C.H. Robinson Worldwide, Inc. (CHRW) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, July 24, 2012. I would now like to turn the conference over to Angie Freeman, C.H. Robinson's Vice President of Investor Relations. Please go ahead, Ms. Freeman.

Thank you, Douglas. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, CFO. John and Chad will provide some prepared comments on the highlights of our second quarter performance, and we will follow that with a question-and-answer session. [Operator Instructions] Please note that there are presentation slides that accompany our call to facilitate our discussion. The slides can be accessed in the Investor Relations section of our website, which is located at chrobinson.com. John and Chad will be referring to the slides in their prepared comments. Finally, I would like to remind you that comments made by John, Chad or others representing C.H. Robinson may contain forward-looking statements which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectation. And with that, I'll turn it over to John.

Thank you, Angie, and thanks to everybody who's taken the time to listen into our call. So my prepared comments, as Angie said, will start with Slide 3 on our prepared deck that summarize our overall financial results for the second quarter. The key metrics that we focus on, our total revenues grew 9.2% for the quarter. Net revenues grew 1.8%. I'll discuss more about it later, but in general, that margin compression of net revenues growing slower than total revenues is a common theme throughout all of our different services. Our income from operations grew 2.7%, and our EPS grew at 6%. Chad will make some more comments later about our variable business model and our operating expenses. But in general, we were pleased that we were able to grow our EPS faster than our net revenues. As in the past, I'm going to make a few prepared comments for each of our individual service lines, but before we move off of the enterprise results, I guess I wanted to touch on what I believe is the common theme for our second quarter results across all of our transportation services. And that really is the theme of: our underlying capacity providers looking pretty aggressively to drive price increases, and at the same time, our customer base that we're working with being as focused as ever on supply chain savings and cost reductions, and not very receptive to meaningful price increases based on overall economic conditions and how they're managing their supply chains more aggressively, which resulted in us across all service lines really, some pretty meaningful margin compression that was pretty systemic for us. It's not a new topic. We've talked about it the last couple of quarters, but it was as anticipated, and we talked about the early days of April on our last call that, that margin compression really continued across all service lines. Again, driven largely, we believe, by the overall environment and macro effects. And as I go through each individual service line, I'll try to comment more specifically on kind of what we're seeing and how we think it might be impacting us. But that's clearly kind of the connecting theme that we would mention. Moving on then to Page 4 and the overall transportation results. There you see the total net revenues being roughly flat for the quarter. The volume growth in almost all service lines that I'll get into more specifically offset by that net revenue margin compression that I referenced. On the bottom half of that slide, our 10-year or historical net revenue margin percentage shows that for the quarter, we had 14.9% net revenue margin for the quarter in transportation. We've talked a lot in the past about how these margins fluctuate and all the various things that could impact them. And while we expected margin compression off of the highs of 2009 and all of the economic circumstances that created that, I think it's fair to say that this margin compression cycle has been longer and more significant than we might have anticipated. So while it's not uncommon for our business model to see supply cost rising faster during periods of time than we're able to pass through to our customers. Again, this has been a fairly significant and fairly long part of the cycle, down to a 10-year low of 14.9% for the quarter. Moving on to Page 5 then for our truck results. As a reminder, our truck category includes both truckload and less-than-truckload. Net revenue combined for the 2 declined to 0.5% in the second quarter. We were happy with volume increases of 10% in truckload and 17% in LTL. Again, following the theme of cost pressures on the truckload side, the capacity that we rely heavily on, the medium and small carriers, continue to experience a fair amount of cost pressure. And as we disclosed, our net cost for the quarter were up 3% on the truck load compared to second quarter of last year, with customer prices being up about 1%. While we've talked in the past and it remains true that we have slightly a higher growth with our larger customers, where we tend to have more dedicated or committed pricing relationships, there was probably some impact to our margin compression based on the changing mix of business and the alignment with those larger customers, as well as some mix change around the length of haul, with that shortening a little bit. So there's probably some contributing factors that were maybe specific to our mix of business and our customer base around the opportunity for price increase versus the supply side on the trucks. But overall, we feel like it's the general environment of price increasing and price pressure on the supply side versus much less receptivity to it on the customer side. Similarly, when you go into the LTL business, as I'm sure many of you know, general trends of pricing on the supply side upward as they come off of some very difficult economic times from a couple of years ago. So that industry continues to look for some pretty meaningful price increases. And while we were able to pass along a little bit more of the price increases there, it's difficult to come up with a precise percentage because of all of the different tariffs and trying to get a clean comparison. We also did have net revenue margin compression on the LTL side. Moving then to Slide 6 in our intermodal results. We had a net revenue decline of 7.8% for the quarter. Again, comprised of single-digit volume growth, mid-single-digit, offset by some margin compression. Again, as many of you are probably aware, rails have generally been looking for some pretty meaningful cost increases that have been put towards us in our pricing. And while we've had some success passing those through, again, there was probably some mix shift where we've been working more with larger customers on a more dedicated basis in intermodal. But in general, the theme was that the supply side costs are rising faster than our volume and our price increases to our customers would allow, resulting in some net revenue margin compression. And in this case, a net revenue decline. The other comment on there that's worth mentioning is we've talked in the past about how we've begun to ramp up with some dedicated or owned container capacity to help us be more effective on those larger commitments in the intermodal world. If you recall in the past, we had 350 short term leased containers, along with 500 owned containers. We recently purchased an additional 500 containers that will take the place of the 350 short term leased ones that we'll be turning in throughout the remainder of the year. So by the end of the year, we should have 1,000 owned containers in place, which is the foundation of a fleet that we're building. Again, it represents a fairly small percentage, somewhere around 15% to 20% of our total intermodal volume at this point. But we believe it's been an effective tool to help us grow our intermodal business. Moving on then to Page 7 for the air and ocean results. Our results in the global forwarding world are probably a little less representative of overall industry trends, simply because our business there remains smaller with less market share and more concentration in fewer customers and fewer carriers. So some customer-specific changes around growth or mix can have a bigger impact. But in general, on the ocean side, the theme holds true around some meaningful cost increase that resulted in us increasing pricing. In this case, more of a neutral net revenue margin effect, but challenging to grow volume in a difficult industry environment. On the air side, is one area where we do see meaningful price decreases. I think the common theme here is that customers are looking aggressively for lower-cost options and managing the cost in their supply chain more aggressively. So in the business that we see a lot less tendency to ship via more expensive air mode and more shift towards ocean. So while our air volume was able to increase, with significant price decreases in both the industry and with our customer relationships, while our net revenue margin percentage improved, the overall absolute dollars of net revenue declined for the quarter by 7.5%. Moving on to Page 8. The other logistic services continues to represent one of the bright spots of higher growth for us. As a reminder, these net revenues include our transportation management services and customs brokerage, which are the 2 largest categories. This source of net revenue has increased up to 4.5% of our net revenue for the quarter, and it's representative of the trend towards more outsourced services and growth in transportation management services. So while that customer and overall pricing environment has put some net revenue margin compression on our traditional transportation services, it's that same environment that's creating a lot of demand and pipeline of services for us in this area. Where working with customers more collaboratively, we're finding better opportunities to provide management services in the form of technology and analytical tools that can help our customers achieve the savings in the directional projects that they have in place. So we feel good about our results here, as well as the outlook for higher growth and continued opportunity in this. And as we've stated in previous periods, in addition to the growth in the net revenues of 4.5% of our consolidated net revenues that are represented by this category, there are also a lot of relationship connectivity to the underlying transportation services in those same accounts. So that when we look at a broader definition of outsourced services and integrated solutions, it already exceeds more than 10% of our net revenue. Moving on to Page 9 and our Sourcing results. Again, another one of the positive highlights for the quarter. We continue to see progress in terms of growing our business and coming up against some of the more normal comparisons as we've talked about some lost business over the last couple of years. Last September, we announced an acquisition of a company called Timco that's primarily focused on the melon business. We had very nice growth during the quarter in that business and are very positive about the future prospects for it. So a more return to more normal comparisons and activity in our traditional Sourcing business, along with an acquisition that we feel good about gave some nice results for the quarter. The margins for the quarter, again, do change and fluctuate in the Sourcing business, similar to transportation. That's primarily driven by the product mix and the seasonality of the different crops that we sell and distribute. Moving on to Slide 10 and our Payment Services. Again, this represents our wholly-owned subsidiary, T-Chek. Net revenues up 8.1% for the quarter. The net revenue growth was driven by increased transaction in our fuel services, MasterCard and permitting businesses that are all part of the menu of services under T-Chek's Payment Services. Those are my overall comments on our services. I'm going to turn it over to Chad for some comments on our financial statements. And then I'll come back and close with some thoughts on forward looking and where we go from here.

