Timothy D. Gagnon - C.H. Robinson Worldwide, Inc. John P. Wiehoff - C.H. Robinson Worldwide, Inc. Andrew C. Clarke - C.H. Robinson Worldwide, Inc..

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson third quarter 2017 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, Tim Gagnon will facilitate a review of previously submitted questions. As a reminder, this conference is being recorded, Wednesday, November 1, 2017.

I will now turn the conference over to Tim Gagnon, the Director of Investor Relations..

Thank you, Donna, and good morning, everyone. On our call today will be John Wiehoff, Chief Executive Officer; and Andy Clarke, the Chief Financial Officer. John and Andy will provide some prepared remarks on highlights of our third quarter results.

We will follow that with a response to the pre-submitted questions we received after our earnings release yesterday. Please note that there are presentation slides that accompany our call to facilitate the discussion. The slides can be accessed in the Investor Relations section of our website, which is located at chrobinson.com.

John and Andy will be referring to these slides in their prepared comments. I'd like to remind you that comments made by John, Andy, 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. With that, I'll turn it over to John to begin his prepared comments on slide 3, with a review of our third quarter results..

Thank you, Tim, and good morning, everyone. Thank you for taking the time to listen to our call this morning, and I'll start right in with the results for our third quarter.

Total revenues increased 12.8% in the third quarter, driven by volume growth across most all of our transportation services, increased pricing, and higher fuel costs compared to last year. Total company net revenues increased 6.3% in the quarter.

APC Logistics added approximately 2% to our total net revenues in the quarter with organic net revenues up approximately 4%. This will be the last quarter where APC integration will be highlighted as we have now fully cycled through the first year of the acquisition.

Operating expense growth outpaced net revenue growth in the quarter, resulting in a year-over-year decrease in operating income and net income. Operating income was $194 million in the third quarter, down 8% from last year, and net income was $119 million, down 7.6%. Average head count was up 8.7% versus last year's third quarter.

The APC and Milgram Global Forwarding acquisitions accounted for about 5% of that increase and the remainder was organic. Diluted earnings per share was $0.85 in the third quarter, down from $0.90 last year.

Andy will be talking us through the deck and our results by business segment, but before he does that, I'd like to highlight a couple themes that you'll hear throughout our remarks. Hurricanes were obviously a significant event this quarter, and like most in our industry, they did impact us, too.

Our offices in Texas, Louisiana, and Florida all had to deal with the difficult circumstances of the storm. Many on our team gave extraordinary effort to take care of personal challenges while continuing to serve our customers.

We often emphasize how critical it is in our business to have the right people, culture, and teamwork in place, and there are some incredible examples of Robinson team members going above and beyond to make it through these catastrophes. I want to start by thanking them for their hard work and commitment to Robinson and their customers.

In terms of the financial impact of the storms to Robinson, there were two types of impacts that you will be hearing more about. The most immediate impact is in the areas where we lost or gained shipments and product orders due to the storms.

We estimate those impacts likely had a net positive impact on our NAST division and a net negative impact on Robinson Fresh. The other impact from the storms is the resulting price increases in the North American truckload market due to the storm disruption.

In our Q2 commentary on our results, we discussed, at length, the rising cost of truckload transportation and how we were adjusting to the market. While it's not possible for us to isolate the pricing impact of the hurricanes, they clearly contributed to further escalation of price increases in the quarter.

Andy will cover our metrics on truckload price increases and how they escalated throughout Q3. While rapidly rising prices does often create incremental spot market activity, it can also create more margin compression on committed pricing arrangements. We experienced both of these impacts in our Q3 results.

The pricing trends and required adjustments to market conditions that we discussed at length last quarter continued and were accelerated by the hurricane impacts. The other theme that you will continue to hear from us is in regards to increased focus on reducing our operating expenses.

We are committed to continued efficiency and productivity gains that will help us reduce our operating expenses in future periods. As we stated last quarter, we continue to focus on growing our net revenues and expenses at similar rates over longer periods of time.

As we continue to invest in acquisitions, technology, and diversifying our business, we will also be very focused on cost control and driving efficiency gains. So, with those introductory comments, I will turn it over to Andy..

costs related to the addition of APC and Milgram of approximately $6 million, which includes amortization; a higher allowance for doubtful accounts of $3 million; claims of $2.5 million; and real estate expenses of $1.6 million. Operating income as a percentage of net revenues was 32.7% compared to 37.8% in last year's quarter.

However, it is up 100 basis points from Q2 of this year. We did have one less business day in this year's third quarter when compared to last year, which equates to over $9 million of net revenue. The effective tax rate was 35.2% in the third quarter, and year-to-date, 34.2%.

Our tax rate has had some variability through the year as a result of new accounting rules related to stock compensation and our APB 23 election last year. We will continue to manage our tax expenses and look for ways to drive down the effective tax rates. Slide 5 and other financial information.

