Good morning, ladies and gentlemen, and welcome to the C. H. Robinson second quarter 2014 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. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded Wednesday, July 30, 2014. I would now like to turn the conference over to Tim Gagnon, the Director of Investor Relations.
Thank you. Good morning, everybody. On our call today will be John Wiehoff, Chief Executive Officer, and Chad Lindbloom, Chief Financial Officer. John and Chad will provide some prepared comments on the highlights of our second quarter, and we'll follow that with a response to pre-submitted questions we received after our earnings release yesterday. Please note there are presentation slides that accompany our call to facilitate our discussion. The slides can be accessed in the investor relations section of our website, which is located at chrobinson.com. John and Chad will be referring to these slides in their prepared comments. I'd like to remind you that comments made by John, Chad, or others representing C. H. Robinson may contain forward-looking statements which are subject to 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 2014 results.
Thank you, Tim. Good morning, everybody. Referencing those second quarter results on Page Three, as Tim mentioned, a quick review of our key financial metrics for the quarter. Our total revenues grew 6.5% in the second quarter compared to the previous year. Net revenues grew 10.2% compared to 2013. Income from operations were up 9.8%, and net income increased 6%. At the EPS line item, our results were $0.80 earnings per share compared to $0.70 in the prior year, which represents a 14% increase. When you look at our overall results for the quarter, with the higher growth rate in EPS and the additional interest expense that came from the capital structure share repurchase transaction that we described a year ago, you see some of those results impacting our results in the second quarter. In terms of overall reaction to our second quarter results, we were pleased with them.
2014 started out with some pretty challenging weather and an environment that was difficult to execute. As the year has progressed and getting through the midpoint here, we do feel like we're executing with the goals that we set out for at the beginning of the year, which was really to adapt to those changing market conditions and some significant price adjustments that are occurring. Also, to leverage our existing network and investments that we've made over the last couple of years, both organically in our surface transportation, as well as the investments in acquisitions in global forwarding. It was a clean quarter representing entirely organic growth. Not a lot of unusual or different items. I guess our sense, overall, we're proud of our company, we're proud of the execution, and we think the results were pretty good for Q2.
It's a more straightforward, cleaner quarter, we're going to go through the deck a little bit quicker than we have the past couple of quarters and get to some of the Q&A that we think is more helpful during this period. Moving on to Slide four with our overall transportation results. Transportation total revenues increased 7.8% for the quarter, and net revenues were up 12.2%. On this page, we look at our overall transportation net revenue margin, which improved to 15.9% and represents a 60 basis point improvement from the first quarter of this year, as well as a 60 basis point improvement from the second quarter of 2013. As we've talked in past periods, there's a lot going on on this schedule in terms of the historical information that we provide. This represents the aggregate net revenue margin for all of our different transportation services.
There are mixed issues as well as seasonal and secular changes that impact all of them. We do believe that it's helpful to look at our business from a long-term perspective and look at these aggregate margins to understand what's happening in the entirety of how we're managing our customers' transportation services. From there, I will move on and talk a little bit more specifically about the individual transportation modes that make that up. Moving to Slide five with our truckload results for Q2 of 2014. Truckload net revenues increased 15.6% in the second quarter, with volume increasing 4%. North America truckload volume grew approximately 3%.
The net revenue margins in truckload did increase from last year in the second quarter, it was largely a result of a change in the mix of our business with more shorter length haul freight and an improved pricing environment that's summarized in the upper right-hand side of the slide that shows that our approximate pricing per mile to customers increased 10%, while our approximate cost of hire per mile for the quarter increased around 9%.
In terms of the overall truckload capacity in the quarter, our aggregate summation is that during the second quarter of 2014, when we look at our route guide depth and other metrics that we would focus on to understand the tightness of capacity and the overall market conditions in truckload, we do believe that the truckload market was tighter in the second quarter of 2014 compared to a year ago, but not quite as tight or difficult to find capacity as it was in the first quarter of 2014. A little bit of sequential easing in the tightness of the truckload market, but still higher than a year ago and a fairly tight market condition. Moving on to slide six with our LTL results for Q2 of 2014. Net revenues increased 11% in the quarter, while volumes increased approximately 8%.