Thank you, John. Slide 11 shows our summarized income statement, and I'd like to highlight a few things contained in that income statement. As John mentioned, we feel very good and are pleased that we continue to operate very efficiently. Overall, our operating expenses grew slightly slower than our net revenue in the second quarter. In the second quarter of 2012, while our average headcount increased 9% compared to last year, our personnel expense decreased. That was due to a reduction in some of our incentive compensation and equity compensation programs that are based on growth in earnings. During the quarter, our stock-based compensation expense was approximately $6.8 million in 2012 compared to $10.1 million in the second quarter of 2011. Growth in other operating expenses was driven by increases in many different categories, including travel and entertainment, claims and depreciation and amortization. While we've been operating extremely efficiently, we've also been continuing our focus on long-term growth of the company. Our people are focused on sales and have been traveling more. We have continued to invest in technology to support our long-term growth and efficiency, which has driven the majority of the increase in depreciation and amortization. During the quarter, we had a decrease in our provision for doubtful accounts. This was driven partially by a partial collection of the customer that we had a large reserve for last quarter and an overall improvement in the quality and aging of our receivable portfolio. We have continued to follow our consistent methodology for assessing our reserve requirements, and are extremely comfortable with the current level of our accounts receivable reserve. Moving on to Slide 12. We continue to have a strong balance sheet, with cash and investments of approximately $240 million and no debt. Our net CapEx for the quarter, including the investments in software was $7.5 million. As John mentioned earlier, we have decided to expand our intermodal container fleet. The 500 additional containers that he mentioned will cost a total of approximately $6 million. $2.8 million of that $6 million is in our second quarter CapEx. The remainder will be paid for in the third quarter. Previously, we told you we expected our 2012 CapEx to be in the range of $40 million to $45 million. That estimate did not include these containers, so we now expect our CapEx to be more in the range of $46 million to $51 million. A couple of comments on our share repurchases. As we have always -- as we've discussed with you many times in the past, we use share repurchases as a variable way to return excess capital to shareholders. We continued this practice during the second quarter of 2012. During the second quarter of most years, including this year, investment in working capital increases as our gross revenues seasonally increase. This increase in working capital reduces the amount of money we have available for share repurchases. However, during the second quarter of 2012, we did repurchase approximately 637,000 shares at an average price of $59.23. And now I'll turn it back to John for some closing prepared comments.

