C. H. Robinson Worldwide - Earnings Call - Q2 2016
July 27, 2016
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to the C. H. Robinson Second Quarter twenty sixteen 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, July 2736. I would now like to turn the conference over to Tim Gagnon, the Director of Investor Relations.
Speaker 1
Thank you, Melissa, and good morning, everybody. On our call today will be John Wehof, Chief Executive Officer and Andy Clark, Chief Financial Officer. John and Andy will provide some prepared comments on the highlights of our second quarter and we will follow that with a response to pre submitted questions we received after earnings release yesterday. 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 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, 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 three with a review of our second quarter results.
Speaker 2
Thank you, Tim, and good morning, everyone. Similar to past quarters, I'd like to start our prepared comments by highlighting some of the key financial metrics. Total revenues decreased 6.9% in the second quarter. The decrease in total revenues was primarily the result of lower pricing in the Truckload Air and Ocean Services. Lower fuel prices on a year over year basis was again impactful to the reduced pricing.
Net revenues increased 1.7% to $594,000,000 in the second quarter. Net revenue growth slowed as the quarter progressed per business day. Net revenue growth in each of the months was 9%, 0% and negative 3% for April through June. The primary reason for the sequential results was the fact that the change in truckload pricing and cost per mile crossed over in June and now into July as our price per mile to the customers is going down more than our costs on a year over year basis. Andy will talk more to this in a few slides.
Though net revenue slowed compared with the past several quarters, our network performed well achieving a 4.3% net income growth and a 6.4% earnings per share increase. We had earnings per share of $1 in the quarter compared to $0.94 last year. EPS of $1.83 for the first six months of the year is a 9.6 increase over the 2015. In terms of some of the highlights for the second quarter, we were able to take market share as we grew volumes across nearly all of our services. Growing our volumes and taking market share in the various cycles continues to be an important part of our long term strategy.
Serving our customers while adjusting to market changes is a strength of ours. We remain very confident in the strength of our model and the ability to react and succeed. We continue to invest in people, technology and our network. Our variable expense model is working well. Pay for performance programs and effective capital management help us to grow our EPS in challenging environments like this quarter.
Our global headcount grew 4.8% when compared to the 2015. We've often mentioned that headcount will grow in alignment with our activity or volume and this was the case in the second quarter. Our long term strategy is working we continue with our initiatives to drive long term growth and shareholder value. With that overview, I'm going to now turn it over to Andy to go through results by service offering.
Speaker 3
Thank you, John. And now on to Slide four and our Transportation results. The Robinson team did a great job of taking market share in the quarter as we increased our global shipment count by over 200,000. We are proud of this statistic as it demonstrates that customers are voting for our services. Volume growth was driven across multiple modes and through several industry verticals with e commerce, automotive and telecom being a few of the areas with large increases in volume and net revenue.
We continue to receive accolades from our customers and in the industry as we were recently named the number one 3PL by Inbound Logistics for the sixth year in a row. We were also named best logistic provider of air freight at the twenty sixteen Asia Freight Logistics and Supply Chain Awards. These distinctions are a credit to the more than 13,500 Robinson employees across the globe who work every day to help our customers win. Though it is a challenging environment, the network continues to connect with more and more companies around the world. During the quarter, we had nearly 20,000,000 web and mobile interactions with customers and carriers.
This is a sequential increase of over 30% from the beginning of the year. Transportation net revenues increased 1.5% to $556,500,000 in the quarter. Net revenue margin increased 180 basis points on a year over year basis. This was primarily the result of lower purchase transportation costs including the lower cost of fuel. Additionally, we have seen the mix shift in the type of freight we are moving to the higher margin businesses and the services we provide.
As we have discussed in the past, our net revenue margin is an output and there are many variables that influence it. The second quarter is a good example of that as we saw our net revenue growth slow while the margin increased. As John mentioned, lower pricing in some of our key services makes it more challenging to grow net revenues. Moving on to slide five, we have taken information that we have been publicly providing since 2008 and put it into a graphical form. Hopefully, will be additive to the commentary about the secular and cyclical aspects of our business and industry.
The light and dark blue lines represent the percent change in North American truckload rate per mile to customers and carriers net of fuel cost over time. The orange line is the net revenue margin for all transportation services. There has been a lot of commentary from analysts and transportation providers in regards to the cyclical and secular changes. This visual illustrates in our results that change is a rather constant factor in our business. Part of the value that we bring to customers and carriers is helping them manage the rate of change that occurs.
When we think about this chart and our business from a secular perspective, there are many factors to consider. One of the most interesting is that during the time period presented, the average price and cost net of fuel have increased approximately 2%. So with all the ups and downs, the truckload pricing has been inflationary. We have talked a lot about the fact that our business has become more committed with now between 5060% of our truckload volume contracted. Both shippers and purchasers of logistics services value our ability to understand the market and manage their transportation spend for their budgeting and planning initiatives.
