C.H. Robinson Worldwide, Inc. (CHRW) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, May 7, 2013. And I would now like to turn the conference over to Tim Gagnon, the Director of Investor Relations. Please go ahead, sir.

Thank you. Joining me on our call today will be John Wiehoff, our Chief Executive Officer; and Scott Hagen [ph], Corporate Controller. Chad Lindbloom, our Chief Financial Officer, is not on the call today as he is recovering from shoulder surgery after a biking accident. Chad will be fine and should be back to work soon. Scott, John and I will be filling in for Chad to cover today's content and questions. John and I will provide some prepared comments on the highlights of our first quarter and we'll follow that up with a question-and-answer session. Scott Hagen will join John and me to participate in the Q&A session. We have a few more prepared comments today and we'd like to get as many of your questions covered as possible. [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 I will be referring to these slides in our prepared comments. I'd like to remind you that comments made by John, Scott, myself or others representing C.H. Robinson may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. Before I turn it over to John, I'd like to highlight a couple of changes in the earnings release and the slide deck. First, we have separated our truckload and less-than-truckload services to provide more detail to the area we formerly called truck. We've received a lot questions about the independent performance of each of these services, and this change will provide more detail than the combined view. We've also added a line for customs, which was formerly bundled in the other logistic services line. Also, with the impact of our purchase of Phoenix International and the divestiture of T-Chek similar to our year-end 2012 earnings release, we have provided pro forma financial measures for net revenue and income from operations to provide meaningful insight and an alternative perspective of our results of operations. We believe that these pro forma financial measures reflect an additional way of analyzing aspects of our ongoing operations that when viewed with our actual results provides a more complete understanding of the factors and trends affecting our business. A reconciliation of the actual results to pro forma numbers is provided in an appendix at the end of the slide deck. With that, I'll turn it over to John to begin his prepared comments on Slide 2 with a review of our Q1 2013 results.