So looking at the Slide 13, our current period comments and summary. Starting with the data points that we've shared about July. As we look at our business and try to understand what information will be helpful to understand the trends in the business and where we think we're headed. We believe it still remains very difficult to try to forecast or guide given the short-term nature of our procurement cycle and kind of the day-to-day volatility in the business. So we continue to believe that sharing actual information that's more current is probably the best way to kind of share what's on our mind and discuss the trends in the business. We did try to enhance a little bit the net revenue disclosures up to the current period to try to help you with that. So similar to what we've talked about in the past, the North American truckload volume growth through yesterday was 11%. Our net revenue per business day declined by 1.5%. If you look at the data below that, that's showing for the current year through yesterday, July 23, we had approximately $6.7 million net revenue per business day. And that compares with $6.8 million per business day last year for the first 25 days of July. So that's where the 1.5% decline would come from. The additional data point to try to provide a little more context around how the quarter is starting out and how comparisons might shape up. So the net revenue per business day for the entire third quarter last year was $6.6 million per day. So you can see while it started out last year at $6.8 million for the first 25 days in July, the average for the quarter was $6.6 million. This year, starting out at $6.7 million. Last July was our most challenging comparison in terms of the net revenue per business day. One additional data point is that this year's third quarter has 1 fewer business day than last year. I think while there's a number of data points there, probably the core message is that the net revenue margin compression that I've talked about earlier really has carried over into July. But we also believe that perhaps the comparisons are going to ease a little bit as the second half of the year goes on. Who knows where the market forces will go and whether -- how they'll actually end up comparing. But that's what we know today. So when we step back and look at the business and say, where do we go from here, how do we see things, how are we managing the business today? I guess the first question is, when do we find a bottom on the margin compression cycle? As I mentioned earlier, it's not uncommon that our supply costs would rise faster than we're able to pass them through. But this is a little bit longer and more severe than we've seen. And so there is question around that margin compression and where the bottom of the cycle would be. Traditionally, at least, when we reach that margin stabilization, our earnings growth would generally move back more towards volume percentage type increases. It can obviously fluctuate for various reasons, but that would be kind of the core expectation when we get there. If we can get some margin relief or margin expansion, that obviously will help us a lot in the future. But I would say that our overall perspective in how we're managing the business is hoping for that margin stabilization or improvement, but also managing to the extent that it doesn't occur or that it doesn't occur in the near future, that we are prepared to manage our business and grow our earnings under more difficult margin comparisons. And when I talk about that, it's things like investing in the sales and account management initiatives that we have to drive market share. We feel pretty good about some of the market share gains in the different services that we've had. And I feel like it is the right strategy to continue to try to take market share. It's challenging to grind out small earnings increases while we're having this sort of margin compression. But we feel like it's the right thing to do, to continue to position the business for the long term and build on those relationships that we have. We're hiring people and investing more in training than we have at any point in our history. We're expanding our service offerings and integrating our services and transforming the business to where customers want more services to help them manage their supply chain more holistically. We're emphasizing heavily our pricing and profitability disciplines. While we're aggressively going after market share, we have the best receivable aging metrics we've had in a long time. Our operating income as a percent of net revenue is at new highs. So we feel very good that we're continuing to have a good discipline around going after market share, but making sure that it's profitable growth. And as we've reminded you on several calls in the past, while margin percentage matters a lot, ultimately, the productivity and the efficiency and the automation that's in the freight can result in operating income that is equally good on less margin freight, if it's more efficient business. So when we go through periods of margin compression like this, it really does drive us to invest in technology and productivity and different processes that we think will continue to benefit us for the long run. So we're spending more on technology this year than we have at any point in our past, and we're very focused on monitoring the turnover and people and productivity initiatives to make sure that our workforce stays motivated and stays focused on evolving with the customers in the marketplace. So as I said earlier, I would summarize our attitude by grinding out small earnings increases while our margins are compressing, hoping for stabilization or relief at some point in a future market cycle and making all the investments that we think are good long-term choices to help us grow our business and be successful even if we don't get that margin help. Those are the end of the prepared comments. And with that, we'll open it up for questions.