We generated $68.3 million in cash in the quarter and have $13.4 million in capital expenditures. The largest driver of the decrease in cash flow from operations versus last year was the increase in accounts receivable during the quarter.

Increased volumes, customer rates, and costs of transportation, including fuel prices, resulted in increased growth in working capital. While we need to do a better job of working with our customers to drive down our DSO, it is normal to see receivables grow during periods of accelerating top line growth.

We finished the quarter with $297 million in cash, up just over $24 million from Q2. Our debt balance is $1.47 billion, up $127 million since Q2, as a result of the Milgram acquisition and increased working capital needs. For the year, we expect total capital expenditures to be approximately $60 million.

On to slide 6, on our capital distribution to shareholders. We returned approximately $125 million to shareholders in the quarter, with just under $64 million in dividends and approximately $61 million in share repurchases. In the quarter, 105% of our net income was returned to shareholders.

Year-to-date, we have returned 92%, which is in line with our stated annual objectives. And now, to slide 7 and net revenue by service. As a reminder, this slide represents the service revenues for all of our business units. I will not review this slide in detail, but rather make comments about the various services within the business segments.

Slide 8, and our North America truckload price and cost chart. On this graph, the light and dark blue lines represent the percent change in North America truckload rate, and cost per mile to customers and carriers net of fuel costs since 2008. The gray line, of course, is the net revenue margin for all transportation services.

In this year's third quarter, the North America truckload rate per mile, net of fuel, was up 6.5% versus last year, while the cost per mile increased 8.5%. The last time we saw this great of a sequential change in the price and cost versus prior year was in Q1 of 2014, when snowstorms blanketed most of the United States.

The year-over-year change in purchased transportation costs did rise through the quarter, increasing 6.5% in both July and August, and 11% in September. Customer pricing also increased throughout the quarter, but continues to lag the increase in costs.

Our transportation net revenue margin increased 20 basis points sequentially as both NAST and Global Forwarding had higher net revenue margins than in Q2. Slide 9 and our transportation results. The transportation total revenue for all segments were up 14.5% to $3.4 billion in the third quarter.

The drivers of our total revenue growth were strong volume growth of 8% across all our service lines and rising prices in most transportation services. Versus last year, transportation net revenue margin decreased 16.4%. This was the result of lower margins on our NAST services and higher fuel prices.

The mix shift of a higher share of Global Forwarding revenues in this year's quarter partially offset that decline. And now, slide 10 and the reportable segments. In the North American Surface Transportation segment, total revenues were approximately $2.5 billion in the third quarter, an increase of 9.6% over last year.

NAST net revenues decreased slightly to $377 million in the quarter. NAST September 2017 net revenues, however, increased when compared to September of last year. Net revenue margin was 15.3% in the third quarter, down 150 basis points from last year. However, margin did improve 20 basis points sequentially.

The lower year-over-year margins were primarily the result of increased purchased transportation costs in both the truckload and LTL service lines. Our truckload contractual business had lower margins in the quarter compared to transactional business, which improved significantly late in the quarter.

As a reminder, we have tens of thousands of unique contracts, and last quarter, we mentioned the importance of account management and the focus on award management in the contractual business.

This is always a priority when we are in an environment of increasing cost, and our account managers did a nice job of fulfilling our commitments while pricing opportunities outside of those commitments at a higher spot market rate. NAST income from operations was down 11.8% to $151 million.

Operating expenses increased 9.5% as a result of an increase in both personnel and SG&A expenses. The increase in personnel expenses was driven by an increase in cash compensation from additional head count and higher variable compensation expense when compared to last year's third quarter.

The increase in SG&A was the result of a higher allowance for doubtful accounts I explained earlier, as well as increased overhead charges related to higher spending and technology development. NAST operating margin was 40.1% in the quarter, down from 45.4% last year.

Employee count was 6,998, up 1.9% from last year's third quarter, and flat sequentially. Now, slide 11 and the results by service within NAST. NAST truckload net revenues were $267 million, down 2.1% from last year. On our second quarter call, we mentioned that we were adapting to the tight capacity and rising price environment.

We have and will continue to honor our customer commitments, and actively manage our freight opportunities as customer routing guides deteriorate. Truckload volume was flat year-over-year in the third quarter, and this decline in volume growth relates to lower volumes in committed freight as routing guides deteriorated.

The lower contractual volumes were offset by higher volumes of transactional shipments in this year's third quarter compared to last year. We often highlight routing guide performance measured in our Managed Service business to quantify the impact of market volatility.

The month of September represented the most volatile routing guide performance we have seen since early 2014. On a national basis, the routing guide was2.2 and spiked to over 5 in certain markets. The transactional volumes were driven in large part by the hurricanes in late August and early September.