You may notice that the price and cost lines have moved closer together over time. The access to information about pricing and equipment availability has led to faster responses in many ways, which certainly include pricing. We feel like our network has done an excellent job adjusting to the markets and adapting quickly to these changes. And finally, the chart illustrates that over the past eight point five years, we have had nearly an equal number of quarters where the percent change in purchased transportation costs exceeded the percent change in price and vice versa. These changes are one of the factors that impact margins which has also varied over time.
Slide six covers our truckload results. Truckload net revenue decreased 1.4% in the second quarter as volumes increased 3%. Pricing was again down in the quarter as you saw on the previous slide as customer pricing net of fuel decreased 7.5% versus last year's second quarter and purchased transportation cost net of fuel fell 8%. Truckload market condition changed throughout the quarter and in June these lines actually inverted. For the first time in the last two years, the percent change in price per mile to carriers decreased less than the percent change cost to customers.
For the quarter, our net revenue decreased $02 per mile, which is the primary reason our truckload net revenue fell when compared to last year. All that being said, there are many positives in the quarter and we achieved 3% truckload volume growth in a market where overall demand was down. We captured more share in June and thus far in July we have seen volume growth accelerate. June volumes increased 4% and to date in July truckload volume is up 7% on a per day basis. Kudos to the team for reacting to the current market dynamics.
Our carrier services team again did another great job by adding 4,400 new carriers in the quarter. This is a record high for us coming off a very successful 2015. These new carriers moved over 25,000 loads. We had nearly 40,000 active carriers in the quarter and we continue to see a lot of diversity in our carrier base. Carriers with less than 100 trucks moved just over 80% of our shipments and larger carriers moved about 20%.
So the key indicators for our truckload business in terms of carrier relationships and customers choosing Robinson look very good. We do have some tough comparables in the back half of the year, but we knew that was the case and have been preparing. Our network will focus on servicing our customers and adapting to the market conditions. On to slide seven and our Lesson Truckload results. Our LTL business had another strong growth quarter.
Net revenues increased 9% to just shy of $100,000,000 Volumes increased 7% when compared to the second quarter last year. Pricing was down slightly as one would expect with fuel being down and net revenue margins increased again. Temperature controlled was a standout area as that portion of the LTL business grew 60. This specialized service has been growing even faster than the overall service line and that team is doing a great job expanding the service within our portfolio of customers. We have received a lot of questions about the growth drivers in our LTL business.
The team and network have made tremendous strides over the past years and the strength of our program centers around one, our vast carrier network two, our ability to execute all shipment sizes from parcel to pallets and probably three, most importantly, our people and technology allow us to optimize and cater the LTL offering to the unique needs of each of our customers. We are able to deliver comprehensive solutions to clients that cover their needs across a broad range from final mile delivery of small packages and parcels to the consolidation and distribution of dry, fresh and frozen products.
Speaker 0
We are adding new customers in this service line faster than any other in North America
Speaker 3
the and we expect this trend to continue. We continue to build on our industry leading position in LTL and feel good about our opportunities going forward. Transitioning to our intermodal results on slide eight. Intermodal net revenue decreased 21.8% in the quarter as volumes decreased 13%. Net revenue margins decreased in the quarter as a higher percent of our volume is in lower margin contractual business.
The team has worked really hard to grow this service, but we are fighting a tough industry trend. Our successes in the quarter came from our committed business as volumes in this area increased as we have been winning some large contractual bids over the past couple of quarters. Those wins however have not been enough to offset the losses in transactional volume on a year over year basis. The low truckload pricing and available truckload capacity environment will be a headwind for the business into the third quarter. Transitioning to slide nine in our Global Forwarding Services business.
Second quarter net revenue in Global Forwarding Services were $91,800,000 an increase of 2.4% from twenty fifteen's second quarter. We are pleased with our cross selling initiatives as they yielded many new customers and new net revenue. Further, we are proud of maintaining our status as the number one NBOCC from S. Ocean net revenue was up 1.7%, air net revenues increased 2.7% and customs grew 5.8%.
During the quarter ocean shipments increased approximately 6% and air shipments were up 20%, which is a clear indication of our team's strong performance and ability to take market share. Pricing continued to be down in the quarter with total revenue per shipment down over 20% in both ocean and air services. Slide 10 covers our other logistics services. The services in this group include transportation management services, warehousing, parcel and small package. Net revenues increased 24% in the 2016 compared to the same period in 2015.
TMC, which is our managed services business represents approximately 60% of the net revenue in this area. TMC net revenue increased 30% in the second quarter and is currently on pace to service over $3,000,000,000 in freight under management in 2016. This business is another one of our fast growing segments. Customers continue to look for new and better ways to execute their supply chains and TMC is a great example of how we are able to add services to meet the increased demand for outsourced solutions by combining our Navisphere TMS technology and 3PL outsourcing. Transitioning to our sourcing business on slide 11.
Sourcing net revenues increased 5.7% in the second quarter. Congratulations to the entire Robinson Fresh team. The net revenue growth was primarily the result of 3% case volume growth across a variety of commodities and services and an increase in net revenue per case. Net revenue margin increased 40 basis points in the quarter, which was primarily the result of a change in the mix of commodities and services sold. I will now transition to slide 11 and a review of our summarized income statement.
