is no question that we are in a softer market today than we were a year ago.

Driven by weakening demand and additional capacity industry wide truckload transactional volumes and spot market pricing are markedly below year ago levels declining new truck orders and increased carrier bankruptcies suggest that capacity has peaked and is starting to exit the marketplace.

Concurrently global forwarding market is experiencing air and ocean volume declines as shippers work through elevated inventory levels, resulting from the volume pull forward ahead of tariff activity.

However, with this as a backdrop there were a number of volume highlights in our second quarter.

Our truckload contractual volume increased at a low single digit pace.

Truckload and LTL volumes per business day increase sequentially during the quarter.

Our truckload and LTL volumes outpaced industry indices, such as the cast freight index, where volumes declined mid single digits in the second quarter.

And Ocean volumes included double digit growth in southeast Asia, as we continued to benefit from our scale in this region amidst tariff uncertainty.

With these results I'd like to recognize the hard work of our people across the globe. Your continued commitment to deliver world class service and to ensure the success of our customers and carriers is instrumental to our continued success.

With those introductory comments I will turn it over to Scott to review our financial statements.

Thank you Bob and good morning, everyone Slide four shows our financial results for the quarter.

Our second quarter total revenues decreased 8.6% driven primarily by lower pricing across most transportation services.

Total company net revenues increased 3.5% in the quarter led by margin improvements in our truckload service line.

Second quarter monthly net revenues per business day were up 4% in April 6% in May and up 1% in June .

Total operating income was up 3.9% over last year.

Operating margin improved 10 basis points versus the prior year.

Diluted earnings per share was $1.22 in the second quarter up 8% from $1.13 last year.

Slide five cover some other income statement items.

The second quarter effective tax rate was 23.4% down from 25.6% last year.

We continue to expect our full year effective tax rate to be between 24 and 25%.

Our second quarter interest and other expense totaled $6.6 million up from $5.1 million last year interest expense declined in the quarter driven by a reduction in our overall debt balance.

The us dollar strengthened against several of our key currencies this quarter, resulting in a favorable impact of $2.8 million from currency revaluation.

The diluted share count was down 1.7% in the quarter as share repurchases were partially offset by the impact of activities in our equity compensation plans.

Turning to slide sets.

We had another quarter of strong cash generation cash flow from operations totaled nearly $200 million in the second quarter and 85% increase versus last year.

A combination of an improved working capital performance and increased earnings drove the cash flow improvement.

Capital expenditures totaled $17.7 million for the quarter.

We expect our rate of capital spending to accept accelerate in the back half of the year and we continue to expect capital expenditures to be between 80 and $90 million for the full year with increased spending primarily dedicated to technology.

We returned nearly $180 million to shareholders in the quarter through a combination of share repurchases and dividends at 32% increase versus the year ago period.

Our second quarter results represent our sixth consecutive quarter of double digit growth in cash flow from operations.

Our strong cash generation enabled us to an increased cash returns to shareholders Fund acquisition increase our investments in technology and pay down debt in the second quarter moving forward, we will evaluate how to best deploy our capital in ways that create value for our customers carriers employees and generate returns for our shareholders.

Now onto the balance sheet on slide seven.

Working capital decreased 10.7% versus 2018 year end, driven by lower gross revenues and the resulting decrease in accounts receivable our debt balance at quarter end was $1.25 billion. Our weighted average interest rate was approximately 4.1% in the quarter.

I will wrap up my comments. This morning with a look at our current trends are consistent practices to share per business day comparisons of net revenues in North America truckload volume. So far in July 2019 that total company net revenue per business day has decreased approximately 8% and Nast truckload volume has decreased approximately 6%.

In 2018 total company net revenue per business day increased 18% in July 16% in August and 17% in September .

We appreciate you listening this morning, and I will now turn it over to Bob to provide additional context on our segment performance.

Price per mile billed to our customers declined 11.5% while cost per mile paid to our contract carriers net of fuel cost declined 14.5%.

Our mix of contractual versus spot market business continued to shift towards more contractual freight during the quarter.

As is typical at this point in the freight cycle. The rapid declines in both change in cost and change in customer pricing resulted in improvement in truckload net revenue margin in the quarter consistent with market trends, we are seeing double digit declines in spot market pricing and lesser declines in the contractual market.

One of the metrics that we use to measure market conditions is the truckload routing guide up from our managed services business, which represents roughly $4 billion in freight under management.

Average routing guide depth of tender was 1.2 for the quarter representing that on average the first carrier to shippers routing guide was executing the shipment in most cases.

This route guide depth is among the lowest levels weve experienced this decade, and it's a reflection of both softening demand and the reduction in price and costs shown in the slide.