Thank you, Tim, and thanks to everybody who has taken the time to listen to our first quarter earnings call. As Tim said, my comments are starting on Page 2 with our actual results. Our total revenues for the first quarter of 2013 were up 17.3% to just under $3 billion. Our total net revenues grew 9.9% to $455 million. Our income from operations was down 0.5% to $168.7 million. And our EPS was at $0.64, down $0.01 from 1 year ago of $0.65. Turning to Page 3. Tim commented on the notion that we're presenting the pro forma information, so I want to start by walking you through Page 3 and helping you understand how we think the most appropriate way to look at the numbers. For starters, one of the things that's important, we touched on this on the fourth quarter call, that on November 1, when we acquired Phoenix International, from day 1 and over the last 6 months, we have been managing our historical global forwarding business and the Phoenix International business as one combined global forwarding business. I'll touch on the more specifics around where we're at in the integration and how we're managing it together. But because of that, already, our operations and results are combined into one business. So we really can't provide very clear commentary on what things would be like this year with or without our acquisitions. So the best way to pro forma the information is to adjust the prior year 2012 activity, which we're doing on Slide 3 here. So as you see, we're taking, in the center of the slide, the 2012 actual results for Robinson, subtracting the T-Check business that was sold towards the end of last year and then adding in the historic operations of Phoenix from the pro forma information that was previously filed. So what that's doing is calculating the 2012 pro forma information as though Phoenix had been included in the prior year. So the slide on the far right side of the column then is comparing our pro forma information to -- from 2012 to the 2013 actual information. So the way we're looking at our business going forward in this pro forma format, that adjusted for all of the activity, we would report net revenue increase of 3.8%, operating expense increase of 6% and income from operations that are roughly flat. One of the things that Tim will be making a few prepared comments on, we always talk and focus you towards the operating income as a percent of net revenue. If you see down on the bottom, on the pro forma number, that 38.3% pro forma for 2012 comparing to the 37% for 2013. So we'll come back to that later in the presentation, but these are the numbers adjusted as we understand them to be best presented and we'll comment from there. So moving to Slide 4. For total transportation, and this would include the results of all of our business including Phoenix, we see for the first quarter is transportation margin of 16.2%. We've had this ongoing conversation for the last several years around trying to understand our margins and the activity in the marketplace. We added this schedule a while back, and I still think it's a relevant way to start. There's a lot of things folding into our total transportation, and I think the more insightful comments follow by each of the individual service lines. And as Tim indicated, we've rearranged those and broken out LTL separately to try to give some greater clarity around what's happening in each of the individual services. But I do think it's worthwhile to look at transportation as a whole just in terms of our margin percentage for each quarter. It gives you some perspective on the history, as well as what the enterprise margins are looking towards. There's a lot of opinions on how to best analyze the margins around the percentages. Oftentimes, the margin per unit or per shipment is more helpful. But one of the things that when we analyze our business a number of different ways, we do feel that there is a common theme across the transportation margin, that across all of our services, there really does continue to be this theme of handling more volume for less net revenue. So our comments around margin compression and kind of the tightness in the marketplace is revealed at the enterprise level here with the margin comparisons. Moving on then to truckload on Page 5. What you see for the first quarter of 2013 is a net revenue increase of 1.9%. Volume increasing 9% overall, with 5% in North America. Similar to some previous quarters that slower net revenue growth is being driven by a cost increase of 2.5%, with customer price increases of 1.5%. So we're unable to pass through the entire increase of the cost to hire during the quarter. And we shared at year-end that January began slow from a truckload volume standpoint. We did see some improvement to that 5% as the quarter wore on. From a net revenue margin standpoint, it also began very slow. We talked about plant shutdowns and a very slow, stagnant environment at the beginning of the year. So while we did see some improvement throughout the quarter by the end of March, by the back half of March, our year-over-year net revenue margin comparisons were consistent with the previous year. Now there's a comment on the slide here about the market conditions, and I know that in every quarter for the past several years, we've gotten a lot of questions around the market conditions and the competitive landscape. So I have a few prepared thoughts to try to frame up some of these comments or things we've said before, but maybe to try to put it into context a little bit as to how we're thinking about the North American truckload market. If you start with the fact that it is a very large and fragmented market, while we believe we're the largest provider, we still do believe that we're somewhere around 2% or 3% of that share. With more than 10,000 third-party competitors and tens of thousands of asset-based providers that participate in the truckload piece of it, it's really hard for us to get real precise measurements on the industry as a whole or kind of how the market is changing. But what we do know for sure, in the last 3 years, some of the metrics that we have is that we do believe the market is growing slower than the past several years, all the different freight indexes and what we see and hear from our customers, that the market is growing slower. We've used this term that the market is balanced. We have a couple of metrics that we track and are otherwise in the industry around route guide compliance and looking at the level of exceptions and freight tendering in the marketplace. There's also transactional load boards that we have and that others make available in the marketplace where we can see, in our exposure to the market, a meaningful decrease in transactional activity and expedited or short-term type needs. So this balanced market with route guide compliance being high, transactional activity being less, less capacity, very few new trucks being added to the market relative to the overall replacement needs and the size of the market, and numerous data points about shipper/receiver attitudes focused on predictability of their supply chain, lowering inventory, focusing in on efficiency. So when we start to look at the marketplace and the competitive environment, we start with the fact that it does feel like a different market in the last 3 years or subsequent to the recession than prior to that. And those data points would continue to support that in the first quarter and what we're seeing in the second quarter so far. From a competitive standpoint, equally, what makes it difficult is that while there is more than 10,000 registered brokers and third-party providers, more than -- high 90% of those are private companies that we really don't have a lot of great visibility to. For those that are larger or more visible public companies, there clearly has been a shift of many of them more aggressively declaring goals of taking market share aggressively, a few roll-ups with aggressive acquisitions and focus on technology. So while it's really difficult to separate the overall changes in the market and what impact the additional competition or the competitive market is having, we still look at it and say, based on the current market condition then the competitive landscape, it has been more difficult for us to grow both the volume and margin for the truckload services that we provide. I think one other additional level of insight that's interesting that when we think about the competitive landscape and the market conditions, that we also analyze kind of by customer, by industry, by vertical. And there are certain things, the advantage of us being larger and being able to leverage our scale in some instances, but it also gives us exposure to a lot of different pieces where we do have a business in the flatbed sector, which is much softer than some of the others. Our business in Europe is soft from a volume and margin standpoint, given the overall economic conditions there. When we look at some of the industry verticals, we've shared many times in the past around our pie chart of activity is heavily focused on beverage and paper and some of the verticals that have been softer. So when we're comparing to these thousands of small competitors, what's difficult sometimes is there are so many different ways to sell, and a lot of them are aligned with assets and more dedicated freights. Some of them are very specific to temperature controlled. And we have a number of our offices, more than 20 that, have double-digit increases and are doing very well. So there's a lot of different niches, a lot of different ways to sell, a very fragmented marketplace. And I guess the point of all