That growth represents a mixture of growth from both existing accounts and new customers during the quarter. Also, when we look at the metrics around our LTL business, we did experience a growth in the size of our shipments, the average size shipment in our LTL business, as well as a small increase in the length of haul for our LTL shipments. Both of those do help with our net revenue margins. Another information point that we wanted to report to you is that in our carrier discussions and business reviews and pricing discussions, that there was more data points this quarter around cost issues, driver shortages, and capacity availability in the LTL market than we've seen over past quarters. As everybody knows, those capacity shortages and driver challenges have been very prevalent in the truckload side for the last couple of years.
We did not intend to call this out as being different or abnormal from that, but just recognizing that the resource shortages, the driver shortages, we feel more impact in our LTL business around that today than we have in the past, and it's very consistent with the truckload portion. Moving to slide seven and our intermodal results. Intermodal net revenue for the quarter increased 9.5%. Volume was up approximately 1%. As we've talked many times in the past, our intermodal business is much more integrated into our truck offering, that we see freight that moves back and forth between truck and rail, depending upon market conditions and pricing. Others have talked, and the industry has talked about some of the service issues that were weather and otherwise provoked in the different rail services.
We did see some activity moving more towards truckload service preferences, which did, we believe, impact our volume growth for intermodal in the quarter. The net revenue growth of 9.5% on 1% volume, really similar to other transportation services, is largely a result of better load selection and better pricing and lane management in our intermodal operations. Moving to slide eight, our global forwarding international air, ocean, and customs brokerage results for the second quarter. Ocean net revenues were up 2.8% in the quarter. Air increased 7.6%, and customs brokerage services were up 5.6%. If you put them all together in our global forwarding business, it represented a 4.4% increase in the net revenues over the second quarter of 2013.
If you look at the volume pricing margin metrics that are laid out on the bottom of slide eight, it really shows consistency between the first and second quarter with regards to our activity around volume and pricing, where on the ocean side of it, we continue to see price increases, but margin compression due to excess supply in the marketplace. On the air side, as has been well-publicized, again, continued challenges from an overall pricing standpoint compared to a year ago. Our net revenue margin improvement was largely driven by better operations, better execution on consolidation, and some of the operational issues that drive air margins. We did call out on that slide that there's a significant uncertainty in our global forwarding business around the West Coast labor negotiations. That's obviously very important to us given our significant presence in the Trans-Pacific eastbound.
Our business is continuing to function as normal, just with the uncertainty, that's an area of our business where we're staying very close to and making sure that we're ready to react given anything else unusual occurring. I'd say the overall message on global forwarding is very similar to what we've said the last couple of quarters, that our integration has run its course. We've got some lingering things to work on, but a couple of years into putting two pretty meaningful global forwarding businesses together, we continue to be very proud of the fact that every single quarter we've had an increase in the net revenue, and that our integration plan is working, and that we're growing our global forwarding business in accordance with the plan that we set out when we made the Phoenix acquisition.
We are continuing to focus our efforts more increasingly on cross-selling and trying to ramp up that growth rate. The most important thing in the first couple of years was to create a stable foundation and a durable long-term global forwarding business that we feel very good about what we've created. Moving then to slide nine on our other logistics services. This net revenue represents the combination of both our transportation management services as well as our various other logistics revenues. For the second quarter of 2014, the transportation management services net revenue increased again. That was offset by declines in some of the miscellaneous logistics services categories. Moving to slide 10 and our sourcing results for Q2. Our sourcing net revenues decreased 10% in the first quarter of 2014.