In 2019, our pricing strategies of shift Merck have shifted markedly from last year to reflect the current environment and to ensure that we are near the top of our customers routing guides.

Turning to slide 10 in our North American surface transportation business.

Second quarter Nast net revenues increased 5.8% driven primarily by growth in truckload.

Our second quarter volumes outpaced year over year changes in the cast freight index for the second consecutive quarter.

Truckload net revenues increased 8.6% in the quarter driven by margin expansion.

Our shift towards contractual volume resulted in an approximate mix of 70% contractual in 30% transactional volume in the quarter versus a 55 45 mix in the year ago period.

Our second quarter results include the impact of repricing activity to reflect current market conditions, including modest price declines in contractual awards with several large customers.

This volume declined in includes the impact of an approximate 50% reduction in our negative loads associated with contractual shipments as profitable volume was up slightly in the quarter despite industry volumes being down.

Our account management and carrier teams are doing an excellent job in serving our customers, which is leading to increased awards with our contractual customers and as a result, our truckload contractual volume increased at a low single digit pace.

Consistent with market trends, our spot market volumes declined at a double digit rate.

While we are seeing evidence of reduction overall truckload market capacity, we continue to add new carriers to our network driving further expansion of the largest fleet of motor carriers in North America.

We added roughly 4800, new carriers in the second quarter, which was a 9% increase over last year's second quarter carriers are increasingly relying on robinson to enable them to be successful business owners in a slowing freight environment such as this carriers continue to gravitate towards Robinson as we have the largest network of customers and available truckload freight across the threepl sector in North America.

LTL net revenues increased 2.8% led by growth in our consolidation and temperature control businesses LTL volume growth accelerated to 3.5% in the second quarter as we added new customers and renewed awards with existing customers.

In our intermodal service line net revenues decreased 33.8% in the quarter intermodal volumes declined 30.5% as a combination of layne reductions related to precision scheduled railroading and a decline in truckload pricing drove an industry volume shift from intermodal truckload.

Slide 11 outlines our net operating income performance second quarter operating income increased 8.8%, while operating margin of 42.1% improved 120 basis points driven by a combination of net revenue growth and reduced variable compensation expense in the quarter.

NASA second quarter results also included a $5 million contingent auto liability claim.

Our investments in technology, along with refinement in our operating model have helped us to generate five consecutive quarters of year over year operating margin expansion in our NAFTA business, our levels of automation are increasing including higher levels of digital order tenders and fully automated shipments in our truckload business. Our digital transformation efforts are providing more benefits to our network of customers and carriers and are driving process efficiency for our employees. We continue to expect our mask head count to be flat to slightly down for the full year.

Slide 12 highlights our performance in global forwarding, which now includes a full quarter of review results from our acquisition of the space cargo group, a leading provider of international freight forwarding customs brokerage and other logistics services in both Spain and Columbia.

The integration is going well and we remain excited about the talented team we brought on to Robinson as well as the opportunity to convert agent business to our network.

Second quarter Global forwarding net revenues decreased 1.5% with spaced cargo contributing three percentage points of net revenue growth.

In our Ocean service line net revenues were down 1.6% in the quarter space cargo contributed two percentage points of net revenue growth Ocean volumes were up 1% in the quarter.

Second quarter Air net revenues decreased to 12.2% driven by lower pricing and a 7.5% decline in shipments space cargo contributed six percentage points of net revenue growth to air.

We are however, seeing inventories levels start to normalize into the third quarter.

Customs net revenue increased 12% in the second quarter, driven by improved mix space cargo contributed one percentage points to this growth customs transactions declined 2% in the quarter.

Global shippers continue to plan for tariff activity and potential implications to the redesign of their supply chains. We remain actively engaged with our customers across the globe to help them understand and quantify the impacts of the changing tariffs landscape and to help them engineered the optimal supply chain.

We continue to benefit from our strong presence in southeast Asia, where second quarter net revenues and volumes grew well ahead of our total service line growth for both Ocean and air.

Given our broad portfolio of services, our expertise and our global presence. We believe we're very well positioned to help our customers navigate the complexities of executing global supply chains.

Slide 13 outlines our global forwarding operating income performance.

Average head count increased 0.7% in the quarter with space cargo contributing 3.5 percentage points to the growth in headcount.

Moving forward, we see significant opportunities to continue to drive scale and geographic reach in our global forwarding business.

We expect to deliver operating margin expansion through a combination of volume growth that exceeds our head count growth and investments in technology that drive global operating cost efficiency.

And over the long term, we remain confident that we'll deliver industry, leading operating margin performance.

Moving to our all other and corporate segment on slide 14.