We estimate the additional volume generated in support of the relief efforts did benefit our business overall, though the opportunities to support the relief efforts were partially offset by the fact that two of our largest inbound and outbound markets were essentially offline for a week during the quarter.

We added 3,600 new carriers in the third quarter compared to approximately 4,200 added in last year's third quarter. Though this new carrier count is down from last year, these new carriers moved approximately the same number of loads, 18,000, as the 4,200 moved last year. LTL net revenue increased 4.8% to $97.6 million.

Volumes increased 6.5% when compared to last year, and purchased transportation cost increased in the quarter, putting pressure on margins. Strong demand in the manufacturing and e-commerce sectors drove the growth in the LTL business, and the rising truckload cost benefited LTL volumes as well.

Intermodal net revenues decreased 1.4% in the quarter, with volumes up 13%. Over the past several quarters, we have been growing our contractual business at lower margins, while transactional volumes are down quite a bit from last year's third quarter. And now to Global Forwarding.

First, let me say congratulations to the Global Forwarding team, whose results were remarkable. They achieved record net revenue and operating income for the second quarter in a row. The entire organization has proven successful in maintaining solid organic growth while integrating both the APC and Milgram acquisition over the last several quarters.

Total revenues for Global Forwarding segment in the third quarter were $552 million, up 41.3% versus last year. Third quarter net revenues were $129.8 million, a 39.1% increase from 2016. APC Logistics and Milgram & Company contributed 18% to the growth, while organic growth was an impressive 21% in the quarter.

Net revenue margins were 23.5%, down slightly from last year. Income from operations was up 82.6% to just over $31 million, and operating margin was 24% in the quarter, up dramatically from 18.3% last year as the team operated very effectively.

Headcount increased 20.8% in the quarter compared to the third quarter of last year, with APC and Milgram representing approximately 650 employees or 18% of the additional head count in the business. Again, congratulations to our Global Forwarding teams, including APC and Milgram & Company. Moving on to Global Forwarding service lines on slide 13.

Ocean net revenues were up 44% with the acquisition of APC and Milgram contributing approximately 17% to the growth. Ocean shipments increased approximately 22% in the quarter. Air net revenues increased 32.7%, with the acquisitions contributing 15% to this growth.

Net revenue margins did decline slightly in the air services during the quarter as we continued to execute on our strategy to grow volume and density in our air gateway cities. Air shipments increased approximately 28% in the quarter. Customs net revenue increased 41.4%, with the acquisitions contributing 30% to the growth.

Customs transactions increased approximately 52% in the third quarter. As mentioned, the integrations of both APC and Milgram are going well, and one of the drivers of the net revenue growth in the quarter is the conversion of former APC agent business into our Global Forwarding network.

We expect successful agent conversion, albeit on a smaller base, with the Milgram acquisition. Transitioning to our Robinson Fresh business on slide 14. I will start my comments by touching on the hurricane impact to the Robinson Fresh organization.

The hurricanes in both Texas and Florida had a negative impact on the Robinson Fresh cases volumes and net revenue in the quarter. We have service center facilities in both of these locations that were shut down for 7 to 10 days as a result of the storms.

Like the rest of the organization, the Fresh team did a great job of working with their customers and providers to assist them during this challenging time. Robinson Fresh total revenues were $614 million, an increase of 3.9% in the third quarter. Net revenues were $54 million, down 4.9% from last year.

The decrease in truckload net revenues was primarily the reason for net revenue declines in the quarter. Robinson Fresh operating expenses increased 8.6% in the third quarter. The increase was primarily due to increases in both personnel and SG&A expenses.

The SG&A increase was primarily the result of an increase in warehousing expense related to expanding facilities. Income from operations was $11.6 million, a decrease of 34.7%, and Robinson Fresh average head count increased 1.5% in the quarter. Slide 15. Robinson Fresh sourcing total revenues decreased 1.8% in the third quarter.

Sourcing net revenues were virtually flat when compared to last year's third quarter. A slight increase in net revenue margin was offset by a case volume decline of 1%. As mentioned, the hurricanes negatively impacted Robinson Fresh case volumes and net revenues in the quarter. And now to slide 16 and the Robinson Fresh transportation business.

Robinson Fresh transportation total revenues increased 12.7% in the third quarter of 2017, driven by volume growth of 13%. Robinson Fresh transportation net revenues decreased 10%, however, primarily due to truckload net revenues declining 13.9% in the quarter.

The margin compression of Robinson Fresh truckload business is the result of a higher concentration of contractual business within their portfolio of customers. Fresh truckload has a significantly higher portion of its business committed versus NAST.

We continue to see strong volume growth in the Robinson Fresh transportation business, with a 13% year-over-year increase in the third quarter. Other transportation services, which include LTL and intermodal, had a good quarter with 9% net revenue growth. Moving on to All Other and Corporate on slide 17.

All Other includes our Managed Services business, as well as surface transportation outside of North America and other miscellaneous revenues, as well as unallocated corporate expenses.