of that is, it's difficult for us to really get our arms around exactly what's cyclical, what's secular, how this is all changing. But we do feel good about our competitive positioning and the fact that we have a unique offering in the marketplace and that we can do a lot of things that others can't. And that while we are very sensitive to more and increased competition, a lot of this is adapting to the market conditions and customer expectations that keep changing. So moving on to Slide 6 and the LTL results that are separated for the first time. A part of what you see is a more consistent net revenue growth and estimated volume activity in LTL. So 12.9% net revenue growth for the quarter to $58.4 million, and approximately a 12% volume increase in LTL shipments over the previous year. Our LTL business has been performing more consistently over the last several years. While we do show a net revenue margin compression for our LTL results, these margins, like every other service, tend to fluctuate. And this margin compression was probably more in the norm of just typical fluctuations from past periods. Moving on to Slide 7 in our intermodal results. While LTL has been more stable, intermodal is probably one of our more challenging service lines from a profitability standpoint. You see a net revenue decline of 6.3% for the quarter. On a slight decrease in volume, close to flat, but also net revenue or net margin compression as well. When we think about our intermodal services, we feel very good about our market knowledge and our capability of executing around drayage and keeping our customers happy and moving the intermodal freight. Our big challenge has really been on that cost of hire in our margin compression. We've been able to keep servicing our customers and participating in the intermodal space, but our margin compression has probably been the most severe of any of the services that we offer, and it's generally associated with -- we're pretty comfortable that we have market-based pricing to shippers. It really is the disadvantage of scale and the contractual and capacity relationships that cause us a disadvantage. We've also talked about, through those contracts and the various pricing mechanisms, the transition in the marketplace that we've had over the last several years to larger, more dedicated accounts with longer-term pricing. We actually feel reasonably good about, again, our pricing and capabilities and our pipeline around new activities, but we recognize that we have some improvement to do on the commitment and capacity side to make sure that our margins and profitability stay competitive as well. So moving on to Phoenix integration on Slide 8. I've got a few comments prepared here on the quarter, let's talk about Phoenix integration. I know that's a topic that many are interested in. I will come back to this near the end around the look forward and talking a little bit more about the forward outlook for Phoenix. So these initial comments are really focused on the first quarter of 2013. So if you look on Slide 8, similar to what we talked about before, the best information that we have is the historical C.H. Robinson global forwarding net revenue for 2012 of $28 million combined with the acquired historic revenue for this quarter in 2012 from Phoenix of $36.8 million of net revenue. So the way we're analyzing the business and holding ourselves accountable at the base of $64.9 million of net revenue in both of the businesses. The combined operation for 2013 has $67.8 million of net revenue or a 4.5% increase for the quarter. When we think about the integration process, we foreshadowed a little bit in the last call kind of how we're thinking about global forwarding and what we're focused on, and the fact that it was going to be a couple of year integration period. If you look at the first 5 months, so November, December, in the first quarter of this year, our primary focus has really been to make sure that we retain the customers and the employees and the business processes that we paid for and that we think are very valuable. So in these early innings of the integration of Phoenix International, our primary focus really is at this net revenue line item. We feel very good about retaining the customers. We feel very good about the combined leadership team. A lot of the effort in the first 5 months was really focused on establishing the combined leadership team and offices. So a couple of data points there. On November 1 of last year, on the acquisition date, there were 75 Phoenix offices that we acquired. There were about 65 offices in the Robinson network that were predominantly focused on international air, ocean and customs services. So that makes 140 offices on closing date. And there are about 25% of the offices. So right around 35 out of those 140 offices where they were located in the same city between Robinson and Phoenix International. So our integration plan is that we are combining those offices. As of the end of the first quarter, about 10 or 10 of the 35 have been combined. So I referenced earlier that we're managing it as one business. In the first 5 months, 10 of the 35 offices have been physically combined. The other offices began immediately co-loading or sharing opportunities where they could. We also put significant effort into combining and realigning the agent strategies around the rest of the world without worrying about which office it benefited or where it went into in terms of Phoenix versus historic Robinson. And we also made all of the decisions from a leadership standpoint in terms of how those offices and regions would be run, and have announced all of those leadership decisions. Another significant effort was really working with the service providers, the steamship lines, primarily on the ocean side, to make sure that we combined the volumes of the 2 businesses. And those of you are familiar with it, in February, March, April time frame is when a lot of the negotiations goes on for those contracts. So making sure that we had a good expectation of combined volumes and negotiating service contracts that provided the right kinds and caliber of capacity for the combined business. So that's what we feel we've accomplished so far. We feel like all of those have gone very well. We feel like the cultural fit between the 2 businesses is very positive. We feel good about the leadership team. We feel good about the market receptiveness, the customer retention and what we'll be able to accomplish by combining the 2 businesses together. While there's a lot of potential for internal focus in all of that, we feel like not only retaining all that business but growing our volumes and improving our net revenue 4.5% during pretty soft market conditions is something that we're fairly proud of. So the overall message on the Phoenix integration is a lot happening, a lot left to happen, but we feel pretty good in the first 5 months. I would say the thing that's going to take the longest from an integration standpoint is the integration of both the information systems and the financial reporting processes that are adjacent to that. We talked last time and still believe that, that's going to take probably an additional 18 months for us to get through those. And again, I'll come back in the end around kind of our overall performance and expectations for the future around the Phoenix transaction. So if you go to Slide 9, the global forwarding results for ocean, air and customs. As we mentioned a couple of times, this is breaking out customs for the first time from the other logistics services so that you can see it. And then here, these variation comments of significant increases in all categories are primarily from the acquired revenues, but also some good examples of specific organic wins and growth in each of the areas. Moving on to Slide 10, and other logistics services. This is one of our higher growth areas, which includes the transportation management services and a lot of the fee-based activities that we've been investing heavily in. So it's really the foundation of additional services and capabilities that tie together the transportation services into those relationships where we're offering integrated services in the marketplace. So we feel very good about how we're positioned in this area to bundle the transportation offerings that we have, but also to provide technology-based services and other management services fees that we think will be a greater and greater portion of our future going forward. A big part of that is a focus in investment in global transportation management as we see more and more of our larger customers focusing in on global procurement and global supply chain metrics, and we're investing in making sure that all of our continents and all of our information can come together in aggregated control towers. Lastly, from a service line standpoint, with regards to sourcing, our sourcing net revenues declined 0.3% in the first quarter. While we had a 6% case volume and an increase in our volume activity, some weather effect around -- largely around rain in categories like asparagus and various vegetable categories did negatively impact our net revenue growth as we've talked before. While we're primarily focused on adding value through the sourcing and distribution of those commodities, we do take some margin risk around the commitments that we make. And occasionally, weather will have a negative or positive impact on the amount of margin that we realize. So those are the prepared comments by service line. At this point, I'll turn it back to Tim for some prepared comments on Page 12 around our financial statements.