As a reminder, all other includes Robinson fresh managed services and surface transportation outside of North America, other miscellaneous revenues and unallocated corporate expenses.

Second quarter Robinson fresh net revenues were down 4.3% from last year case volumes declined 7% due to strategic decisions to exit unprofitable businesses Robinson fresh generated 300 basis points of operating margin expansion in the quarter.

Second quarter managed services net revenues were flat and freight under management grew mid single digits. We have a strong pipeline of new business opportunities in our managed service business and we expect to return to net revenue growth in the third quarter.

Other surface transportation net revenues increased 3.3% in the quarter with the acquisition of demo services, adding about four percentage points of net revenue growth.

We posted solid financial results in the quarter, we delivered market share gains in our truckload and LTL service lines and net revenue margin and operating margin both expanded in the quarter, while we significantly increased our cash flow from operations and our cash returns to shareholders.

These results in the current freight environment are a testament to our employees and their ability to successfully create value for our customers in what is a highly cyclical global freight environment.

Our people remain focused on accelerating commerce for the network of customers and carriers that engage our platform.

We do expect the softer freight environment to persist for the balance of the year in response to the falling cost environment North American trucking routing guides are resetting at lower prices and our net revenue dollars per shipment are moderating.

In truckload after the rapid run up during 2017, and 2018 pricing and costs are now at or below 2016 levels.

Tariff concerns and fears of recession are resulting in weakening shipper demand.

However, regardless of the freight environment, our focus areas remain unchanged as I've said before we are committed to taking market share over time, we've taken market share in each of our largest service lines and we expect to continue to expand this market share moving forward.

Second we will continue to automate and reengineer, our business processes, reducing our cost to sell in our cost to serve while delivering the industry, leading quality service that our customers and our carriers expect from us.

And finally, we remain committed to operating margin expansion and our investments in technology and process automation will help us to achieve this objective.

Could the over 200000 companies that conduct business on our global platform. Our success, we will continue to be fueled by our ability to create unique value for you.

Through our people through our process and through our technology.

I remain confident and committed that we will continue to deliver industry, leading capabilities and supply chain solutions to help you achieve your goals.

I'm also confident that we will continue to provide rewarding career opportunities for our employees and generate strong returns for our shareholders.

That concludes our prepared comments and with that I'll turn it back to the operator, so we can answer the submitted questions.

Thank you Donna.

For todays Q and a session I will frame up the question and then turn it over to Bob or Scott for response.

Our first question comes from Tom Wadewitz with Us.

Jack Atkins from Stephens and day Vernon from Bernstein asked similar questions.

What are the primary factors driving the significant falloff in net revenue performance year over year from up 3.5% in the second quarter to down 8% in July .

Good morning, Tom Jakone, Dave Thanks for the question.

Results in second quarter decelerated throughout the quarter as our net revenue dollars per load decreased sequentially week to week.

If we look back from week 22 to week 26 week, we saw a pretty significant drop off in our net revenue per truckload.

Until we reached a bit of an equilibrium at around 5% below our historical trailing 10 year average during week 26.

So we've seen a slight uptick in net revenue per load during the last week of July but we do anticipate continued pressure on that key metric of net revenue per load based on what we're seeing in the marketplace and where we feel like we're needing to reprice our business in order to maintain and take volume in this market.

Bye bye repricing at the current market rates our win rate on contractual business is really higher than we've ever experienced at any time. So we see that as a real positive on the bids that were that are coming through our process in the second and third quarter, but these awards are coming in at lower margins than what we saw last year. So this coupled with contractual customers seeking mid cycle price relief and really the lack of spot market freight. These factors are going to continue to put pressure on net revenue per load through the balance of this year when comparing to the second half of last.

So it's clear that our path to EPS growth in the second half of this year is really going to need to be driven by meaningful truckload volume growth and while I'm not going to attempt to predict the results for August or September at this point relative to July sequentially, our growth rate did slow through Q3 last year in truckload. So the comps do get somewhat more favorable as the quarter progresses, but really our success in third quarter isn't going to be driven by our comps alone.

The team and Masters, if nothing else scrappy and aggressive and also very aware that while we're the largest player in the threepl market, we still represent less than 3% of the overall truckload marketplace.

I think it's important to call out that our incentive systems are all really designed around growth and so you're going to be pretty motivated team in the marketplace right now really focused on driving growth in the second half.

Thanks, Bob.

The next question is from Jack Atkins with Stephens, Todd Fowler with Keybanc asked a similar question.

Truckload volume has declined and six out of the last seven quarters.

While it's clear spot market trends are very soft what is preventing the returned to volume growth given your significant cost advantage.

So there really isn't an easy answer for this question and I'd be lying if I said that our goal was to have volume to be down in six of the south six of the past seven quarters.