Personnel expenses increased 2.4%, primarily driven by an average headcount growth of 5.2% in the quarter. Our headcount growth is often closely correlated to the activity and volume growth and this was again the case in the second quarter. As I mentioned in a previous slide, our ability to combine electronic customer and carrier connectivity with talented professionals will continue to allow us to drive productivity improvements. SG and A expenses decreased 0.8% in the second quarter. As John said earlier, the Robinson business model worked well as a reduction in variable compensation and lower SG and A expenses on a year over year basis helped us to achieve higher net income growth than net revenue growth, which is always our goal.
We were also able to convert revenue to profits at a higher rate of 39.3%, a 10% pardon me, a 10 basis point improvement from the same period last year. Moving on to slide 13 and other financial information. We had another strong cash flow quarter generating just over $143,000,000 in the quarter. Capital expenditures were $26,200,000 in the second quarter and $44,000,000 year to date. We continue to expect capital expenditures to finish the year between 70,000,000 and $80,000,000 The increase on a year over year basis is the result of the costs associated with the building of our second data center.
We finished the quarter with $965,000,000 in debt and $2.00 $7,000,000 in cash. And finally, before turning it back to John, slide 14 and our capital distribution to shareholders. We returned approximately $88,000,000 to our shareholders in the quarter with $63,600,000 in dividends and $23,900,000 in share repurchases. Again, thank you very much to everyone at Robinson for a solid second quarter. And thank you all as well for listening in.
With that, I will now turn it back to John to make some closing comments before we answer some of your questions.
Speaker 2
Thank you, Andy. Before we move on to the pre submitted questions, I'll take just a couple of minutes to wrap up with some final comments. Coming into the year, we planned that we would continue to add to our team and be aggressive going after market share and that's exactly what we're doing. We're growing our volume in nearly all of our services. As Andy mentioned, our truckload volume growth has increased the past two months and is pacing at a 7% per day business increase in July.
Europe's growth in both Surface Transportation and Global Forwarding is accelerating. The Freightquote team continues to perform well and deliver strong results. Our outsourced services including TMC are delivering consistent double digit growth. There are a lot of bright spots across our business and we feel good about how we are executing and our long term opportunities for growth. Our July to date total company net revenue has decreased approximately 2% per business day.
This decrease is primarily the result of lower net revenue per shipment in the truckload service line. Andy's comments covered what we're seeing in truckload pricing. We also know that the truckload net revenue margins for the 2015 were on the high side of our historic ranges making for challenging comparisons. As I shared in my opening comments, we pride ourselves on maintaining great execution while we adjust to the market cycles. However, net revenue growth in Truckload Services is more challenging in this environment.
If you look at our historical performance, we've been very consistent at delivering EPS growth that approximate or exceeds our net revenue growth. We achieved this through variable cost, productivity gains and efficient capital management. We continue to focus on all of these components of our business model as we believe it's the right combination to motivate our team, serve customers and carriers more efficiently and create shareholder value. With that, we'll now move to the Q and A part of our call.
Speaker 0
Thank you. Mr. Gagnon, the floor is yours for the Q and A session.
Speaker 1
Thanks, Melissa, and good morning, everybody, again. And thank you for taking the time to the many analysts and investors who submitted questions for John and Andy to respond to. With that, I'm going to get right into the responses here. The first question is for Andy. The tax rate has been 37% to 38% for three quarters now.
Should it remain at these levels and not 38.5% for the rest of the year? Yes.
Speaker 3
Thanks, Tim. Approximately 15% of the net income we generate comes from subsidiaries and operations outside of The United States versus ten years ago that number has actually increased very nicely. And traditionally, we repatriated those earnings to The U. S. And paid The U.
S. Federal tax rate, which is one of the highest in the world. As we discussed previously on our last call, in the first quarter of this year, we elected APB 23 and asserted that we will indefinitely reinvest the earnings of those foreign subsidiaries to support the expansion of our international business where the opportunities are large and the tax rates are lower. As a result, our effective tax rate is now lower. Our foreign operations in the aggregate continue to perform well and therefore we expect the effective tax rate to remain in the low 37% range.
Speaker 1
Thanks, Andy. The next question is for John. June was minus 3% total company net revenue and July was minus 2%. Should we take this as a sign of stabilization and that we can see a better trajectory from here?
Speaker 2
Where were the comps a year ago by month for June, July, August and September? We tried in our prepared comments and by adding the chart to graph out some of the price changes that we've had over the last eight or nine years. We tried to do the best we could to be transparent about the trends within the quarter and kind of what we're seeing in the marketplace to address some of these trends. In terms of third quarter comps and the June, July, August question, our growth and our margins during the third quarter a year ago were fairly consistent. I believe us up 7%, up 5%, up 8%.
So that from a comparability standpoint, July is probably fairly typical of what we're going to see in the third quarter from a comparison standpoint. In Andy and my prepared comments, we talked about that chart that we added and the fact that volumes have accelerated during the months of June and July and that with that has come the margin compression and the turn in those costs and price comparisons that the graph showed. So we don't really know where we go from here in terms of have we hit bottom. We know that the months of June and July felt different and that it's a normal part of the cycle when we start to see volume accelerating and margins starting to turn. But we'll have to see what happens in the marketplace for the third and fourth quarter and how the market evolves from there.