[Operator Instructions] And our first question is from the line of William Greene with Morgan Stanley.

John, you had a good sort of synopsis there right at the end that makes a lot of sense with a lot of the strategic initiatives you were trying to put in place. One question that comes up though a lot when I have discussions on the name though is, is what can Robinson specifically do to change the growth trajectory now? Right? Like so, I understand that you're making investments and that sets you up for a better outcome later when the macro gets better. But it sounds like every time it comes back to, okay, but the macro if it doesn't improve, there's not much we can do. But I'm not sure that's what you're trying to say. Do you have any thoughts on that? If it can be done outside of macro?

I think there are some short-term things that we could possibly do to improve our short term earnings. But I don't know that, that would be the right thing to do for the long term. You can always be more aggressive on pricing at the risk of the relationship or we probably could do some cost cutting or some other things that would improve our short term earnings. But I really do think we're staying pretty focused on the long-term investments and while we're spending more on people, and spending more on technology and making investments in containers and a lot of these things, we're opening offices in Europe despite all of the economic uncertainty because we continue to believe that there's a really good long-term opportunity for us there. We're also looking at acquisitions and other things that maybe could help us grow a little bit faster in the shorter term like the Timco acquisition did on the Sourcing piece of it. So it's not that we're not trying to improve it in the short term, but we clearly have a bias towards the longer-term approach.

Okay. No, that's fair. You mentioned the investment in automation. And if I remember correctly, you could correct me if this number is wrong, but I thought about 5% of your loads are sort of tendered and matched electronically. Is there a step function we could get? Could you see sort of this number be 15%, 20%, 25% or so of loads sort of tendered electronically such that we could have a whole step function change in the way we perceive operating margins?

I'm having trouble remembering what stat that was that's 5%. Because I think our electronic tenders of loads -- tendering in from the customer is probably closer to 30%.

Yes, I thought it was a match, the electronic match, but maybe I've got the number off.

Oh, the 5% is we have some preexisting in a very limited amount of our capacity when we commit to certain programs with a customer, we'll go out and contractually hire those carriers as well. That type of relationship will probably continue to grow. But it's got a pretty limited application today of where it makes sense. But when you look at things like our LTL automation, a lot of those transactions end up being no touch because we have each carrier's -- each common carrier's rate in our system, and we automatically pick the rate that will meet the service requirement of the customer. So we've been making many different technology enhancements to LTL, to truckload, to try to integrate with more of those customers, try to integrate with our carriers. In addition to the kind of the prepurchased capacity, we also have grown where with some of our truckload carriers that we can tender them a load offer electronically, and they can respond electronically. I'm not quite sure what that percentage is. So there's many different productivity initiatives driven by technology, and a lot of them are electronic interface, EDI and other electronic communication methods. But I don't have any real new stats to give you.

Yes, but I guess it still comes back to the kind of margin improvement that you've seen over like the last 10 years. It's going to be difficult to repeat that even with these productivity initiatives.

Yes, I mean, we're pretty consistent about saying, we went from under 30 to over 40. We're not going to see that type of expansion -- or we can't see it today at least where that type of expansion would be possible in the future. But as we mentioned in some previous calls, yes, we can get up into the mid-40s, but maybe even higher if we didn't care about growth. I think this business is constantly balancing growth and efficiency.

Our next question is from the line of Justin Yagerman with Deutsche Bank.

John, you mentioned that this is already a longer period of margin compression than you would've expected given experience in past cycles. So I guess with double-digit volume growth not translating to similar types of net revenue, at what point do you actually say, "Okay, maybe this is the systemic environment from a capacity standpoint where I'm not getting the leverage that I need and I've got to reevaluate the volume versus the price dynamic that we're pushing with our workforce?"

I'd like to think we're doing that everyday. When we look at those account management strategies that I emphasized and when I talked about sort of systemic margin compression, that margin compression really is across all the freight, the existing freight, the new freight. So we're very comfortable that this 10% volume increase that we got came at comparable margins to the core business that we had before. And there's even a fair amount of churn within that core business through rebidding and different transportation cycles. So the way we think about the business and the profitability and the elasticity of pricing is looking at account-based profitability around the total margin and the total workload that managing that freight entail, and the labor and cost that we have associated with it. And that is a very fluid, perpetual process that we're adjusting literally daily around pushing back on our customers if we need more automation and more help to be able to keep that freight profitable. We are doing that every day.