If you look back at the relationship between our truckload volume growth on a quarterly basis in truckload net revenue per shipment over the past several years. What you see is largely a cyclical story when that revenue per load is down volume is typically up when volume is up net revenue per load is typically down there is all sorts of lagging and leading indicators to this that we can talk about but in short it's really been kind of the same cycle for the last several years.

Over the history of Robinson, we've largely been focused on maximizing total net revenue across Nast and this has come with that trade off that you've seen between volume growth and margin expansion or contraction.

As Ive talked in a lot of forums about our work to reengineer our processes to take cost out of our model to get further along and evolving our NASS structure in our strategy into further centralize our pricing support and leveraging things like technology and data science in different ways. Our goal is really to change this trajectory and we need to get to a point, where we are growing volume and taking share regardless of where we're at in the cycle.

So we're really proud of the results we have delivered in the story really isn't all that negative we're winning huge awards from some great companies in the contractual space that are far outpacing our awards in contractual freight that we had last year, but in many cases. These awards are not making up for the loss of the spot freight we executed when routing guides were failing last year for the same companies. So we are seeing for some of those largest customers.

Volumes trending trending down.

So we know that we need to be more consistent in our results in order to do this it's forcing us to think differently and act differently within our network in order to break through some of these cyclical patterns.

Thanks, Bob. The next question comes from several analysts what is your take on truckload industry capacity.

Do you see a reduction and carriers or capacity generally.

So weve, obviously seen the same publicly announced carrier bankruptcies and closings and exits from the marketplace that that everyone else is seen in talking to a lot of the carriers that we work with there is there is certainly a sentiment there around kind of the negative marketplace compared to last year, you coupled out with the declines in class eight orders cancellations of orders and just general sentiment around carrier profitability and.

You can start to see.

The tea leaves that are going to probably focus on contraction of capacity.

Based on the rate of increase in capacity that we saw in the last couple of years and these changing market dynamics. We expect many of the smaller carriers that entered fairly rapidly due to exit at a pace similar to as as they entered so candidly. If you look at our business, we were little bit surprised to see the increase in new carrier sign ups this quarter and seeing that increased by I think 9% compared to last year, but we really contribute that to not not so much new small carriers entering the market, but perhaps those carriers gravitating towards Robinson.

As they look for other alternatives to keep their equipment moving so in many cases the past is obviously a pretty good predictor of the future and the past cycles would indicate that when the spot market start to dry up.

We see this downward pressure on rates, we will see this contraction and capacity.

Thanks, Bob The next question is from Bruce Chan with Stifel.

We've heard reports of increasing price competition, especially on contractual business to what extent is this for you and is it normal or abnormal given where we are in the freight cycle.

I'd really qualify this as a normal part of the freight cycle in this marketplace from a contractual standpoint. If you are not first on the routing guide your last and so in this market I'd estimate that somewhere around 85% of all truckload freight is moving under contractual terms right now as we said in our prepared remarks with a routing guide depth of about 1.2, which is the lowest we've seen in the last decade, youre, probably only going to see five maybe 10% of tenders.

In the contractual market actually fall to the secondary carriers or to the spot. So given that balance the routing I believe just really isn't leading to that much opportunity in the spot market, which continues to lead the heavy pressure towards being first in the routing guide, which obviously fuels a lot of competition around price.

Thanks, Bob The next question is from several analysts.

CH Robinson seeing a greater impact from tech focused players in the market.

Or are the competitive pressures coming from conventional brokers and the broader market.

I think as everyone knows on the call the competitive landscape that we face spans from the 18000 registered freight brokers in the us.

Some cases, many of the asset based carriers other I am season, and the forwarders amongst others.

Our market has always been competitive and today just like any time in the past, it's not disproportionately impacted by any one type of competitor.

Competition to us as a constant in this fragmented industry and.

Frankly, we're not we're not as much focus on our competition, because we really prefer to keep our attention focused on how we serve the customers in the carriers in how we create value so as not to say, we're ignoring the emerging trends amongst competition or the greater utilization of technology, but we're really keeping our focus on the things that we can control.

Thanks, Bob.

The next question comes from Dave Vernon with Bernstein.

Our year contract shippers, putting downward pressure on your cell rates.

Or otherwise, reducing your allocations due to the weak spot market.

So the tone through a lot of these questions is kind of confirm that there is downward pressure on rates and greater competition for rates I would add that we have seen some shippers come back outside of normal normal bidding cycles, asking for either rate concessions or term concessions in order for incumbent carriers, such as Robinson to maintain our incumbent volumes I don't think thats unique to us, but more a broad marketplace statement.