Headcount was up 13.4%, and this was primarily the result of personnel increases in technology, other enterprise resources, European Surface Transportation, and Managed Services.

Slide 18, net revenues for the Other category increased 7.9% in the third quarter of 2017 compared to the same period in 2016, led by the continued strong performance in our Managed Services, aided by an increase in net revenue in the European Surface Transportation business.

Managed Services net revenue increased 10.8% in the third quarter of 2017 to $18.5 million. This net revenue increase was a result of new business. Other Surface Transportation net revenues increased 4.2% in the third quarter to $13.9 million.

The increase was primarily the result of truckload volume growth in Europe, partially offset by truckload margin compression. I will conclude my remarks by again thanking the Robinson team for their performance during the quarter. We made some large improvements versus Q2, and look to build on those as we close out the year and go into 2018.

The disruption in the quarter provided everyone with a glimpse of how established organizations with the right people, the right process, and the right technology perform when supply chains simply don't. Thank you for listening to us this morning. I will turn it back to John to make some closing comments before we answer some of your questions..

Thank you, Andy. So, before we move to those questions, I will wrap things up with some final comments. In October to date, our total company net revenue has increased approximately 8% per business day. This does include additional revenues from the Milgram acquisition. Our North American truckload volume growth is flat versus October to date.

With regards to our current priorities and key initiatives that we are focused on, there are a couple of thoughts to share. As was talked about, our Milgram acquisition in Canada is being integrated into our Global Forwarding network.

As you've seen in our results, our Global Forwarding team has good momentum and has been very successful at expanding our global network. We expect this integration to go well, and it will be a key priority for us as we continue our growth in Global Forwarding.

Adjusting to the market and the changes in truckload pricing will be very important over the next couple quarters. Our account management practices, including how we price and change with the market, is always an important component of how we serve our customers.

The current market events, including the storms and the ELD requirements in December, are contributing to increased price volatility and changes for all of us. We need to get committed truckload pricing right over the next several quarters to ensure consistent service as the markets change.

The last two bullet points around focusing on growth and operating expense control are not new ideas, but we definitely have some new focus areas and priorities. Selling, servicing our customers, and growing our market share continues to be at the core of our business model and approach to creating value.

All of our operating divisions have updated go-to-market strategies, and we believe there are significant opportunities for market share gains across our company. We have new capabilities and visibility, analytics, vertical expertise and order management, to name a few of our priorities.

We will remain aggressive in innovating and growing our services. Efficiency and cost control is also not a new idea, but worth sharing how we're thinking about productivity and expense control.

Many of our initiatives and priorities tie directly to our digital strategies and network transformation that we introduced to you at our Investor Day earlier this year. As we continue to invest in our Navisphere platform and digital capabilities, we are evolving our operating networks with the goal of significant efficiency gains.

Those iniatives include some office consolidation, driving increases in automated exchanges with shippers and carriers, and supporting internal process automation in Navisphere. As we continue to invest in our people and our Navisphere platform, we'll also be elevating our goals for productivity and efficiency gains.

In addition to the personnel efficiency goals, we are also creating new focus for all general and administrative cost categories to look for opportunities to reduce costs as well. That concludes my prepared comments, and with that, I will turn it back to the operator so we can answer the pre-submitted questions..

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

Thank you, Donna. And I'll kick off the Q&A here by thanking the many analysts and investors for taking the time to submit questions to us last evening. I'll frame the question up and turn it right over to John and Andy, and we'll jump right into it now. And the first question is for Andy. Please discuss NAST truckload volume growth.

Was there a tradeoff between contractual freight and transactional freight that resulted in flat volumes during the quarter, or some other factor? If possible, can you provide an idea of how much volume was contract versus spot in the quarter?.

Yeah, thank you. The volume levels and growth that we saw during the quarter were pretty consistent for July, August, and September.

We've talked at length about our account management and award management, and the account managers out there having conversations every day with their customers, particularly as the quarter progressed and routing guides continued to deteriorate, and in some cases, actually outright failed.

And as a result, our spot market business grew greater in September – the last two weeks of August and into September than the committed volume basis on that time period..

Thanks, Andy. Next question for John.

Given your experience in transportation space, how would you characterize the current market? Are there any other historical times you could point to that mirror the current environment? Given your experience, how are you thinking about the potential duration of this cycle maybe in relation to prior cycles you have experienced?.

So, looking back at history and trying to decipher if there's anything to be learned about kind of where we're at in this cycle, I guess I would start by referring the group back to slide 8 in our presentation that Andy spoke to on pricing. There's 10 years of history there.

This is information that is pretty critical to how we think about where we're at in the cycle. So, if you look at those dark and blue lines on slide 8, and the 10-year average of activity, we've pointed out previously that this ten-year average is about a 3% increase.