Speaker 1
Thanks, John. The next question for Andy. How much of the 180 basis points year over year increase in transportation net revenue margins was attributable to lower purchase transportation versus fuel versus mix? Pardon me, the 180
Speaker 3
basis point improvement on a year over year basis is pretty consistent to what we've experienced over the last several quarters. With just over a third of that improvement, again, cosmetically being from fuel, third of it was from the price cost spread and just under a third of that was a mix shift to higher margin business such as LTL and Global Forwarding.
Speaker 1
Thanks, Andy. Next question for John. Do you believe July represented an inflection point in the truckload supply demand dynamic or a mere seasonal uptick?
Speaker 2
So I touched on this at the end of the previous question that there are some elements of seasonality in the summer around June and July. And we look at produce season and produce season may have extended longer this year than last year. And there can be some seasonality in June and July that was probably contributing to some of the activity. However, if you look at kind of the macro chart that Andy talked you through, when you look at a longer period of time with average costs going up 2% and you see a couple of years in a row of kind of declining prices and that downward trend on the chart, it does feel like there's the potential for an inflection point as well. And clearly in the month of June and July, we've seen those data points crossover.
Speaker 1
Thanks, John. Next question for Andy. You've stated multiple times in the past that the goal is to return 90% of net revenue or net income, excuse me, to shareholders through dividends or share repurchases. Yet in the second quarter, you only returned 61%. Can you provide some color on the variation from your target and how we should expect this trend this to trend for the remainder of the year?
Speaker 3
Yes, thanks. Year to date, we've returned $2.00 $6,000,000 or 80% of our net income to shareholders in terms of both the buyback and the dividends. In the first quarter, we actually returned 99%. So there are clearly fluctuations and variations within the quarters. But we remain committed to returning 90% of our net income to shareholders on an annual basis.
Speaker 1
Thanks, Andy. Next question to John related to headcount. How should we be thinking about headcount in 2016? Will C HRW need to increase headcount faster in the second half given the recent acceleration in truckload volumes? Or are there technology offsets that we should be thinking about?
Speaker 2
So maybe one reminder here is that we do continue to hire a significant percentage of our new employees right out of universities. And our hiring patterns, while the long term objective is to mirror them with our volume or activity. We are planning our hiring on more of a calendar or annual basis around the schools, the graduation rates and the hiring cycles. So we look at that. We look at our market expectations.
We look at our productivity expectations. And we're making decisions about how we're going to add to the team. In the prepared remarks, I commented that we did set out this year with a plan to add to the team. And we do plan to continue to do that throughout the remainder of the year probably at that low to mid single digit range that we experienced throughout the first half of the year. The fact that our volumes are accelerating, we have been for several years now and really it's a permanent part of our culture to be looking at our productivity, our business practices and our job families around being ready to handle that additional volume when the market makes it available to us.
So we will be adjusting our hiring thoughts and plans over time as we always do, but we'll be executing what we set out to do at the beginning of the year to keep building the team. And if we do have continued volume increases throughout the 2016, we're confident that we'll be able to handle them.
Speaker 1
Thanks, John. Next question for Andy about Managed Services. Is the 30% growth rate in Managed Transportation sustainable in the near to mid term? How large of an opportunity do you think this is for CHRW on a long term view?
Speaker 3
Great. Those are two distinct questions and I'll tackle the second one and then come back to the first. We believe the space for outsourced managed services is both large and growing. More companies today understand that their supply chains are global, they're complex and they're ever changing. They further understand that in many ways internally hiring people, buying technology and negotiating with and managing a carrier base isn't core to what they do.
Also it doesn't allow them to scale because they only have their business volumes to leverage. And we discussed in our first quarter earnings call the success we're having with Microsoft. I think us managing their global supply chain is a great example of the overall trend in the market today. They can leverage our people, our process and our technology. And as it relates to the growth rate segment, we're very happy with the growth of TMC and managed services overall.
Our ability to sustain double digit growth rates is dependent on our ability to continue to execute. We have a high degree of confidence in our team's ability to do so.
Speaker 1
Thanks, Andy. And a follow-up on Managed Services. Of the $3,000,000,000 of freight spend under management at TMC, how much of that are you able to capture presumably at arm's length in your brokerage operations?
Speaker 3
Well, first let me say that transactions between TMC and Robinson are at arm's length. They have to be. It's a contractual requirement of the customers. And the folks at TMC are extremely strict on SOC two, so no one on the Robinson side sees any information from TMC. In fact, all of their offices are in separate buildings from traditional Robinson offices.
Of that $3,000,000,000 that TMC manages approximately 10% goes to Robinson on a competitive bid process.
Speaker 1
Thanks, Andy. Next question for John. Have you seen any impact of the SOLUS mandate through your freight forwarding air ocean service lines of business?