One thing that's that's interesting that we've started to see over the last quarter is that with spot markets.

The spot market rates being so far below contractual rates in many lanes instead of shippers following their normal routing guide process. If the first carrier rejects a tender we're seeing more and more shippers go directly to the spot market versus going about secondary carrier in the routing guide, which does have some impact to the level of commitments that get fulfilled.

One might think that have countered to what we've seen in the decline of spot market volumes, but again, there's so little freight falling that second tender position it really doesn't compare to where we were last year.

Thanks, Bob The next question is from Brian Ossenbeck with JP Morgan.

Have shippers shown any preference for brokers or asset based carrier so far in 2019.

Will this change as both carriers and brokers attempt to move up in the routing guide.

Good morning, Brian .

We havent seen any indication in our contract renewals and I'd, even go back to the fourth quarter of last year go back for the past few quarters, we haven't seen any indication that shippers are showing any favor towards either brokerage or assets in any meaningful way compared to past contract cycles.

In our experienced smart shippers evaluate the performance of individual providers based upon whatever their key metrics of service quality rate commitment tender acceptance and make decisions upon their customer experience with a provider more so than favoring or disfavoring a section of capacity providers based on our asset ownership position.

Thanks, Bob will give this next question to Scott.

Tom Wadewitz with us and for the term loan with bank of Montreal asked is NASS net revenue performance meaningfully better or worse than the overall, 8% decline in July .

Excuse me Nast net revenue is the primary driver of the overall minus 8% net revenue change per day in July driven by declining margins, but also by comparisons to a very strong growth in the prior year, while we've seen global forwarding show up slight slightly in July .

Thanks Scott.

The next question is from Todd Fowler with Keybanc, Jordan Alger from Goldman Sachs asked a similar question.

Please provide an update on truckload contract pricing.

Where our contract renewals currently and what impact will recent renewals have on gross margin expectations going forward.

So as I kind of alluded to we're seeing truckload contract pricing that we're bidding in the second quarter and into the third quarter.

Inflecting negative compared to last year, and the and the contract market.

In terms of where renewals are add on a positive note our win rates on contractual bids in terms of the percentage of opportunities that we're winning.

In the second quarter were twice that of where we were at in fourth quarter, and one and a half times, where we were at in first quarter. So we are winning a larger share of of the freight that we get visibility to the other side of that coin, though is that frankly, there is just not as much freight being bid during the second quarter as as we see in fourth quarter and first quarter. So as we said in our prepared remarks were really targeting to be first in the routing guide.

For our customers and that typically is going to drive a lower net revenue per load in that contractual business.

Thanks, Bob. The next question also comes from Todd Fowler, Brian Ossenbeck with JP Morgan asked a similar question.

Hello, CH Robinson improve operating leverage.

What are the main areas Robinson is targeting for efficiencies and is there an expectation that efficiencies will hit an inflection point at some point.

Or is it more of a gradual implementation over an extended period.

All right. So there's a lot to this question we could probably go on for the rest of the time, we have just around this but I'll try to touch on a few key areas, but I want to flip the question around a little bit Todd ill take the focus off us, creating internal efficiencies and focus more on how we're reducing friction and increasing value for really all parties across the supply chain of course by doing that the focus is on at the same time, improving efficiency and improving the efficiency internally, which is ultimately whats going to drive improved operating leverage. So there is a lot of areas that we've got focus, but I'll speak to a few of them.

The first is around pricing and so we've spent the last few years working to really automate pricing for our customers and our carriers, which allows for faster response time more accurate bidding greater compliance to two routing guides et cetera, and so thats, a real area of investment and focus around efficiency and improvement of quality is on pricing.

The second area that gets a lot of press right now is around freight matching in the in the idea around digital freight matching.

We know that the majority of our carriers are small carriers about 85% of our freights executed by small carriers and these carriers tend to have higher empty miles and less efficient networks. Then do some of the larger carriers. So we're investing a lot in data science in order to provide them better yields and better matches and reducing their deadhead miles and hopefully helping them to run more efficient businesses.

By moving towards a more digital platform for matching it also eliminates the need for negotiations and takes it makes us an easier company to work with as well.

And Weve had fully automated booking and the ability to book tours online for quite some time now and more and more of our carriers are seeking out that benefit and gravitating towards that option.

The 30 or I'd talk about is around in transit visibility both the inventory in motion and inventory at rest. So we feel great about the uptake of our mobile apps. We feel we have one of the most widely used mobile apps and with a really.

Strong stickiness factor with our carriers. We also feel good about our integration with other ERP providers and third parties that allow us to provide real time visibility to our customers, which has really become table stakes today, and we're able to do that without without human interaction. So that takes a bunch of work off of the off of the desks of our people, which allows them to focus more of their time on revenue generating activities.