Okay. Thanks, John. And as mentioned, I am starting on Slide 12, and there's a lot here. And John touched on it earlier, and I'm going to try to go through some of the important measures to call out on this page. And I'll start with just emphasizing some of the things John had already mentioned in terms of our net revenue growth in total, or the actual net revenue growth of 9.9% in quarter 1 and then the pro forma net revenue growth adjusted for T-Chek and Phoenix at 3.8%. To talk a little bit about our income from operations, as John had mentioned earlier, I want to take us into that a little bit, and I'll be reflecting both on the pro forma numbers, as well as some of the events that impacted the actual numbers for 2013. So the first thing to point out is, and John had touched on this earlier, that the pro forma 2012 operating income as a percent of net revenue was 38.3% in 2012 versus 37% in 2013. That 1.3% variance is largely attributable to an increase in our personnel expense. Our personnel expense did grow faster than net revenues in the first quarter. And I want to highlight one exceptional event that happened in January of 2013, where we had delivered the vested portion of the restricted stock awards from 2005. As of 2005, our executives, directors and general managers received awards once every 3 years. And as a result of that, the size of the awards was larger than for the participants who received awards annually. In most years, the payroll tax expense for the deliveries was about $1 million. But in quarter 1 this year, the payroll tax expense was $4 million in the quarter. So a difference of $3 million that had an impact on that elevated personnel expense number here in 2013. Now, we'll have normal deliveries for the next 2 years in the first quarter. And then in 2016, we'll have another large delivery for a similar type of event. So also, a couple of additional comments regarding 2013 income from operations as a percent of net revenue. We estimate that Phoenix increased our consolidated personnel expense as a percent of net revenue, approximately 1%. We've shared that number in the past as a result of their operating income as a percent of net revenue being less than the historical Robinson business. We also -- I also should note that acquisition operations and additional purchase price amortization tallied approximately $4 million in quarter 1. So that's a quick run through of Slide 12 and our 2013 actual compared to 2012 actual and pro forma numbers. Moving to Slide 13, in some of the other financial information. I'll review this slide from the top left to the bottom right. So starting in the top left. Our net cash declined in quarter 1 as a result of a tax payment on the gain of the sale of T-Chek in 2012. That tax payment was $108 million in quarter 1. Quarter 1 is typically a lower cash flow quarter for us. And you can see the large swing in cash there as a result of that tax payment. Our net capital expenditures were just over $10 million for the quarter. We do expect our capital expenditures to be around -- from $45 million to $50 million in 2013. Moving to the right, our effective tax rate was 38.7% in quarter 1. That's a bit above our expected rate range of 38% to 38.5%. The variance there was largely caused by a change in the tax law on the state of California that changed the law in terms of how corporations must apportion their income for corporate income tax purposes. The law change causes us to source more of our income to California than under the previous law. So based on this, and this will be a change going forward as well, our expected tax rate going forward will be in the range from 38.25 to 38.75. So we've moved it up 0.25 as a result of this change. In the bottom left, a couple of highlights on the balance sheet. We have approximately $160 million of cash and debt of approximately $390 million at quarter-end. And in the lower right corner, talk a little bit about our repurchases of common stock. We've repurchased just over 1.5 million shares in quarter 1. This is a higher amount than our typical first quarter, and I'll explain some of the details around that. So on the left side of that chart labeled repurchase, we show 851,555 shares purchased on the open market at $58.10. And the column labeled withheld on deliveries represent shares withheld from the restricted stock delivery in January that we had mentioned earlier. When restricted shares are delivered to the participants, the participants owe withholding taxes based on the value of the shares at the time of the delivery. Our grant agreements require us to withhold these shares based on the terms of our award agreement. As a result, we deliver the net number of shares after withholding tax to the participants' accounts, and the shares that have been withheld are treated as a repurchase of stock from the participants. And the funds from the deemed repurchase are paid to the government to cover the withholding tax obligation. Moving on to Slide 14, and a bit of a transition from the quarterly results into a perspective over time. In the chart labeled over time, our performance over time, you see some of the key metrics that we look at in our business from total revenue, net revenue, net income and earnings per share. And John reflected on the tough environment that we've been in over the last couple of quarters. But we also pay close attention to our performance over time, and our decisions are often reflective of good balance between the environment we're in currently, as well as consideration for the long-term of our business. So in looking at our business over time, you can see from this graph that we're really proud of our growth over time. And in particularly, in the past 5 years where we've been able to achieve growth in lieu of a very difficult environment, from the 5 years from 2007 through 2012 year-end, we've grown our gross revenues 9.2% during that time, 6.7% net revenue growth, 7.2% operating income and 8.2% in earnings per share. And though our near-term results are not to our expectations, our long-term growth and our growth in a very difficult environment over the last 5 years is something that we do feel good about and we're proud of here as we reflect on a more long-term perspective. So with that being said, I'm going to turn it back over to John to close with some comments around Q2 and 2013 as a whole.