Yes, I mean, if I think about it in terms of my business, if I have a trader who's taking losses in dealing with customers, that will get stopped out at a certain point. I mean, are you micromanaging it to that point on a regional basis? Where if the customer is running you over too many times, you start pushing back in a very big way?

Absolutely. And as we've talked about before, every single day, we lose money on some of the loads that we move, but some of them are growth investments, some of them are bundled freight commitments with other good freight. And every office, every zone, every manager is continually looking at the profitability of the freight and trying to reprice or decline freight where they have to honor commitments where we've made. It's a very fluid perpetual thing. And we're not losing on a significantly higher percentage of the loads today than several years ago. It's compression across the board based on the macro environment. But we feel like our day-to-day account management and pricing disciplines are very consistent and very reliable like they've been in the past. It's just that the market is not giving us the same spread that we've had in other periods.

I mean, is it that market is just moving away that much faster and that you guys aren't reacting fast enough? And then I guess in terms of bid season, as we go into the back half of the year, is it maybe just a contractual issue and we're about to get some relief as July 1 brings new pricing across the board with many of your contractual customers?

No, I think our results are very consistent with every other industry data point we've seen in that the carrier base, especially that we rely very heavily on the medium and small carriers continue to feel a lot of economic pressure. There's a lot of churn. There's no new -- not much new capacity coming into the marketplace. And they're very aggressive looking for price increases because it's still a challenging economic environment for them with a fairly balanced freight environment. Shippers on the other hand are dealing with all the economic uncertainty and looking for cost savings ideas in the supply chain as aggressively as possible. And really, I mean, one of the things that we've discussed a lot the last couple of quarters is that, I think traditionally, a lot of the easy market share gains and high margin freight for the third-party providers like ourselves comes from the growth in the freight. And the unplanned and surge and seasonal freight that's difficult for a shipper to manage. And in this environment, there hasn't been a lot of that. So the market share has come more out of existing customer relationships and making more aggressive price commitments like keeping rates flat to retain or increase your volume when you know you're going to have a couple of percent increases on the supply side. So that's a very typical example of the types of market pressure and squeeze that we're under today. And yet, we know that through more automation that we can be very profitable on that freight. And as market conditions change, hopefully see some margin expansion or improvement as we go forward.

Our next question is from the line of Tom Albrecht with BB&T. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Chad, I wanted to get 2 things. What was the amount of the doubtful account collection? And did you have any lower bonus cash accruals? I know you mentioned the stock based and then I have a bigger picture question.

Okay. The specific collection of the specific reserve we talked about last quarter. We collected about 1/3 of that, which was $600,000. The total bad debt expense for the quarter was actually a negative $1.3 million. The rest of that positive variance came from the improvement of the quality of both the customers in our portfolio on an overall basis, as well as an improvement of the aging in the older buckets where we apply a higher percentage of reserve requirements to the dollars that are outstanding. So we had a couple of significant customers that got -- had improved ratings, both from D&B and some of the credit rating services. So we drove them to the higher quality percentages of reserves, as well as things just getting better and collected quicker in those older buckets of receivables. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Okay. Cash bonuses.

Oh, and about cash bonuses. Our core bonus program is based on a percentage of earnings of a branch. So some people's cash bonuses went down and some people have gone up depending on the adjustments to their bonus contracts, whether they got more or less point and then how well is their branch performing compared to a year ago. Within the specific incentive-based programs that we talked about that are based on growth in earnings, there's both the restricted stock program, and there's also what we call the growth pool. So if a branch grows above -- the general rule is if a branch grows above 20%, there's an incremental bonus that kicks in. There's far fewer branches that are reaching that additional cash bonus program that we call the growth pool internally. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Okay. That's helpful. And then the bigger picture question was, so by year end, the intermodal container fleet will be about 1,000 units. Do you foresee a situation where you're going to need to have this build out over the next 2 or 3 years to perhaps 4,000 or 5,000 containers? I think anytime we hear of a company adding containers, we wonder if you only have density on day 1 when you buy them, and then you need several thousand to consistently have density in the rail yards across the country. So as you look out, will you be able to profitably run this business or are you going to need to have a big ramp of several thousand containers?

I think we have talked about this before, but the equipment that we have in place today is all committed to the BNSF. And because that fleet today is much more concentrated in fewer lanes in one region of the country, we feel very good about having the density and the execution to be successful with it. The commitment that we've made to date on containers is focused lanes with committed customers, where we can be more successful in managing those relationships. We will expand it if we can continue to gain customer commitments that we can match with it. But one of the things that we've said thus far in our intermodal growth is that we want to try to preserve that container component as a smaller percentage of our capacity needs. So that we can match it with customers and not have that be the driver of our growth. So we're not anticipating any time soon getting to the size fleet where our container purchases or equipment are what's driving our growth and enabling increased capacity. We really want to grow it more selectively in certain lanes and match it to customer-specific commitments. And then use pooled equipment to grow our business and to manage the fluctuations in the volumes.