So, while there's ups and downs in cycles across the past periods here, the average is maybe a little bit greater than inflation in terms of both customer and cost increases during that period of time.

I think the specific answer to the question is that when you see the pricing and cost lines racing upward in 2017, looking back in 2014 during the snowstorms and early -- late 2009, early 2010, during the recovery of the financial crisis, you see two other periods where the cyclicality of the pricing was racing northward, and it felt very similar to the period that we're into today.

When we study this past and our pricing behavior, and think about how long will this cycle last and what might we learn from it, a couple more observations that I would share, I guess, is that if you look at the 2017 activity, we are coming off of almost a full two-year period where average pricing was below that 3% long term.

So, coming into this year, there had been a fairly meaningful period of price adjustments that were below the long-term average. And I don't think there's anybody in the industry that I've spoken to that doesn't expect prices to increase in 2018. So clearly, some momentum for continued upward movement.

When you think about the cyclical and secular changes, and what might be different this time around, obviously, ELDs and the pending regulation changes in December are a significant item as well, too.

So, I think probably the biggest unanswered question of the cycle versus the secular changes is, are these increases that we're experiencing this year, might they sort of peak in 2018 in a normal cycle or will ELD and capacity-related changes make the upward part of this pricing cycle extend even a little bit longer.

So, the summary is there are periods of time where these upward price changes feel similar to 2014, 2009, but then there are also some kind of interesting questions that – where history may not be a good guide as to how long this cycle may last..

Thanks, John. Next question is for Andy.

What was the split of contractual versus transactional volumes in NAST truckload during the third quarter? Given the material change in spot truckload conditions during the third quarter, do you expect to materially shift this mix towards transactional volumes during 2018?.

The answer to the first question is we saw approximately a 10-point swing in our ratio of committed or contractual to spot.

So, we ended the quarter just under 60% of our business being in that committed and contractual and just 40% to slightly above on the spot market, which is down from where we had seen that ratio in the high 60%s – so, 65%, 66% earlier in the year on the committed, and 33%, 34% on the spot.

So, we did see that shift, as I mentioned in the first part of the Q&A, that we did see that shift. Now, as it relates to the expectations for the rest of the year or 2018, that's the great news, is we have wonderful account managers and salespeople that are out there having conversations every day with their customers.

And I will just dovetail with what John was saying in that last comment and referencing the slides. So, we are having those conversations with the customers. And at corporate, we don't have a specific view. Our account managers are out there having those conversations, and we're talking about rising prices.

We are talking about routing guides, and we are talking about where our customers want to be in a committed or a spot market scenario. And so those conversations are happening every day, and we talk about the rotation and the cadence with which we have those conversations. Roughly 60%, just less than 60% happen in Q1 and Q2.

And we're having those conversations even starting today in the fourth quarter going into next year. And where it shakes out is where it shakes out, but it will depend on the balance between those customers and our viewpoint on where prices are going to end up..

Thanks, Andy. Next question for John.

At what point does automation of various elements of the brokerage process enable the company to scale back the head count growth, if ever?.

This is the question that we wrestle with a lot around our digital transformation and applying the technology to our business, and trying to figure out what our growth and productivity expectations should be.

One thing that is important to understand in this is that we do feel like we have already seen some meaningful benefits of automation and the related head count and productivity gains. Our implementation of segment reporting and the diversification of our business, I think, is pretty relevant to this topic.

If you look at where a lot of our head count additions have come over the last several years while we've been taking market share, we've grown a lot in Global Forwarding in other parts of the world, where the labor equation and the processes are very different. We have invested a lot in building our own technology as opposed to buying it.

So, you see a lot of head count additions in our IT area, where we're hiring and training developers, and making proprietary tools as opposed to just purchasing it from others.

And you also see significant head count additions in our Managed Services business, where we're growing with more integrated and combined software and people solutions that are different.

So, if you take those aside and look back to kind of the more digital automated processes of truck brokerage and kind of some of the core activities that we do, we have already seen in certain job families, much more significant productivity improvements in the number of shipments per person and the level of activity that has gone on.

As we look forward and think about continuing to invest in the platform, I mentioned in my prepared comments that we do feel, with scaled carrier centers and leveraging mobile technology and leveraging API technology, that more and more, we are going to see significant gains in those productivity opportunities within select job families, where the technology can make a greater and greater impact on it.

So, we are going to do the best we can to be transparent around the various components of the business, and what impact the technology investments and automation are having on them and their outcoming efficiencies..

Thanks, John. And the next question is for Andy.

What were the drivers for the strong organic net revenue growth in the Global Forwarding business?.

The Global Forwarding team continues to do a great job of focusing on their go-to-market strategy. They have had a wonderful execution over the last several quarters. They've got great account management when they go and engage their customers. We're the number one -- we have retained yet again our number one NVO status from China to United States.