Speaker 2
So real briefly for those on the call who may not be familiar with it, SOLIS is an acronym that stands for Safety of Life at Seas and it's an initiative in the maritime community to improve the data and the information around the weight of the containers on steamship lines, so that they can be more safely balanced. Effective July 1, so at the beginning of Q3 here, there were some global rules that went in place. I think there's more than 150 countries involved and a lot of complexity in terms of how it's being implemented. But the basic idea is that just to capture more accurate and better information about the weights in all of these containers. We have done a fair amount of work leading up to July 1 to make sure that all of our Global Forwarding customers are prepared to be compliant.
And we do feel good about the status of our compliance at this point. Because it's a complex rule with a lot of implementation, a lot of different interpretation and enforcement practices around the world in all these various countries. We do think it's a topic that's going to continue to evolve and require some further conversation and some further modification and evolution of how that goes. But it's been in place for several weeks now. It's very similar to some of the domestic regulation changes that we've seen over the last five or six years that it is focused largely on safety and data gathering and the information around that.
So the impact on us becomes the data gathering and the process management to make sure that we and all of our customers are compliant with it. And so far we feel very good about that.
Speaker 1
Thanks, John. Next question for Andy. You previously talked about growing your European road business and also expanding your freight forwarding presence in Europe. Just wondering if anything has changed there given the Brexit vote. Also, can you help us size your potential exposure in
Speaker 3
The UK, which I imagine is pretty small from both a footprint and currency perspective? Thanks. Yes, first let me start off by recognizing the great work of our European teams. We're really pleased with the efforts and results of both our road and Global Forwarding operations there. And regarding Brexit, nothing has changed in the time since the vote took place.
Trade is still occurring and we're executing for our customers. While The UK has new leaders in place, trade in some form or fashion will continue regardless of the direction government takes. So we aren't really concerned from that perspective. But in total, our U. K.
Operations represent less than 1% of our overall net revenue.
Speaker 1
Thanks, Andy. Next question for John. In your slides, you referenced a 7% year over year increase in North America truckload volumes so far in July. Can you provide some color on what is driving this growth? And is this in the spot market or on the contractual side?
Speaker 2
We've touched on this a little bit through the prepared comments. But as in our quarter end process as we look at the customer side of the activity for June and July and trying to really do the best that we can to understand what's changing, we have seen increases in both the committed and spot market activity of our North American truckload activity. In the prepared comments, I mentioned that we approached to this year and did approach the contractual opportunities and the committed relationships that we have throughout the 2016 by being aggressive and trying to stay involved in that freight. So we are seeing growth with those long term committed relationships. I think it's also been fairly well publicized that the spot market activity in June and July has increased pretty meaningfully as well too and we certainly are seeing that and participating in it.
As the world has gotten more sophisticated and more participants have more data, there is a lot of opportunity for people to route their freight within contracts or go within Spotted Mark. So we're always trying to do the best that we can to understand our freight relationships and monitoring what is committed, what is spot market and making sure that we're adapting to the pricing properly. But through June and July, the short answer is that we did see increases in both of those categories.
Speaker 1
Thank you, John. To Andy for the next question. How should we be thinking about depreciation and amortization for the remainder of the year? Was there anything unique in Q2 twenty sixteen?
Speaker 3
No, there was nothing unique in the quarter regarding depreciation and amortization. Going forward, a number should be between 17,000,000 and $18,000,000 on a quarterly basis reflecting the higher capital expenditures.
Speaker 1
Thanks, Andy. To John for the next question, again, on the Truckload business. What percentage of your business was committed versus spot in 2016? Is there a certain mix level that you are targeting on a go forward basis?
Speaker 2
We've discussed this in the past. Our best estimates today and for the 2016 would be that we're about 60% committed and about 40% spot market or more transactional in our North America truckload business. The longer term trend on that is if you go back a couple of decades, we were in the 90 plus percent spot market. We were much more of a transactional truck broker in the marketplace. Over the last couple of decades, we've evolved into the scale and the capabilities to handle those larger committed relationships with generally the larger shippers that are out there in the marketplace.
As we've grown into that capability of being a core carrier and working on committed freight that has become a larger and larger percentage of our business. Our best estimate based on tracking the types of shipments that we do like I said is that sixtyforty relationship with committed freight probably being a little bit more than half of it now. I've said this in the past, but as a reminder, one of the reasons why these are estimates and it's hard is because there are unique customer contracts and there are thousands of them across our networks. And there are different definitions of commitment and what commitment means and what the pricing relationships are. So what may seem like a fairly simple concept and able to quantify it when you get into the weeds on this, there is quite a variation of contracts and what commitments mean.
They don't all start and stop at the same date as well too. And with many of those customer relationships, we're interacting with them in different lanes on a variety of committed and spot market activity. So the actual execution and quantification of these is more complex than it might sound, but at a very high level it's about a sixty-forty relationship.
Speaker 1
Thanks, John. Next question to Andy. What does the acquisition market look like right now? Are you comfortable with idea of owning assets?