The other area that I would speak to is around serving our large base of small or infrequent shippers and providing these small businesses accepts so access to markets that they may not have access to on their own given their scale. So for the last couple of quarters Weve been beta testing, a new product and in second quarter. We brought this product to life in full so we've built this product.

Based on our learnings from our acquisition of Freightquote and we're really excited to formally launch the freightquote by CH Robinson product this quarter, which enables any of our customers to go online get an LTL or a truckload rate at any time pick their carrier literally swipe, a credit card and be guaranteed capacity to move their shipment.

Based on their needs the feedback we've gotten most of the user experience a super fast and simple and the feedback has been really positive and why that's so important is that we've got about 50000 customers small businesses that interact with us as these infrequent type shippers and today, we have largely a wrap economy, serving those customers and so by moving that to a to a digital experience, we see a real opportunity to help us reduce our cost to serve and provide them a great quality experience. So roll all that together and to answer the question directly.

This has and will continue to be an incremental change as we continue to onboard more partners drive compliance amongst those partners continue to innovate and launch new digital tools and concurrently amend our legacy business processes. So as you know Todd our main driver of operating expenses personnel expense and so any and all these investments while focused on creating value for customers and carriers are also targeted at lowering that personnel expense relative to net revenue.

Thanks, Bob.

The next question comes from Chris Wetherbee with Citi.

Brian Ossenbeck asked a similar question.

Can you provide an update on your automation efforts is a softer freight environment more or less conducive to further automation progress.

I think I touched on much of this in the previously submitted question from Todd, but in general we don't see the market as a driving factor around our automation efforts. We've got a clear long term roadmap of where we expect to be in terms of the next months quarters and years and that will continue to be implemented regardless of where we're out in the cycle.

Thanks, Bob.

Jack Atkins with Stephens asked about head count growth.

Todd Fowler asked a similar question.

Where do you anticipate head count going for the remainder of the year.

And do you believe that you can expand net revenue per employee in the second half of 2019.

Or does the current operating environment make that difficult.

Our focus has been on having our change in headcount really across the enterprise and NASA, specifically lag that of our change in volume over time as you saw through the first half of this year, our head count growth did exceed that of total volume growth slightly.

Looking forward based on what we see as our current trajectory, we would expect headcount to decrease sequentially throughout the balance of this year and the finished 2019 flat to down compared to year end of 2018. So as I've said, our focus continues to be on taking share and growing volume. So if volumes end up being up significantly or positively by the end of the year. It is possible that head count could be up but at a rate lesser than where volume growth plans.

Given the headwinds the second part of that question around net revenue per employee given the headwinds around truckload net revenue per load in the second half I do think it will be challenging to increase the net revenue per employee relative to last years second half.

Thanks, Bob.

Lee class Gulf from Bloomberg asked totaled 2019 second quarter head count went up by about 2% sequentially from the first quarter and was driven by a 5% increase in the all other and corporate area.

Is that technology related hires can you provide any color on what this is Scott why don't you take this one.

Sure.

A large portion of the 5% increase was driven by the expansion of our IP organization, we have a talented team of 1000 people in it and we continue to hire data scientists and software engineers to accelerate the digital transformation that is critical for our future success. We have spent over $1 billion on technology in the current decade, and we expect to increase our rate of spending on technology to at least $200 million annually over the next five years. So that we can better leverage our data to drive insights to our customers our carriers and to our employees.

Thanks Scott.

Brian Ossenbeck and Jack Atkins asked about ESG in a.

What is driving the SG nave per employee higher this quarter year over year and sequentially.

Will this remain elevated with the current investments Scott why don't you take this one as well.

Sure. This is sort of consistent with the last answer but much of the increase is driven by investments in technology, particularly expenses related to the integration of our purchase software and we do expect the technology portion of SG and expense to remain elevated through the rest of the year.

Thanks, Scott. The next question is from Matt Young with Morningstar.

The global Air and Ocean forwarding industry is fairly fragmented, but not quite as much as the us highway brokerage space.

Could you offer some thoughts on CH Robinson is opportunities to grab share in the forwarding market.

Sure. Good morning, Matt. So we're one of the largest envios from Asia to North America, and the largest from China to us, but we still have such a small fraction of the total global market under management that we see a ton of runway for growth.

As you see our results Ocean really dominates air for us and we see areas as a continued area for growth.

We think we've got a lot of growth runway in several geographies and across our service portfolio in global forwarding and our approach is going to be similar to what you've seen really up to this point since 2012, we've invested about $1 billion in to our global forwarding business in terms of the acquisition of Phoenix, and APC and Milgrom and space cargo. So we're going to continue to run that play which is a blend between organic and non organic growth. So we think about what we've been doing its focus on acquiring solid founder led businesses with strong teams with cultural fit that fill in geographies or service needs for US. We then kind of run the play to convert the agent business of those acquisitions.