We built out a global platform, and the team has done just a wonderful job of staying focused on the execution and staying focused on their go-to-market and building out the areas of ocean forwarding. I mentioned in my prepared remarks, our gateway cities.

And obviously, on the customs side, we've been able to integrate now, coming up on our second acquisition, and at the same time, use those as leverage points to go in and have more conversations with our customers..

Thanks, Andy. Next question for John. Please discuss the competitive landscape.

Given the shifting freight environment, does that create more opportunities for startups or nontraditional providers, or does it support traditional models? Has there been any discernible shift to new entrants in the market?.

The overall answer to the question is no, we have not seen any discernible shifts in the competitive landscape, but let me expand on that a little bit because when you go to a large shipper's carrier conference or when you interact with them, one of the things that you're constantly reminded of is that it is a very fragmented, competitive landscape.

It's not uncommon for there to be several hundred providers in the room, and probably several hundred more who didn't have enough activity to get invited to events like that.

So, much of what we learn about the competitive landscape in any one customer or vertical does become more anecdotal around what you see and hear based on who's doing press releases or what other activity may be going on.

Another comment that I think is relevant, though, is that during times of more stable route guides and more stable prices, or particular declining pricings, I do think, in general, it's more typical for a shipper to think about renewing incumbents at flat to declining prices and keeping volumes static, or growing volume in those lower or to declining prices.

When we go through a period of time like we're in now, where prices are rising rapidly, that puts pressure on all of us, the shippers and the providers, to kind of reprice and think about where there might be opportunities to be more efficient or where you can mitigate some of the price increases that are happening in the marketplace.

Those environments probably are more naturally logical times for new entrants or new participants to participate and to get some freight.

Almost every shipper that I've ever interacted with is thoughtful and probably cautious about how and when they introduce new providers, to make sure that they put them in the right spots and test them, and see if they get traction over time.

So, there may be, in this type of an environment, a better opportunity for newer players to insert themselves where others are leaving in the route guide or where prices are increasing significantly, and then it takes time to sort out who gets traction and who can really provide the service metrics and keep the customers happy over a longer period of time..

Thanks, John. Next question on SG&A for Andy. You mentioned an increase in the provision for bad debt, claims expense and warehouse cost.

Was there anything one-time in nature related to these expense increases or were the increases tied simply to the increase in volume handled during the quarter?.

We had a little bit of expense related to the acquisition of Milgram during the quarter, not really material, which I would consider to be one-time. As it relates to the allowance, as it relates to the claims and the warehouse, there's nothing in there that is one time.

I would like to expand a little bit on the allowance, though, and that as volumes increase, as that gross revenue number arises, we will see that allowance, and we'll balance that against what our actual experience is in bad debt write-offs. And over the last several years, we have not seen, knock wood, a material change in any way on our experience.

So, despite the fact that we're growing our gross revenue nicely, we're not writing off any more than we ever have. It's just the way the accounting rules work, is when you have more of those revenues, you need to reserve for them, but we balance that against what the actual write-off is.

The warehouse expense that we mentioned, we put that in, in the fourth quarter of last year. So, on a year-over-year basis during – in future periods, there won't be a change to that. Claims, you look at them from two perspectives. One, the frequency; and, two, the severity.

And in the quarter, we had, I would say, a greater number of less severe claims than what we might have experienced in the past. So, nothing unusual about those items either..

Thanks, Andy. Next question for John.

What is your forecast for margin improvement in the Robinson Fresh truckload business?.

Our forecast would be gradual margin improvement over the next several quarters. Because the Robinson Fresh business is – the transportation truckload business is more concentrated in 12 to 15 larger shippers, where it's generally longer length of haul, generally mostly temperature-controlled type freight.

It is much more committed than the broader book of business, and repricing cycles will generally take longer. Given some of the unique dynamics in the marketplace, as you saw in the Q3 results, the margin compression sustained itself in the Robinson Fresh truckload business more this quarter than it did within NAST.

We will be using the same account management techniques and processes, and adjusting to the market, just like we have been within the NAST business, but it will take a little bit longer, and hopefully, will show gradual improvement over the next several quarters..

Thanks, John. Next question on APC for Andy. With regard to last year's acquisition of APC Logistics, can management provide an update on its progress bringing agency business in China and Europe onto the core C.H.

Robinson platform? Does strong global trade demand create a favorable environment to win the business? Also, can we expect to see similar net revenue opportunities from agent conversions in the Milgram business similar to APC?.

I will start with the middle question, which revolves around strong global demand. Yes, certainly, strong global demand does help us and others win business. We are growing well in excess of the overall marketplace, but it's always helpful to have a growing marketplace.

With respect and regard to the APC acquisition and the conversion of the agents, yeah, it's gone very well. The team, our C.H. Robinson team in Asia and our C.H.