Okay. Thank you, Tim. Our last slide is Page 15 titled, A Look Ahead, just a handful of bullets to comment on here before we open it up for Q&A. The first is just a reminder that our T-Chek comparisons will remain a variance through the remainder of the year. All of the information is available in the pro forma filings. And just in case you weren't aware or hadn't focused it in, our pro forma information will be presented for the next several quarters similar to how we have this time. Moving back then to Phoenix International and kind of talking a little bit forward-focused about our global forwarding business and what our thoughts and expectations are around the Phoenix International acquisition and how we're thinking about things. When you look at 2012, the combined net revenue of Robinson and Phoenix for calendar 2012 is just shy of $300 million. So that earlier slide, that was comparing the historic base for 2012 and how we're doing forward, will aggregate to about $300 million of net revenue for the year in international air, ocean and customs. So that's our baseline and will be the primary measurement metric for this year as we focus on retaining current accounts and managing the combined businesses to serve the customers. So we believe that we can grow the global forwarding business over time at a double-digit net revenue rate. It's going to start out a little bit slower as we become more aggressive around cross-selling, consolidating and expanding our network. We do think that we can accelerate that growth rate. Net revenue growth will be a key metric for us, and accordingly, we've broken that out, including the customs brokerage piece so that we'll all have clean visibility to our baseline and understanding the top line of the forwarding services going forward. We think that the net revenue growth will be the primary measure of how we're succeeding in market share gains and how we're doing in serving our customers. We obviously are hoping for a little bit of market strengthening, which would be helpful to us, when we made that investment decision to acquire Phoenix. Our growth plans were not based on a return to market conditions of double-digit growth, but more to the mid single-digit growth that many are forecasting. And we think we can use our scale and the combined business to improve our margins and increase our market share by selling and further expanding our network to get to that double-digit growth. As far as profitability is concerned, our baseline measurement has always been our branch offices and the branch P&Ls. Phoenix has a similar culture, and one of the many positive fits about our teams was that focus on branches, general managers and branch P&Ls. We will continue to measure and manage the business with branch P&Ls, and empower general managers to run their own business. Under our one global network concept, we will continue to emphasize greater coordination and interaction of the offices, balanced with the local customization and integration of whatever services that the customers want. So while each of our branch offices is unique, with a unique combination of services, shared account, freight mix, et cetera, we're constantly evolving our profit-sharing calculations and processing -- our processes for managing the shared accounts and overhead allocations across that network. While the branch P&L is the foundation, we also analyze our activity by profitability for region, service line, customer, operating center, however else we can. So we've shared in the past that our offices primarily engaged in global forwarding services were not nearly as profitable as the company as a whole. And given our relative scale and market presence, our earnings from those offices also fluctuated much more than the other service lines. That was a big consideration in our decision to invest in Phoenix International. As you can see on Slide 3 in our presentation deck, while the historic profitability levels of Phoenix were at approximately 30% of net revenue for operating income, the purchase accounting amortization will lower those reported earnings. The net effect of all this, that our baseline of $300 million of net revenue, our best estimate of the profitability is somewhere around 10% to 15% prior to any additional integration spending. Our longer-term 3- to 5-year goal is to grow our earnings in those office in excess of the net revenue growth by increasing our operational discipline, leveraging our bigger platform and using our Navisphere platform to drive efficiency. As we achieve that operational alignment and systems consolidation in the first 2 years, then we'll begin to drive greater leveraging of the cost. We'll continue to analyze and share with you in future periods how we assess the combined profitability of the offices, but the actual metrics we use will depend somewhat on how integrated or separate the offices become. And our enterprise level operating income, the net revenue will probably always be the best metric to see how we're progressing as a whole. Our overall goal for the 5 years is to have a global forwarding network of offices that's somewhere between $500 million and $600 million of net revenue, with estimated profitability approaching back to that 30% operating income of net revenue. The network would stand alone and offer independent international forwarding services, but also be a key pillar of the integrated logistics services that we've been working very hard on. If we get anywhere as close to that level of success in achieving our goals, we think the return on investment on the acquisition will be really good and we'll feel very positive about it. So that's some insight into our thought process of how we're looking at the integration, how we're holding ourselves accountable and what the key metrics will be to deliver on that. The next point around truckload margin compression remaining a challenge. I tried to do a little bit more thorough job of kind of laying out the broader market conditions that we're seeing. And I guess part of the point is that while in March and April, we're seeing some leveling of our truckload net revenue margins in North America, it's really primarily driven by some easing of comparisons with the prior year as opposed to us seeing any significant shift in the overall marketplace. We understand better now looking at our history that high periods of growth with price increases, inflation, dislocation in the market, new capacity coming in and being conditioned to the marketplace, all of those things provide more growth, as well as more transactional opportunity for us. We strongly believe that those markets will return at some point. I don't know when, I know everybody's been hoping for that for the last couple of years, but while we did see some improvement in the net revenue margins in March, as I said a couple of times, it's really more about year-over-year comparisons rather than a belief that we've seen a shift in the market conditions that have made growth a little bit more difficult. Lastly, we've talked about this before, but just in terms of our overall philosophy of growing the business, we do feel that for a long-term value creation like on the slide that Tim referenced and when we talked internally, that it's really important that we continue to take market share and generate the scale of the business. And that when we're in a more difficult environment like this, we're not going to do things that we don't believe we can't get a reasonable return on, but that we do err towards the side of making sure that we continue to aggressively sell and go after volume growth and market share gains in the marketplace. And through that, we acknowledge that we do have a lot of productivity challenges that we're tackling head on and taking a very aggressive approach towards making sure that we continue to lower our overall cost of operations, and making sure that we maintain that competitive advantage of having the best processes and being able to be very effective in the marketplace. So there's a lot that happened in this first quarter and a lot of changes going on in the business, and we changed a few things in our reporting. So we took a little bit more time to talk through all of that, but at this point, we'd like to open it up for questions.