Our next question is from the line of Tom Wadewitz with JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you a bit about the compensation trends and just to kind of try to figure out how much they can fall. I guess if I look at the -- you drive compensation, incentive comp by the pace of growth, you had fairly slow earnings growth in the quarter. What would you -- if you stay at that pace for a couple more quarters, would you see in absolute terms that, that personnel expense would fall further? I guess it fell about 3.5% second quarter versus first. Or are you actually kind of close to what would be a threshold level payout that wouldn't fall any further?

It's -- I'm thinking about all the different compensation programs that are out there. But if our growth rate stayed relatively consistent with where it is today and our headcount stayed relatively consistent with where it is today, I'd say that this quarter would be -- that the third quarter could be similar to the second quarter. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. So if you had 5% earnings growth in third quarter, it's similar to what you had in the second quarter, and you didn't change headcount, your comp and benefit would be stable, you wouldn't see incentive fall further?

It -- it varies a -- it varies a lot. It would depend on how we got to that consistent revenue growth or consistent earnings growth, depending on which branches grew by how much and which business line grew by how much because there are different varying levels of incentives branch by branch. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Right. Yes, I know. Just trying to frame a complex thing into a simple, I guess a simple framework, which maybe is tough to do.

We just have so many different programs out there that react differently. But...

The broader compensation framework is designed to try to keep personnel expense as a consistent percentage of net revenue. But it's really on an annual basis, where a lot of the bonus pools and equity vesting and different things are calculated annually. So from a year-to-year basis, it's easier to make some assumptions about what personnel would do under different circumstances. But from quarter-to-quarter, it's challenging because if the growth rate is accelerating or decelerating, the accruals might be doing the same and it gets tougher to compare to it. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Right. Okay. Then a second question. It seems like there -- there are some, what appear to be some competitive pressures with more private carriers and then some of the asset-based carriers doing brokerage. I know that's not a new thing this quarter. But it seems like that's been developing, I don't know, past couple of years I suppose. Do you think that shippers have maybe figured out a way to take advantage of that and put more of the pricing risk, manage their rates a bit better and put more of the capacity constraints and pricing risk on the broker? It just seems like the dynamic has kind of changed. And so you see this volume growth, but you just see an unusual rate pressure in between. Do you think that might be the case and you think that type of dynamic might continue just related to more competition in brokerage?

I think there's a lot of interrelated dynamics, including the one that you just described, and it's really difficult to quantify or assess what impact any of them is having. The big theme that I tried to talk about in the prepared comments is just sort of the collective shipper mindset, which it's probably dangerous to even to try to generalize about that. But when you think about willingness to expedite freight or would you wait another day to ship it if you don't like the price or would you make 3 more phone calls yourself or do you think you got a competitor who's maybe as capable now. There's a whole bunch of different reasons why a shipper may or may not accept a rate increase and competition is one of them. But for the most part, it's the cost pressure and how they're running their business. We think probably the lead variable is how they're thinking about service and inventory, and expedited charges and whether they'll roll the shipment over to the next day or make 3 more phone calls before they'll accept the price. And when you get into an extended period of a balanced market with static route guides and shippers who are trying to keep inventories down and really manage cost down, it just kind of tightens everything up to where there's not a lot of unplanned freight or margin opportunity. And then of course, you've got 10,000-plus competitors like there's always been. And when the market tightens up like that, everybody starts looking for share in each other's pocket rather than kind of the growth in the unplanned opportunities. So yes, it feels like it's a lot feistier and more competitive during that part of the market cycle. I am sure there's some real growth or some real changes in the third-party presence in the market as well too, but when we've been asked about it in the past, our general feeling is, there's nothing radically different or nothing revolutionary in it. It's more competitive because there's not as much growth going on and the environment is different. And that's what we feel kind of the lead variable in that complex web of factors is, including the one that you mentioned.

Our next question is from the line of Nate Brochmann with William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Wanted to talk just kind of along those lines of market share gains, John, in terms of, I mean, obviously, your volume numbers have picked up pretty nicely and definitely evidence of some market share pickup there. Is that coming from a couple of large wins, things that you've been working on for a while or have you seen any increase in any kind of spot activity or like you said, is it more of just kind of maybe going down the channel and grinding it out a little bit harder than maybe you had been?