Two our Robinson network and then we frankly, we cross sell the heck out of all of our new global forwarding customers with surface Trans services, and we sell our new global forwarding capabilities to our existing surface trans customers. So we see a lot of room for growth and kind of the string of pearls approach and a lot of synergies in the approach for for our global forwarding business.

Thanks, Bob. The next question is from Jordan Alger with Goldman Sachs.

You noted that current market conditions are expected to continue through the balance of 2019.

But what is the feedback you're getting from customers, especially in truckload brokerage with respect to peak season demand outlook.

Essentially trying to ascertain if expected market weakness is more tied to excess truck capacity competitive pressures or underlying demand.

Thanks, Jordan. So instead, we do think there are some excess truck capacity in the marketplace today, but I do think that the definition of peak season has continued to evolve over the past several years and the peak today is much less compressed and it has been in the past and we attribute a lot of this to e-commerce , and how thats changed retailing in general, but today, we tend to manage to measure peak across months and not weeks, which frankly makes it much more manageable.

Our belief is that this trend coupled with the excess capacity will likely lead to a less robust peak season on the back half of 2019 of the 20.

That's not to say that there won't be some regional tightness of capacity or short term increases in spot market demand and pricing, but in general we don't see anything that would trigger a large scale change in the market fundamentals.

Thanks, Bob Scott Schneeberger from Oppenheimer asked about less than truckload.

Please discuss business conditions in LTL.

Versus prior years of this current cycle or prior cycles, and how you foresee this business trending in the intermediate term.

Okay. So the way that we report the LTL service line with Theres a lot in that and we include our common carrier LTL business, where we're providing freight to the to the network of common carriers. We include our consolidation business, which includes consolidations for industries, such as retail and automotive as well as general freight all kinds as well as our temperature controlled consolidation, which focuses on everything from fresh cut flowers and produce two frozen goods. So with that being said our LTL results at times will not cycle exactly with how you might see some of the other publicly traded LTL carriers report their results.

The diversity of our services that we report under LTL is really what's been fueling our growth over the past several years and we anticipate that mix continuing to drive growth moving forward as we provide this kind of unique in bundled service to our customers.

Our customer base within LTL really spans virtually all industries and all customer size segments from some of the largest global companies.

To really mom and pop shippers that need better efficient digital solution that I and access to markets that I talked about earlier. So in terms of our business. That's most alike to the other publicly traded LTL. We saw similar results in the quarter to what to what you've seen reported another in other releases and Thats pretty consistent weight per shipment decrease as there was less truckload spillover freight hitting the LTL networks and in general volume was was flattish for the quarter much of the financial improvements in LTL for us during the quarter can be attributed to lower purchased line haul transportation costs within that consolidation side of the business.

Thanks, Bob Our next question comes from Bruce Chan with Stifel.

Jason Seidl with Cowen and company asked a similar question Scott This one's for you.

Have developments in the global markets affected your target list for M&A.

Are there any lanes, where you prefer to grow in this type of environment and would you focus domestically if global freight market slow relative to the U.S.

Thanks, Bob we are always looking at M&A options to expand our geographic presence. This has been a theme for us over the past number of years.

They have typically been businesses that are strong financially and are a good cultural fit and a good business model fit and even if global for freight marketing slow we wouldn't sit on the sidelines if a good opportunity presented itself.

We will continue to look at acquisitions that filled geographic space for us and that strengthen our scale. We will also look at companies that would add new services or technology to our platform.

Thanks Scott.

The next question is from Scott Schneeberger.

Please address see a tremendous opportunity and progress in managed services and discuss the company's ability to leverage this business with other businesses in the portfolio to garner contract wins.

I'll address the question first off I wanted to touch a little bit on our Q2 results and maybe add some more color to the to the managed services results in the fact that revenues were flat for the quarter is really a function of timing. We've got a really really solid pipeline of deals for our managed services business that have already been closed and several more that are to close in the coming quarters and so we feel like our growth trajectory should be on a pace similar to what you've seen in that business over the last couple of years. So if we Peel back managed services TMC is the largest part about managed services business and they are really focused on global complex multinational multi modal shippers with really complex supply chains, which lead to complex global integrations.

Typically and what this would have been a high growth business for us, we're bringing on new supply chain engineers and more talent prior to revenue actually being recognized due to the complexities and the length of time associated with these integrations.

So we're in a really good place with this business, we expect that the freight under management in the revenue to accelerate in the back half of the year.