[Operator Instructions] Our first question comes from the line of Justin Yagerman with Deutsche Bank.

It's Rob Salmon on for Justin. John, in your prepared remarks, it sounded like the -- obviously, the conversion rate on the Phoenix side of the acquisition is being constrained by the purchase price accounting. It sounds like that the net revenue margin conversion had been 30% beforehand and it's now kind of in the low double-digit range. When we look out over that 5-year plan, how quickly do you expect to ramp up back to that 30% net revenue margin on the global forwarding business? And can you give us a sense where the base is today from the 2 companies combined?

Yes, so a couple of other data points on that. We're still understanding and putting together the seasonality of it too. So one of the things that we'll learn this year, if you see in the historic numbers, both Phoenix and our net revenue is greater in the second and third quarters, and the level of variable operating expense is a little bit less than the global forwarding business. So when you look at operating income to net revenue, there probably will be more quarterly variance on the global forwarding than there will be on the rest of the business through the purchase accounting. So there's $4 million a quarter or about $16 million a year of amortization expense that will run for about 8 years. So today, that amortization expense is reducing the Phoenix reported income as a percent of net revenue by a pretty meaningful amount. If we achieve that $500 million to $600 million of net revenue, that $16 million a year of amortization out in year 5 would represent about 2% to 3% of net revenue. So our goal in 5 years is to get back to the high 20s, 27%, 27.5%, hopefully better than that if we can -- that's probably the high water standard now for some of the world-class forwarders, and we think Phoenix International was doing a pretty good job. So if we can get back to that level with amortization in there, the operating income would be kind of in the mid-20s. I mentioned in my prepared comments that our historic business was not nearly as profitable, and that probably that 10% to 15% range is probably a good baseline for both the Phoenix business because of the purchase accounting and integration costs, and for us due to less profitability in our history. I didn't talk a lot about the integration costs above and beyond that, but one of the things that we covered in the last call, and I think is important to understand as well, too, that our approach towards the integration of this is that while we're spending a significant amount of time and energy to put the offices together and put the systems together, it's really not possible for us to get a nice, clean, quantified determination of what that integration spending is right now. So while we know that our shared services like IT and finance and legal and HR, it's the #1 priority and probably the top resource allocation in all of those groups that we're spending north of $150 million a year on as combined companies. Every single person in those groups is probably touching this in one form or another, but it was really not possible for us to break out exactly how much additional integration spending is hitting us from that standpoint. And a lot of is re-prioritization of personnel cost that is really just an opportunity cost rather than an additional hard dollar.

I'm going to take this opportunity, this is Tim, just to mention that we do have to limit to 1 question per caller just to try to get as many folks as we can on today. And please feel free to follow up with me to get some time scheduled as a follow-up. So thank you, Rob, for that, and we'll move along to the next caller here.

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

Maybe if you can just kind of jump into on the core truckload business where you talk about your rates going up 1.5% and the costs going up 2.5%. Can you delve into -- it's been 6 quarters now where you've seen that underperform your cost. What do you have to do to get that at least to break even on a cost relative to your place basis?

I think there's a couple of relevant points there. One is if you look back, and part of the reason why I put that 10-year history in there that when you look over the last 3 or 4 years, part of our challenge is coming off of historic highs from a margin standpoint that we knew were unsustainable in 2009. We're very short on the buy side as we've talked about before. So our cost of capacity is moving pretty quickly. And those margins expanded quite a bit. So whatever changes in the marketplace and competitive factors there are, those are all being blurred in with coming off of unsustainably high margins that have put that together. When you think about, where do we go from here? Like I said, we've seen some leveling in the current periods, so hopefully, it will be less of a factor going forward. But the main thing is that you've got the supply side who's not adding a lot of capacity and pushing really hard on yield. And you've got shippers who are very focused on stability and grinding out rates. We just need some leverage in the marketplace around more capacity coming in or more growth on the demand side where you have more rate negotiation and leverage to make a change. So we hope we're seeing that soon, but it's the combination of all that stuff that I rambled on around that's impacting the market conditions.

Our next question comes from the line of Anthony Gallo with Wells Fargo Securities.

I want to make sure I understood you right, and then I have my question. So the net revenue of the forwarding business is expected to grow from a base of, say, $300 million today to $500 million to $600 million over the next 5 to 6 years, did I hear that correctly?

You did, so 15% growth would roughly have a double in 5 years, and so double-digit growth would put it between $500 million to $600 million.

Okay. So I guess I want to make sure I understand the components of that growth because I don't think the market's growing at that pace. It doesn't sound like the entire CH network of customers can be harvested for this business. And it also sounds like it's a little bit headcount-intensive at some point, so how do personnel costs not grow in line with that growth rate? So that's -- how do we get there, I guess, is the question.