Speaker 3
Again, two different questions. So I'm going to tackle the second one first. We've been very public with our go to market strategy of solving customers' complex global supply chain issues with people, process, technology. We've also gone to market and been very public with our asset based providers and partnered with them to help them better utilize and leverage their networks. We meet frequently with these providers and they recognize the value they bring to us and we to them.
We just can't envision a scenario where owning assets on a significant scale helps us on either side of that equation. As it relates to M and A, the market really hasn't changed much in the last year or so. There are still good companies out there as well as some not so good ones. So for us, it comes down to strategic fit, culture alignment, a non asset based business model and valuation.
Speaker 1
Thanks, Andy. To John with the next question, is the forwarding business more likely to weigh on or add to your earnings in the 2016?
Speaker 2
When we look at our Global Forwarding business, again, I have to rewind a little bit here that going back three, four years ago, we were not happy with the profitability of our Global Forwarding business. And through the Phoenix acquisition about 3.5 ago, we've been successful at not only really increasing the size and substance of our Global Forwarding division, but over that period of time integrating and improving the operations so that our combined Global Forwarding business over the last several quarters has reached the level of profitability that we think is sustainable and is contributing nicely to the value that we're creating. So what that means is when we think shorter term about the question around '16 and kind of what's the outlook for our Global Forwarding business, today it's sort of down to similar to North America where if the net revenue growth is there, we feel like there's a fairly predictable amount of operating income and results that will come from that. So we have good momentum in growing our Global Forwarding activity right now. So we feel positive about the second half outlook and the taking of market share and the continued growth of our Global Forwarding Network.
As most of you probably know, the macro environment around pricing in the ocean area in particular is pretty challenging right now. And so similar to the truckload side of it, it will probably be more about margins and margin fluctuation in the second half going forward depending upon overall market conditions now that we have a more stable and mature Global Forwarding activity. So just like the truckload side, we feel good about our execution. We feel good about market share and volume gains, margin comparisons and margin activity in Global Forwarding in the second half of the year will likely be the challenge.
Speaker 1
Thanks, John. To Andy for the next question. How was the decrease in doubtful accounts during this quarter? Or how much was the decrease, excuse me?
Speaker 3
Yes. The allowance for doubtful accounts decreased by $3,000,000 in the quarter, which is similar to what we experienced in the first quarter. The determination of this amount is really is primarily formula driven and it takes into consideration the quality as well as the duration of the receivables. The teams have done a great job of decreasing the amount outstanding past sixty days and we have a high quality customer base.
Speaker 1
Thanks, Andy. To John with this next question. At today's depressed spot market pricing levels, are you finding that carriers are struggling financially? If so, are you seeing any reduction in available capacity? Or have the 4,400 new carriers you've added to your roster in the second quarter more than made up to handle any of the fallout?
Speaker 2
So there's a lot of good questions woven into there. And it kind of goes back to the data points and the chart that we've talked a fair amount about around the changes in the marketplace around the supply side. When prices are declining as they have for the last couple of years historically and what would logically end a cycle like that is when the capacity side finds the bottom begins to say no to price reductions or further price decreases and or some of them fail or go out of business or make the decision that it's no longer economically viable to operate at those rates. So there have been data points in the marketplace about increased bankruptcy or increased churn in the supply side. So the data points that we monitor around that is we're constantly looking for new sources of capacity.
And as you saw our new carrier sign ups in the quarter were very healthy. That could be a byproduct of our efforts to reach out and find capacity. It can also be a byproduct of capacity that's looking for freight more aggressively and checking for more sites or more shippers or more third parties to look for that capacity. So similar to many of the other comments that we've made, there are some data points that would suggest that the churn in the capacity is ticking up a little bit or may be starting to happen. We have not seen kind of widespread tightness or shortness of capacity that oftentimes comes at this part of the cycle.
While we have seen volume increases and margin compression, there has generally been available capacity. It's still more around the pricing metric at this time than just where you might see a complete absence of capacity and have to wait a day or two to ship freight that you would have otherwise preferred to ship on that date. So that's the color that we can add about what we're seeing on the capacity side and relationships with our carriers.
Speaker 1
Thanks, John. To Andy for a question about compensation. How should we be thinking about incentive comp in the 2016 versus the $10,600,000 accrued on stock based comp in Q2? Were there also lower accruals for the cash incentive comp in Q2?
Speaker 3
As John mentioned in his remarks, our cash and equity compensation model is variable. And the way it works, it is if we grow the business profitably, we get paid more. It's pretty simple. So we have both time based options and performance based restricted shares There were lower cash and equity incentive accruals in the second quarter, which was again formulaic and based on our results.
Speaker 1
Thanks, Andy. Next question to John. Despite a soft May and June, CHRW was able to grow EBIT 2% and net income 6% in the quarter. This came on net revenue of 2% growth. With net revenue in July down 2%, what levers company pull to ensure that earnings do not go negative?