Overall, in terms of our sourcing results, I think the message is consistent with what we've talked about the last couple of quarters, that we continue to experience some business that's transitioned away from us, primarily with one significant customer. In addition to that, there are some pretty significant West Coast drought conditions that are impacting the level of planting and crop availability that are impacting the business. The other call-out that we have on this slide is that many of you may have seen press releases or heard during the second quarter of 2014 that we did launch a pretty significant rebranding effort in our produce business. Under the Robinson Fresh label. Over the decades, as we've operated under different commodities, we've had a variety of different brands that we go to market with.
While some of those will stay in place, this was a meaningful effort to really highlight and emphasize our expertise in fresh produce and put an umbrella brand over the top of it to really try to integrate better and do all of our commodities in a more coordinated way. That was a significant effort during the quarter that we thought went well. If you see or hear initiatives around it's really not so much a change in strategy of our business model, but really a marketing and branding effort around how we're going to market and clarifying the offerings and expertise that we have in produce. With that, I will turn it over to Chad for some comments on our income statement.
Thanks, John. As John mentioned, I will begin my comments on slide 11 with our summarized income statement for the second quarter. As John mentioned earlier, our total net revenues grew 10%. Personnel expenses increased 16% in the second quarter compared to the second quarter of 2013. Our bonus restricted stock and other performance-based compensation expenses drove 10% growth in total personnel expense, and the remainder was due primarily to a 4% increase in average heads compared to last year's second quarter. Although we have kept headcount relatively flat with the end of 2013, we are growing, as I mentioned, over the second quarter of 2013. SG&A expenses decreased 2.9% in Q2, which is primarily the result of a $5 million contingent auto liability claim that was in last year's second quarter. Excluding this item, SG&A expenses would have increased 3%.
The biggest increase in SG&A was our provision for doubtful accounts. This increased expense was primarily the result of the growth of our total receivable portfolio and a slight deterioration of our aging. We do feel good about the overall quality of our receivables and our current reserve level. Total operating expenses increased 10.5%, which is a blend of those two above, and income from operations increased 9.8%. Our operating income as a percent of net revenue decreased slightly in the quarter compared to last year's second quarter to 38.5% from 38.6%. As a reminder, we talked about last year the impacts of the Phoenix acquisition. Just folding in a lower operating margin business impacts our income from operations of about 1%, and the amortization that came with the acquisition is about another 1% impact to our income from operations. Moving on to slide 12, I'm sorry.
The other financial information slide. We had a strong cash flow quarter with income or cash flow from operations approximating net income, which is an internal benchmark we use. CapEx was relatively low for the quarter, partially due to timing. We still expect our total CapEx for the year to be around $40 million. Our balance sheet and capital structure remains relatively consistent with previous quarters, and our total debt balance was $900 million, with $400 million drawn on our revolver. During the quarter, we returned a total of approximately $104 million of cash to our shareholders through our ongoing dividend and $51 million worth of share repurchase activity. We repurchased 844,900 shares at an average price of $60.83. With that, I'll turn it back to John to talk about an outlook.
On slide 13, the bullet points regarding a look ahead, the comments that we would like to share about our forward thinking before we turn over to the Q&A. The first one, really, over the last two or three years, when we've interacted with shareholders and analysts, probably the most common topical themes have been trying to understand the cyclical versus secular forces that are impacting our business and how they're changing. I think we've pretty consistently answered that question, that there are both types of impacts that are impacting our business. I think one of the things that we felt in this quarter was that more so in a long time, it was very evident that both of those were there.
If you look at the fluctuations in our results and the fluctuation in our margins, we've talked a lot in the past about supply and demand and how those margins will fluctuate, have fluctuated, and that we would expect that to continue into the future. If you look at our results, particularly in the Truckload arena, there are some very meaningful cyclical fluctuations around capacity, availability, and pricing that have been consistent in our business for many decades, and we expect that to continue going forward. At the same time, we've been very open, and many of you have observed and agree that it is a different industry today than it was five years ago or any time in the past. The competition is alive and well. Technology is making a bigger impact.