So what I tried to lay out in my prepared thoughts is that our long-term hope or forecast in the market conditions is mid-single-digit growth. That was the analysis that we came up with versus the double-digit growth that was maybe happening over the decades where things were growing much faster. So I recognize that the market is not there today, but our hope is that we do, over the next year or so, return to more normal market conditions of single -- mid-single-digit growth. We do feel that there are significant opportunities to cross-sell both the international services to the Robinson customer base, as well as improve our margins through better rate negotiation, better consolidation opportunities, as well as expanding our network in Europe and other parts of Asia where we don't have a presence today. So it's the combination of all that, that says that we feel we can grow our net revenue at 10 -- or double digits for that 5-year target. When you look at the expense structure, what we've talked about is that rather than taking people out and trying to squeeze operating expenses out of the network today, we recognize that we are carrying costs through integration that we hope to be able to leverage in the future so that we can grow our business and not have to add the operating cost or the people to drive operating income growth greater than the net revenue growth once we get past the integration phase.

Our next question comes from the line of William Greene with Morgan Stanley.

John, I'm curious about your views on how long you think you sort of have patience for the kind of performance we're seeing in terms of -- really, I'm talking about the bottom line growth rate. Because for a while, we've heard, well, it's the market, and we've got a way for things to come back and we did an acquisition, but there are some onetime things here that are not leading to the growth. How much patience do you sort of have? Because it's been a while since we've seen growth rates that Robinson used to perform at. So I'm curious when the moment arrives when you finally say to the team, we've got to start taking actions internally here and not wait for the market.

I think that was 2 years ago. Well, implied in your question is that we're okay with this or that we're being patient about it, I don't think that's the case at all. There are a number of different sales and productivity initiatives across the North American network that I feel like we've been very aggressive on. I feel like the investment and divestiture that we made last year was directly related to repositioning ourselves to greater scale and adapting to a more competitive market. We've put a number of different initiatives in place. I mean, in these calls, we're trying to explain our thought process and what we're observing. But if you look at -- I mean, we do have this foundation of a variable business model and pay for performance that causes a certain amount of immediate reaction in the lesser performance where we're all feeling the pain in the last couple of years. Trust me, that's not gone unnoticed within the company. And there are a lot of different initiatives. And I would say, probably the most aggressive thing is really, the integrated logistics selling where in this more aggressive environment, we've push very hard with a lot of the customers around return on investment, selling and focusing more on integrated services, where it's a little bit more complex, but it ties us to the customer a little bit better and it feels like that's probably more what our future is about. I don't know if there are other examples or thoughts around your word patience, but I feel like we have been trying to react fairly aggressively.

It was just a comment on -- a lot of it relates to market and what's going -- we need this in the market to happen, that in the market to happen. And at some point, it's sort of like, okay, I get that, but what are you going to do now? And you've outlined some things and maybe I'm reacting to the Midwest mentality, and you sound so nice about it that maybe it's that. But I just sort of feel like the markets, sort of the investors are waiting to see a return to those growth rates and we haven't gotten there. And so it's kind of like, well, when? What's that date? And I guess that was the point of the question, but I appreciate your thoughts.

It's a fair point, so thank you for making it. And I do feel like if you look at our EPS growth over the last 5 years, it's been 8%, 8.5%, something like that, so it hasn't been to our long-term targets. Some of that is coming off of those high comparisons and some of it is because we believe we're in a little bit different market condition. So we're not sitting around waiting for the markets to change. Some inflation, some growth, some increase in demand would be a very good thing for us, but if we never see that, if we never see improvement and it just continues to contract, at some point, we have to hit bottom on margin comparisons and get to the point where our volume growth and our activity will equate more with our earnings growth. And in the meantime, we've got analyst initiatives around integrating the services, leveraging our scale and trying to make sure that we're enhancing our productivity so that if it is an environment of sustained margins, that we'll continue to have earnings growth more in line with our volume growth rather than the 8% that we've had the last 5 years.

Our next question comes from the line of Chris Wetherbee with Citi.

I guess when you think about the transport margin, I know you said it was difficult to kind of break out maybe what the core underlying C.H. Robinson transportation margin looked like x Phoenix, but I guess, maybe directionally, as I think longer-term or towards kind of obviously at the trough end of the long-term chart that you put up on Slide 4, I guess, when you think about the underlying business itself -- I mean this is a broad question, but how do you think about where this goes? I mean it seems with larger customers, there might be further pressure to the downside here. Is it possible that we could be seeing kind of a new normalization in this? I know the market has been different the last couple of years, but just kind of curious if that should change.

There's definitely, as we've suggested a number of times, there's certainly the possibility that it's a new era and a new environment where some of the margins never return to what the historic averages would be. However, when you look at it at an enterprise level like this, there's such a diverse mixture of stuff with ocean and air and LTL and consolidation services where margins can vary quite a bit depending upon your density and your success level from it. Included in those transportation margins are the 100% margin fee-based business for the integrated services and the technology fees and the stuff that's growing pretty significantly. So when we think about the future and the margins and what sort of productivity levels we need to be at to sustain our high levels of return on investment and where we're at, it's making sure that customer-by-customer, office-by-office, service-by-service, that we're taking the right approach of blending all that in to make sure that we keep our returns acceptable.