Speaker 2
I touched on this a little bit in the prepared comments and it sort of takes on to what Andy just spoke to as well too that the kind of core premise of the business model is that we're going to earn and grow as much net revenue as we can and that net revenue gets shared variably to the team at Robinson as well as profitability and shareholder value. We're constantly looking at productivity gains to try to make sure that hopefully our operating income and our earnings grow as fast or faster than our net revenue. And our track record on that has been pretty positive. We also focus on capital management and share repurchases to make sure that hopefully our EPS is growing faster than our net income. So if you look at our historical results, I think that's one of the very positive attributes of our business model is that constant productivity and efficiency that constant high return on capital that allows us to repurchase shares and allows us to grow our EPS faster.
So those are the key kind of macro levers that we can pull in terms of how we're going to attempt to grow our earnings and continue to grow our EPS regardless of where the net revenue might shake out. I also said on that call though that in our prepared comments that when you get into that part of the cycle that we might be experienced on the truckload side, as you've seen in our past, does make for shorter periods of time in the cycle where growing that North America truckload net revenue is more challenging. And when that happens since it's such a material part of our business, it does create challenge in growing the net revenue. So we've been doing this for many decades and we think we're pretty good at it. And I think the track record speaks for itself in terms of creating shareholder value and we will continue to work on those pillars of our model to do that going forward.
Speaker 1
Thank you, John. To Andy for a regulatory question, are you encouraging carriers to adopt ELDs sooner rather than later? If so, what are you doing? If not,
Speaker 3
why? We've always stated that we expect in fact our contract with the carrier states that they must comply with all local, state and federal laws. Let's remember that the actual hours of service law is not changing. It's just a method by which the carriers comply, which is their accountability. Our accountability is not in that aspect of it.
But what we have seen and what we would expect to continue to see is some of those carriers adopting early so that they can kind of get in and figure out the actual how it works for them in terms of the ELDs versus the traditional paper logs. But again, the hours of service themselves are not changing and the accountability of complying with all those laws remains at the carrier.
Speaker 1
Thanks, Andy. Next question for John. Can you help us think about the factors that contributed to the sequential decline in net revenue per business day in the quarter? Was it a function of increasingly difficult comparisons, normal seasonality, contract repricing or some other factor?
Speaker 2
I think we've beat up these topics pretty well already in the prepared comments and some of the other Q and As. But again, it's all the above. And hopefully what we've tried to do is share the fact that yes, there's cyclicality, so comparisons are changing. There is some seasonality to the summertime and there is repricing with some of that committed freight and changes in the spot market. It's tough to with all those moving parts to know exactly what contribution each of those made to the changes or where the market is going to go from here.
But hopefully, we've been transparent in sharing the combination of things that are impacting all of that.
Speaker 1
Thanks, John. To Andy for a little more clarity on the new slide five. Not sure what the commentary will be by John, but it is the gist of this chart to illustrate that the recent rise in gross margins has been more function of structural things like the addition of Freightquote and fuel thus not a symmetry between the rate of change in buy and sell rates. If this is the case then is there any way to quantify what the structural uplift has been from Freightquote and how much fuel has impacted gross margins versus say 2014?
Speaker 3
Yes, there are several themes that we hoped to get across in this slide. And again, the information itself is not new. We've been publishing it for years. We just wanted to put it in a graphical form to hopefully explain and really show a couple of key themes as well as the trends. And what we hope that the chart shows is a couple of things.
One, the cyclical and overall inflationary nature of pricing, right? Since 02/2008, as John mentioned, it's been up on average 2%, both the price to the customers as well as the cost of the carriers. And you can see the fluctuations that have happened within that. The second is the fact that pricing can change rapidly. There are periods in which it's gone up double digits and there are periods in which it's gone down double digits from a quarter to quarter basis.
Third issue is, as the question referenced, has a cosmetic impact of fuel. When fuel is lower, the margin is higher and vice versa. But it's a purely cosmetic impact to the net revenue margin percentage. Another key theme is that those lines tended to converge as information becomes more readily available, the lines converge between pricing to customers and the cost of the carriers. Customers are smart as well as our carriers are smart.
What we do is, as I mentioned earlier, we help them manage the rate of change and the pace of change on a quarter to quarter basis. And then I would say finally on that net revenue margin comment, that margin has trended up over time versus traditional truckload. So we've added higher margin relative to truckload services such as LTL, such as Global Forwarding and you see the impact that it has going back to 2012 all the way now to 2016. There is a shift change with higher margin business, higher margin being relative to truckload.
Speaker 1
Thanks, Andy. To John with the next question, congrats on another quarter of impressive net revenue margin expansion. Just wondering how sustainable you think that is. Given the aggressive pricing environment we've been hearing about and customers' option to renegotiate pricing, how much of your 2016 pricing has already been set with customers? And has there been any pressure to renegotiate those rates downward given the current loose market conditions?
A similar question could relate to margins and forwarding as well.