We have seen for the last year or so slightly higher growth rates in our Top 1,000 or Top 2,000 customers, which are generally, the larger companies and generally are larger customers. And we hope and think that's part of this expanding relationship and continued trust and reliance on our model and our service levels and all that. So we are growing and taking share a little bit disproportionate to the larger more committed accounts. And as I've talked on past calls, in general, that comes with a longer term, more committed pricing relationship as well too, which gives us a little bit less short term repricing capabilities. But the growth of share has come across the board and there has been a lot of new customer activity. And we do have more salespeople than ever just looking for accounts of all shapes and sizes. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And just real quick with that, in those longer term committed relationships, are you extending past the typical 1-year timeframe that you historically had done?

No. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay. And then just my second question was, I mean, seeing the nice growth in logistics business, could you kind of remind us again, I mean, I know a lot of that is just kind of pure fee-based in terms of the consulting arrangements. But is that able to drive some additional revenue back to kind of maybe the core truckload business or to other pieces of the business?

We believe it does. So the largest single source of fee-based income in our management services is the transportation management fees, where shippers are paying us, in essence, technology fees or fees for the utilization of our system to help manage their freight. It is a separate relationship, separate pricing, separate contracting. But when we have a relationship like that with a shipper and are able to see their entire transportation data better and consult with them on supply chain savings or other return on investment type programs, we can oftentimes give more exposure to our transportation capabilities and participate in a bid in a more efficient way and be there to help them solve any transportation needs in a more automated or efficient way. So with those customers where we have those management relationships, our underlying freight activity can expand or contract, and we see some of each, but in aggregate, we feel like it is a net plus and that our freight relationships have grown better where we have a broader, integrated relationship with the customer.

Our next question is from the line of Ken Hoexter with Bank of America.

Just to follow up there. Do I understand you're locking in the pricing? So should we not expect kind of a re-expansion on that net revenue growth from the -- or net revenue margins from that kind of 14% to 15% range back to the 16% range? Just understanding if you're locking in those long-term rates.

So I think in more pure transactional business where it's -- the customer is tendering the loads daily or there is not a longer term commitment, we can adjust to the market conditions daily or whenever we see appropriate. With a large lot of the larger accounts, it flows more on an annual bid cycle. Every time it comes up, we can reassess the pricing, and we hope that longer term our margins can improve or increase over time. But that is typically more 3 month, 6 months, at some point in the future where there's the opportunity to address the customer pricing on more of the freight that with those larger customers.

So locking in...

But the lag time and the delays in repricing to the customer are different than with more transactional freight.

So locking in business in hopes of when the market rolls, you have a chance to reprice it?

Yes. Building the relationship and improving our connectivity with them, taking market share with that customer, helping them in a more holistic way and then as market conditions change, hopefully, our margins can normalize as well.

So to that point you mentioned, what's gone on in July, the volume is up 11%, but net revenues, 1.5%. Can you flesh that out a little bit? What are you seeing in the dynamics there? What are you -- I'm sorry, and then kind of what we should see, I guess, in a decelerating economy, and you're accelerating that share I guess because of those large customer relationships. I guess, how should we look at that split with the volumes up, but the net revenues declining?

So the data points midmonth are always a little fluid. I would say that the general message in our July disclosures is that not a lot has changed. Really, if you look at the volume growth and the margins, we've got a little bit more difficult comparison. We have 1 fewer business days, but that in general, we're having significant market share and volume gains. But it's coming at the -- with margin compression. Where it goes from here, it really depends upon what happens starting tomorrow with the collective pricing decisions and psyche of 50,000 carriers and 35,000 shippers and how they respond to economic growth and freight demand and what happens tomorrow.

But Chad to that point, are you seeing that accelerate I guess? I just want to understand what message you're sending with giving that, the to date in July. I know you've done it in the best, but are we seeing that compression accelerate from where you were last quarter?

No, not necessarily. I mean, last quarter, when we give the stats, I think volume was up 10% and net revenue up 1%. So yes, there's a slight acceleration of that, but it's not -- it's really more of the continuation of the same where our carrier prices are rising slightly faster than our prices to our customers.

And that slight change is probably driven more by comparison differences than any business decisions we've made in the last 23 days.

I'm sorry, John, can you say that again, because of what?

That slight change is likely more driven by comparison changes from July of a year ago versus any business decision we've made in the last 23 days around pricing or margins.

Okay. So it's not getting more aggressive with the pricing?

No.

Our next question is from the line of Matt Troy with Susquehanna.

This is Bascome Majors in for Matt this afternoon. Historically, your business model has worked very well. When the TL capacity tightens and service failures start to become commonplace at primary carriers. I know you briefly alluded to this earlier. But I was hoping you could give us a little more detailed color on sort of where the supply demand balance is today versus -- or even how close you've come to sort of this disruptive environment, which has paid dividends for you in the past?