Our next question comes from the line of Tom Wadewitz with JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you along the lines of the competitive dynamic in truck brokerage. And I think one of the things we've seen from some of your competitors, and I think you've maybe experienced this as well, that in order to see the volume growth, you've had to take greater risk in the market. And so one way, I think, of maybe looking at more of the route guide business and making more contractual commitments, which gives you a bit more risk on filling the capacity side. You think that's a fair characterization? Is that still where the market's at? And do you think that would continue to be the case, that if you really want to grow volumes, that you just are forced by the competitive environment to take more risk on the gross margin side?

That is definitely a trend. I think it really goes back even way prior to the last 3 or 4 years. So really, over the last 20 years, we have evolved our business from more of a pure transactional broker to where we are, a core carrier in the route guide. And even up to 4, 5 years ago when we talked to upwards of half of our business being in that more committed or dedicated framework, where you do have a little bit more margin risk but you also have much more volume certainty that you can work with. Over the last 3 or 4 years, when we make statements like the world has become more committed and less transactional, and route guide compliance is very high, your choices around taking market share for all of us are more within that route guide, around the planned freight and the dedicated stuff that generally comes with a price commitment or as part of a bid. So it is absolutely true what you're saying, that as the market has shifted to more predictable dedicated freight, those of us who are trying to take market share, that's really the only logical place to go get it. But as I said earlier, I think that is part of the broader transformation of the percentage of the marketplace that third parties have been able to address in the last couple of decades by moving into aggregation of capacity and being that core carrier provider that we are with a lot of our large shippers. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: So I guess to be more specific on that though, so do you -- that's been the case, but do you think that continues in that percent that's contractual, would continue to increase going forward?

If the market stays the way it is, yes, it would. And then, as we've talked before, the goal around that would be with those higher volume shippers, you can do things to align more committed capacity. You can automate the process and make it more predictable so that your operating income per shipment can improve. So it's a slightly different business model around how we would think about efficiency and profitability, but if the market stays tighter with slower growth, more controlled, yes, there will be a greater and greater percentage of the freight that operates under that model.

Our next question comes from the line of Scott Group with Wolfe Research.

So just a couple of things I want to clarify and then I had a question. First, in terms of the new reporting on truckload versus LTL, that's pretty helpful. Maybe just for all of us, if you have any history on that, that you can give us, that'd be great. And on the call, do you have any sense on what that truckload net revenue growth was last quarter and maybe for the full year '12?

We haven't decided, Scott, that we're going to share that yet. It's something that we should talk more about here. We more prepared that information for this quarter, here in Q1, so...

And also understand that part of our reluctance to break it out in the past was that there are some definitional variances across our network around perishable freight and what's included in LTL and truckload. And part of what we've been working on the last few years is to make sure that we've had consistent definitions around how we categorize our freight so that we can break it out. So part of the decision tree on sharing history is whether or not it's actually consistent for you to compare to.

Got you, okay. And then, John, I'm not sure if I missed it. Did you give what truckload volumes and net revenue was tracking through April like you've done in past calls?

I did not. I just shared that we are continuing to see more consistent net revenue margin year-over-year, but that we're not seeing an acceleration in demand in the marketplace.

So we should be thinking about transport net revenue margins that are flatfish and -- flattish year-over-year in the second quarter?

I'm sorry, what exactly did you say?

So transportation margin percents that you're saying are pretty flat year-over-year compared with second quarter?

I was talking specifically about North American truckload, and that the net revenue margin percentage was consistent with the previous April.

Okay. That's helpful. And just in terms of my longer-term question, you've been talking on the past few calls about slow leasing, about using more leverage on the balance sheet. And I wanted to know if you can just give us an update on how you're thinking about the balance sheet and buybacks going forward.

The capital policy that we've been operating under for the last couple of quarters that we'll continue to review as we go forward is that we are maintaining our 90% to 100% capital distribution philosophy through both the dividend payout ratio that we have of around 40%, as well as the share purchase activity that for the last 5 years has brought us up to that 90% to 100%. So despite the fact that we have some debt and we have it approved up to $1 billion, we do expect to continue to execute that high return on capital model of dividend and share repurchases like we have in the past. From an overall financing standpoint, we're constantly looking at the amount of dry powder and the pipeline of M&A opportunities. And we've been approved to go up to $1 billion of debt within that framework, and we'll keep looking at the market conditions in our pipeline and figuring out whether we accelerate or pull back our buyback activity from there.

Thank you. Unfortunately, we're out of time. We appreciate everybody taking the time to be on the call today. And thank you very much for participating. The call will be available for replay, and the operator will step in here and give some of those details as we close out. Thank you, everybody, for your time today.

Thank you. Ladies and gentlemen, yes, today's conference will be available for replay. And if you would like to listen to the replay, you can dial (303) 590-3030 or 1 (800) 406-7325, and enter the access code of 4613551 followed by the pound sign. Ladies and gentlemen, that does conclude the C.H. Robinson First Quarter 2013 Conference Call. We thank you for your participation today, and you may now disconnect.