Robinson team in Europe have worked very well with our new company, APC, in Australia and New Zealand to identify the customers, to identify the business processes, and identify the right way to convert that business onto the platform.

And we're happy to report that virtually all of the business that APC had controlled through other agents in those markets have converted over to the C.H. Robinson platform. It's worked very well, and I would also add that, in addition, it allows us to now – so that's just one part of it.

With all the other customers that we and they had both independently, when you respond to global RFPs, one of the boxes that you have to check are whether or not you have a company store or your own brand in those other markets. And if you don't, there are some customers that do not allow you to bid on that type of business.

We are now getting access to a lot more organic growth and organic opportunities because we and they both have had customers that, in the past, would not allow us to execute that level of business in those lanes because we were each other's agent. But now that we are all C.H.

Robinson, we are getting access to a lot of that freight, and we would expect that to continue into 2018 and beyond. As it relates to Milgram, again, we are in the very early innings of the Milgram acquisition, but progress is going very well. It is a smaller base.

It's a smaller company than APC, but we do expect to see those opportunities from agent conversions in the acquisition..

Thanks, Andy. Next question for John. Please discuss the ELD mandate's impact on the business over the last few months..

The impact of the ELDs over the last few months has really been not significant. There's been a few protests and a lot of discussion about it, but with the pending regulations in December, we really haven't seen any meaningful changes to date.

The possible exception is that when people are thinking about committed pricing and looking to the future, given that everybody is expecting some capacity contraction and impact around it, it could be impacting people's thoughts and attitudes around what the future pricing may be.

The more common question around what do we expect the ELD mandate impact to be in Q4 or going forward, you know what, I think we have answered that a number of times and still have the view that similar to hours of service or CSA regulatory impacts in the past, that there will be an impact.

There are lots of estimates around how significant it will be. We understand that there will be a market reaction, that there may be some capacity that chooses to exit the marketplace, or some may route their capacity or limit their miles differently.

But overall, we feel like that will get worked through in the first quarter or two of next year, and we will be helping shippers adjust to any changes in the marketplace that happen from it..

Thanks, John. Next question for Andy.

What was the average net revenue margin on spot truckload brokerage business in the third quarter? How much better was it than the contractual business?.

We do not and have not broken out net revenue margins on any of our truckload business, whether it's spot or committed. What I would offer is that for the first two months of the quarter, which were more on the stable side, what we've experienced historically is during those stable periods, you see that committed and spot tend to walk in lockstep.

And so, there's not a material difference between margins on committed and spot. But, when Harvey hit and then Irma hit, and you get the last two weeks of August and then all of September, there was a dislocation in the spot market. And we saw the spot market margin jump several hundred basis points during that time period..

Thanks, Andy. Next question for John.

What specific controls and operational efficiency targets are planned for the fourth quarter and beyond?.

One of the challenges that we have to be specific with our targets is that we have so much of our cost structure that is variable, and so much of it is personnel-oriented, which is pay for performance, that it's hard to target a lot of specific metrics on exactly what we hope it to be, because in many cases, if we're successful at growing our net revenue and growing our margins, it's going to drive increased costs as well, too, which are the good kind rather than the inefficient kinds that we're trying to get rid of.

When we think about moving forward, it's our overall statement that we think we can improve in all areas of the business. And improve means that key metric of income from operations as a percent of net revenue, that for some of our smaller divisions or our larger divisions, we are cycling up and down.

When we cycle up with pricing and expanding margins, that typically helps us gain some improvement in those overall cost metrics.

So, by leveraging our technology and process improvements that I talked about earlier, and taking advantage of cyclical expansion of margins, those are good periods of time for us where we can hopefully show some improvement in our efficiency metrics.

The other component of that, that I would like to sort of reemphasize along with this question is that as we've diversified our business over the last 10 years, mix has a pretty meaningful impact on that key metric.

If you look at our segments and you look at the Global Forwarding business, particularly since we've acquired a lot of the Global Forwarding business, the adding back the depreciation and amortization from those deals, and looking at the operating metrics for our Global Forwarding business separate, I think you see improvement in there.

And while it's lower than the enterprise total, a lot of it is from the accounting impacts of the acquisition.

So, we will be looking for relative improvements in all of the operating divisions based on the plans that we have in place, and our core cost and efficiency metric is that income from operations to net revenue relationship adjusted for whatever M&A activity there might be..

Thanks, John. Next question for Andy.

Considering the investments in and utilization in data analytic capabilities during 2017 that were credited with CHRW's material improvement in awards per account during this year's bid season, is there any reduced confidence in those advancements' ability to sustainably drive share gains in NAST, considering 3Q 2017's truckload volume was essentially flat?.

Short answer is no. There is not any reduced confidence in either the advances that we made, the teams that we've assembled, the analytics team that we've assembled, or the algorithms that they are using. The longer answer is, it's a lot of arts and sciences.