In terms of the intersection of this managed services or TMC business with the other divisions of Robinson, one of the things that differentiates TSMC in the marketplace as a commitment to being a neutral platform, but typically what we see is that the TMC or managed services.

Services are sold to existing customers of either European surface transportation or nast or global forwarding and so these typically tend to be customers that have a favorable opinion of robinson to begin with and when we implement the TMC platform over the top and provide the customer with a neutral platform to manage their bidding their supply chain management. Other routing guides, we typically see Robinson other divisions, do very well and maintain or grow share with with those customers. Given the fact that theyre, giving a neutral platform and solid decision, making support to work with.

Thanks, Bob.

The next question is also from Scott Schneeberger.

CH Robinson has been acquisitive in Europe recently.

Please discuss your growth opportunity and strategy in Europe , particularly in freight brokerage.

We probably will talk about Europe enough in terms of of what we see in the opportunity there and we've been in Europe around 25 years now doing freight brokerage I would say the CH Robinson model is one that is not that common in the European marketplace as most surface transportation companies.

And to have more blended model between assets and independent contractors or brokered brokered carriers are tend to be more more of the integrators. Our growth in Europe has been a blend of organic and acquired growth overtime with the latest acquired company prior to demo being a frail logistics back in 2012.

Today with the acquisition of demo services, we gained some density in the Italian marketplace, which we didnt previously have and we added some great people, which will help us to continue to build out our scale and expertise in the market. If we look at Europe surface transportation independently in total we've got 37 offices, there across 16 countries and about 650 people executing surface transportation for a wide variety of customers in Europe .

I'd say, there's a few things over the past couple of years that have evolved in a really positive manner.

That that are were sharing in the first is that we've really strengthened our leadership in terms of the talent that we have within Europe .

We built a really strong leadership team there based local leaders versus ex Pats and we've also become much more focused on driving truckload growth with enterprise clients.

Whereas in the past we are maybe more of an overflow carrier for the marketplace.

So one of the great things about our Europe surface Trans business is that we're able to share of lot of learnings and a lot of technology back and forth between our Nast business and European surface trends. So while there are certainly differences and intricacies between the two businesses. There is a lot of learnings that we can take back and forth, which allow us to to accelerate our development in Europe .

Given that that European marketplaces is equal to or greater than in size to the us truckload marketplace. We're really committed to continue to invest and growing in that space.

Thanks, Bob.

Our next question comes from Ravi Shanker with Morgan Stanley .

Bruce Chan asked a similar question.

What will be the impact of IMO 2020 on the global forwarding business.

We really view the impacts of IMO 2020 to largely be a pass through for us.

Should the increased costs and the forecast.

The impacts of IMO to the steamship lines lead to further consolidation of capacity or reduction of capacity or in any way interfere with global trade that could certainly have adverse impacts to our global forwarding business, but at its face value, we see the cost impacts as being a pass through.

Thanks, Bob Scott another question for you.

Allison Landry with credit Suisse asked about working capital.

You've made good progress on working capital efficiency.

Can you discuss how much further you might have as far as optimizing accounts receivable and accounts payable sure.

We are pleased with the progress on working capital efficiency. We also feel we have room to continue to optimize our working capital performance.

We have a number of initiatives underway to improve our cash conversion, while continuing to provide a high level of service and support to our network of customers and carriers and vendors.

Thanks, Scott. The next question is from Ravi Shanker with Morgan Stanley .

Ken Hoexter with Bank of America Merrill Lynch asked a similar question.

Ken net revenue margins increase year over year in the second half of 2019.

With the truckload spot and contract rate gap closing.

I think as you know we tend to manage our business to net revenue dollars per shipment versus net revenue margin just because of all the noise around net revenue margin.

Given current market conditions, and our forecast for the market for the balance of this year, though we would anticipate net revenue dollars on a per load basis to decrease compared to the second half of 2018, where we experienced net revenue dollars on a per load basis, well above our 10 year moving average.

Thanks, Bob.

And our final question is from Scott Schneeberger.

Please provide perspective on your intermediate term and long term margin objective for the global forwarding business.

So for global forwarding.

As we've been integrating companies over the past few years and bringing all these global companies onto a single system. There has been a an outsized investment in technology for the global forwarding business, we've more than doubled our investment in technology for global forwarding over the course of the last several years also with the acquisitions. There is a fair amount of impact to purchase price amortization, but if we think about our target operating margin for that for that global forwarding business.

We look in the intermediate term to moving that towards the high Twentys and the ultimate goal is to have that in the low thirtys for for that portfolio.

Thanks, Bob.

That concludes the Q and 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 CH Robinson dotcom.

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 second 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.

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