Based on the service metrics that we have in both our transportation management business and in our core freight services, we still see the market as fairly balanced. There isn't a lot of service failures. There isn't a lot of depth to the route guide would be the most relevant metric that we would talk about, where customers who have structured programs for how they tender their freight, how deep are they going in their carrier selections. The vast majority of the time, those route guide depths are still less than 1.5, which means the majority of the time, the carrier at the top of the route guide is getting the load based on a balanced market, which is why in our freight services, we would continue to try to position ourselves near the top of the route guide commitments because that's the best place to be in a balanced market to make sure you're getting access to the freight and moving what you can. There's a lot of things that could happen that could change that balance. The continued contraction of supply and the lack of ordering of new equipment will continue to put pressure on that supply side. Any kind of economic growth or change in the shipper side or the freight side of it -- but it needs -- we feel like there needs to be some sort of more meaningful economic transition on either the demand or the supply side to really change the environment that's been out there for more than a couple of years now.

Can you recall a time in the past when you have had a supply side driven disruption that really drove this type of revenue growth at your business?

Not like this. I think probably the biggest supply -- the truckers could probably answer better. But from our perspective, at least what feels a little bit unique this time is just coming out of that 2009 timeframe with all of the financial crisis that since then, the change in leverage, the access to financing, the lack of new equipment orders, the fear of driver shortages, the regulatory pressures on hours of service and the cost increases from emission rules. You put all that supply side stuff together and it does feel like we've been talking for several years that the dynamics around how and when new capacity will be added and what cost it will be added at is a little bit unique or maybe fairly unique in terms of this type of the cycle.

Our next question is from the line of Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I guess first, just to summarize what you've been talking about as it relates to some of the productivity gains on a per employee basis, I'm wondering if you can provide some framework to think about transactions per employee over the course of the past 3 or 4, 5 years a period of time. And then frame it -- kind of thinking about what you think the annual productivity gains on a transaction per employee basis can be over the next similar time period, over the next 3 to 5 years.

Right. We don't have and haven't really disclosed any hard stats on transactions per person and one of the reasons is the transaction is not a transaction. So when you look at the different modes of transportation and services that we provide. For instance, somebody can do probably up to 5x as many LTL shipments as they can do truckloads. So it is -- it takes a lot of detail and a lot of things that we analyze internally. So as far as how many transactions per person are we doing, it really depends on the mode. A lot of the times, even within a mode, if -- there can be people who can do 10 truckloads if the -- if it's consistent freight, it's tendered electronically, they have a consistent carrier following or it can take all day to do 1 load. Hopefully, if it takes all day to do 1 load, we're making 10 times as much money or net revenue on that load as we are on each of the 10 loads. So it really gets a lot more complex than that when looking at net revenue or at transactions per person. We use more net revenue per person and operating income per person and how are we doing at managing those. And then where is the compensation expense as a percentage of net revenue. So when we look -- really look at internal productivity, it's far more driven on net revenue per person than it is on transactions per person. And the ultimate measure is really operating income to net revenue when you look at efficiency in our opinion. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: That's fair. John, earlier, you had talked about -- you had mentioned Europe as an opportunity. I know that you've got some new leadership over there. You opened an office recently. Are we in front of an accelerated period of expansion or opportunity in that market? Or is this just a natural evolution of developing your service offerings over in that region?

We've been offering truckload services in Europe for about 20 years, and the growth rate has slowed more recently because of some of the economic strain and slower environment there. But we did just recently relocate one of our executives to Amsterdam to help really lead a greater pace of investment and growth. We're going to open offices a little bit more aggressively, and we feel like, again, over the next 10 or 20 years that there's a really good opportunity to replicate our surface transportation offerings and really grow that business disproportionate to what's happening in the market. That's another example of where we're taking a pretty long-term approach towards it. It's not the greatest environment to really be trying to invest more aggressively and taking market share for reasons that we talked about earlier. But we do feel like our service, our truckload service especially, is working well, and that there's a lot of opportunity for longer term market share gains. And we have ramped up our commitment to it this year.

The next question is from the line of Peter Nesvold with Jefferies. Tavio Headley - Jefferies & Company, Inc., Research Division: This is Tavio Headley in for Peter Nesvold. So what has to happen for yields to move in your favor? Do we need to tip into a loose market?

I think I kind of mentioned earlier that there's a couple of things that could happen, but it's some combination of movement on either the supply or the demand side, and that could either be the continued contraction of capacity and more severe shortages that really start to cause shippers to take a different attitude towards expedited or incremental freight charges or it could be new supply coming in that changes the dynamics and loosens the market, as you suggest. The more likely thing in the short term historically at least has been more aggressive change on the freight demand side. That's an easier needle to move in the short term just in terms of some sort of peak season or accelerated freight demand that would cause a change in that balanced market condition that we've had for a few years.

So unfortunately, we're out of time. That will have to be our last question. We apologize we couldn't get to everybody today. Thank you for participating in our second quarter 2012 conference call. This call will be available for replay in the Investor Relations section of the C.H. Robinson website at chrobinson.com. It will also be available by dialing (800) 406-7325 and entering the passcode 4556404#. If you have additional questions, please call me, Angie Freeman, at (952) 937-7847. Thank you.