Speaker 2
So from an overall pricing standpoint, it probably references back to some of the previous questions starting with kind of the sixtyforty mix that there is about 60% of the North America truckload business that is pre priced or through a committed relationship where there's generally a one year price expectation. Again, as we've talked in the past, there is not a set date or a certain pattern around how and when those contracts renew. So even though there is a decent component of our freight that has more of an annual pricing expectation to it, there is a constant renewal or an annual process to that that results with maybe more like an effective six month duration around what type of committed pricing is out there. Also when you get into the relationship between committed pricing and spot market pricing, A lot of the relationships that we work with, we may have committed rates in place, but be accepting volumes above and beyond the committed volume activity that went with that committed pricing. So as we've talked in the past, if we do continue to see more of a floor and we do continue to see a shift in the marketplace around the supply and demand cycle in that, the same things that have always happened in the past will continue to mentioned the carrier churn in the previous question.
All parties will start to tighten their contractual monitoring in terms of making sure that only the committed volume is moving at committed pricing and making sure that spot market activity is better identified and better priced separately. And shippers will be reacting to those as well too. One of the many reasons why we charted out some of the information that we've been sharing over the last eight or nine years was to show you and hopefully give you a sense that while the markets have become more volatile and that prices are probably moving up and down a little bit more aggressively over the last eight, nine years than they did prior to that, that our relationship between price to customer and cost of capacity have stayed relatively tight and maybe even arguably have stayed closer together over this period of time. So in our comments around being proud about how we react to the market and how we are able to serve customers while balancing these various commitments into the marketplace. That is clearly one of the messages that we're trying to deliver on this call.
Speaker 1
Thanks, John. To Andy, a technology question. Have you looked at any of the companies endeavoring disintermediate brokers with a mobile application? Do any of these companies have a chance of making a major breakthrough? Would you consider acquiring a company or making investment in one of these companies?
Speaker 3
So it's a good question and we get it quite often. The short answer is, yes, look at every company that comes out with a website and a mobile app. And there's aspects of it that they claim to be this or they claim to be that. And what we've seen is that for the most part, the models they're trying to emulate are like Uber. But Uber, let's remember, took on a heavily regulated industry.
Our industry, transportation logistics has been deregulated since 1980. And so we're coming out in fact, we've had what was traditionally called CHR trucks, a mobile app for years. We've rebranded that to Navisphere and it's just been recently released both on the Apple as well as the Android stores for our carriers to download. And it's a very rich and it's a very robust mobile application. It allows those trucks and the partners that we have out there in the carrier space to connect, do things like paperwork, do things like submit billing, find loads, because we have a very rich and robust technology platform that they're able to plug into.
I guess what when we think about it in terms of I'm sure there's some really slick apps and I'm sure there's some really slick websites that are out there. But I guess the question that we have and the question that I think is out there is, we connect over 150,000 customers and carriers. As I mentioned in my prepared remarks, we have over 20,000,000 electronic touches this quarter. We have 13,500 global employees, right? And that the knowledge and the relationships with the customers and the carriers.
And so it's one thing to go out and stand on the corner and get a cab or get a black car to the airport, because five years ago it was a regulated industry and they just weren't as many of them out there. But it's an entirely another thing to connect a global supply chain with hundreds of thousands of participants and hundreds of thousands of variables and variations that go along with that. So we feel very comfortable of our track record of disintermediating this space because again, we've been doing it since 1980.
Speaker 1
Okay. Thanks, Andy. The next question again for you Andy is related to customer relationships. What's your sense for shippers' expectations during twenty sixteen's fall peak season shipping? In that vein, what is your sense of current retail inventory levels?
Is there any risk of destocking during the 2016 or an early twenty seventeen?
Speaker 3
We have daily conversations with our customers in terms of expectations for the second half of the year. And nothing that we've heard or nothing that we've discussed with them would present anything materially different than what we're seeing right now in terms of inventory levels and destocking. I think the verdict is still out there on what's going to happen in that particular space.
Speaker 1
Okay. Thanks, Andy. And the last question here will be for John related to EPS. Without asking for formal guidance, you believe you can grow EPS in the 2016 on a year over year basis?
Speaker 2
In the pros and cons of giving earnings guidance, I think we've talked a lot on this call about the primary reasons why we don't is because of the market volatility and the margin consequences that we have with that. It just becomes very difficult. And in our planning and budgeting process, we know that it's very difficult to forecast the margin activity and what exactly is going to happen in the supply and demand in the marketplace. So that's the reason at the core of why we don't give guidance. What we do feel good about is the things I discussed earlier around our variable cost model and our ability to generate operating income and EPS growth that comes out of that net revenue.
So really the key for the second half of the year is what happens with the net revenue and pretty high confidence around our business model and the EPS that will fall out from that. So we're going to be focused on maintaining those disciplines, but also managing those buy rates, managing those margins and seeing what kind of market activity happens in the second half of the year. We have not given up on the concept of growing our EPS in the second half of the year. But again, it will have a lot to do with what happens in the cyclicality and the pricing of that margin on the net revenue side.
Speaker 1
Thanks, John. And thanks everybody again for participating in our second quarter call. This call will be available for replay in Investor Relations section of our website at www.chrobinson.com. That call should be available later this morning. If you have any additional questions, please call me or Adrian Broussen or email us.
We'll be happy to follow-up with you as quickly as we can. Thank you everybody.
Speaker 0
Thank you. This concludes today's teleconference. You may disconnect your lines and have a wonderful day.