And the science is in the algorithm and the art is in the account management and the wonderful people that we have across the United States and the globe that are dealing with the real-time implications of supply chain disruption.

And having those conversations every day with our customers and feeding that information back into the algorithm, we actually remain even more confident that we're learning a lot of new information as the market develops, as customers develop, as pricing changes, and feeding that into the data analytics team and feeding that into the data science team, and them using that and bringing it back to the account managers and the general managers and the people on the floor.

So, it's a real-time learning environment for all of us. And do we always get it right? No, we don't. But that's why you have the human intervention. That's why you have the 113-year history of doing this, that we're able to adjust on a real-time basis. So, our confidence is incredibly strong with what we are doing there..

Thanks, Andy. Next question for John. How much of the 8% net revenue per business day growth in October was organic, i.e.

non-Milgram?.

The Milgram – the net revenue from the Milgram acquisition, we expect, will be about 1% of Robinson Enterprise net revenue. So, a little more material to the Global Forwarding division, but 1% to the overall enterprise. The Milgram acquisition, there's only one month included in the third quarter.

And so, in terms of the month of October, it was less than 1%. So, almost entirely organic growth. And maybe the other comment, we always caution that we share these kind of mid-quarter numbers -- this is sort of later in the quarter, but we still have the quarter end impact that can change things significantly.

Probably also good to remind you that with the lapping of the APC acquisition and Milgram being smaller in October, there is less growth from the Global Forwarding division and more from the truckload trends of improvement within that..

Thanks, John. Next question for Andy.

With the ELD mandate fast approaching, how many of your carriers do you believe are compliant? Have you noticed a change in your carrier base as the adjustment to an ELD-regulated world approaches?.

We haven't seen a change to our carrier base. It's – we're currently at over 42,000 active carriers today, which is up both sequentially from Q2, as well as up versus Q3 of last year. So, no change there. And as I said in my prepared remarks, those 3,200 carriers that we added did the same amount of loads, 18,000, that 4,200 did in Q3 of last year.

It's always difficult – we have talked about this at length, it's difficult to give you an exact number on how many of our carriers are currently ELD compliant. But, again, it's no surprise that the smaller carriers are always the last to adopt new technology, and have until December 18 of this year to adopt that.

The good news is that the price of adoption continues to decrease. And so, we would expect the barrier of cost to adopt to not be an issue with our carriers in December of this year or 2018. As how it all shakes out, John mentioned in a recent question – or answer to a recent question of, there will be a disruption.

There will be a change to how they perform and whether or not they take a load. All of these different issues, I would only point everyone to the fact that it's very similar in that regard to a hurricane. And you see how our company performed during periods of disruption.

We are going to be the ones that go out and secure the capacity for our customers to make sure that their supply chains continue to operate..

Thanks, Andy. Next question on head count for John.

Looking into the fourth quarter and early 2018, what are your expectations for head count growth?.

Sequentially, for the remainder of this year and into next year, we would expect minimal head count growth. I mentioned earlier that there are several job families that we are seeing productivity gains. And with lower volume growth that we experience, we would expect minimal to flat head count growth in those areas.

There are some -- we have the acquisition that, year-over-year, will show growth. And there are other areas of Managed Services and GF where we're growing faster, and there may be the need for some head count additions.

But we are expecting that 2018 will be a year of improvement, and that, hopefully, we will be able to leverage some of our past investments to drive some efficiency gains..

Thanks, John. Next question for Andy.

Should we expect M&A deals at the rate of about one deal per year or could that pace accelerate? Are you seeing or finding deals that are good fits, that are sizable enough, and attractively valued enough to be immediately accretive to EPS?.

I guess, like anything, it depends. In terms of the pace, we, as an organization, are capable of activating and completing more than a deal a year. And we do have a very active pipeline and feel confident about our ability to execute deals. However, we do have a strong vetting process.

And two of the issues that were mentioned in that question are sizable, attractive, and accretive. And those are just a few of the issues that we vet. Cultural fit is highly important to us. Business model is very important to us. Strategic rationale is very important to us.

And so, when we go to actually activate on these deals, we bring all of those issues and variables into the equation, and don't feel like we have to be compelled to complete a deal or more than a deal a year if they don't really make it through our rigorous vetting process. But if they do, we certainly can do more than a deal a year..

Thanks, Andy, and thank you, everybody, for joining the call this morning. Unfortunately, we are out of time, and we apologize that we couldn't get to all the questions today. Thank you for participating in our third quarter 2017 conference call.

The call will be available for replay in the Investor Relations section of the Robinson website at chrobinson.com. It can also be accessed by dialing 1-877-660-6853 and entering the pass code 13670605#. The replay will be available at approximately 11:30 Eastern Time today.

If you have any additional questions, please call me, Tim Gagnon, at 952-683-5007 or by email at Tim.Gagnon@chrobinson.com. Thank you, again, have a great day..