Maybe as we've said in the past, most importantly, I think shippers' attitudes towards supply chains and the balance around growth and efficiency is maybe a little bit different today than it's been at any point in the past, and it's clearly a more global setting and focus than we've had before, too. When we look at our business and try to understand our results, I think that's maybe first and foremost the reality that we realize we're in a different world today, and that we have to manage differently, and that there are some forces that we'll continue to be challenged by, and at the same time, there is a very traditional cyclical element to our business.
Our second point, what we like to do is share the factual information that we have, given the difficulties of predicting or guiding that we've talked about so often in the past. What we do know, the most information is about our North America Truckload business, and into July, our net revenue growth rate has been similar to the second quarter, and that really continues to be driven primarily by margin improvement with more minimal volume growth in July. The third bullet point, I already touched a little bit around continuing to focus on both growth and efficiency.
As we get into the Q&A and what we've discussed before, that's terminology that we've been using for more than a decade to talk about and discuss strategically around how we try to grow the business and go after market share gains and expand our services, but that we're constantly balancing that with our efficiency, productivity, and profitability that's very important to creating the shareholder value as well, too. We feel like our culture is pretty good and pretty balanced around those two topics. They've both been part of our core, part of our culture, and part of our strategy for many decades, and we will continue to do that with evaluating the market environment for each of our services, making coaching decisions to our network around pricing and what the environment feels like in terms of opportunities to go after share versus profitability.
Continue to operate in a heavily decentralized environment where our account managers use that guidance and that data, but have a lot of autonomy to do what's right for their customer to serve them and adapt to the local market in a way that's appropriate. Lastly, just re-emphasizing again, when we look at what's going on in Robinson, separate from our Q2 results. We laid out a long-term growth strategy in our investor day last fall, where we talked about our revised growth plans and the things that we were investing in. One message we wanted to convey is that we continue to feel that that's an accurate assessment of a reasonable goal for the future.
What we talked about a lot in that is the investments that we're making in the areas of technology with our Navisphere platform, how important that becomes to our service offering, and how significant the investments are that we're making to continue to keep that a competitive advantage in the services that we offer. Global expansion with the investment in Phoenix and the investment in European truckload services. We continue to push heavily to invest in a more global platform. Those are decisions that we feel very good about. The return on those investments will continue to come more into the future as there's been a lot of investment and cost associated in the past with them. Globalizing the business is something that we take very important, and expanding our network and our footprint around the globe is an important part of our long-term strategy.
Last and not least, this is a people business, and we are spending and investing as heavily as ever around our workforce and our talent development, with investing in training and making sure that our account management and our people are being educated and supported with resources in the go-to-market initiatives as effectively as we can to do that. Those are probably three of the areas that we've talked a lot about in the past, but just want to highlight them again that we continue to make what we believe are very meaningful investments in each of those areas to position ourselves for continued success in the future. Those are our prepared comments on the quarter. With that, I'll turn it back to Tim to facilitate the prepared Q&A for the quarter that was submitted.
Thanks, John. As I get into the questions here, John and Chad will provide answers, I'd first like to thank the many analysts and investors for taking the time to submit questions. We really appreciate a lot of good questions. We'll get right into that now. The first question is for John. The question reads: how realistic is it to experience 10-plus% net revenue growth and not have to add significant costs? How are you managing that balance right now?
This question goes back in our lens to the balance between growth and efficiency. We talked about at the beginning of the year that for several years in a row, we had invested in our North American surface network at a rate of headcount that exceeded our volume growth for probably a three-year period of time as we were pretty aggressively going after share in a very balanced market condition. We also talked about in our global forwarding business that when we did our integration strategy and put the two businesses together, that our strategy was to retain all people from both organizations, knowing that there were opportunities to grow into that bigger infrastructure and hopefully leverage the productivity opportunities in the future after the acquisition.
Lastly, with the known transition away of some of the sourcing business, we felt the resources that we had in place there would be adequate to reassign and to grow that sourcing business. When we think about the cyclical evolution and all the changes in our business coming into 2014, we believe that we could leverage our network, continue to go after some of the process improvements and synergies to work together and really try to harvest some return on those past investments that we made. Our long-term growth strategy has not changed, that we do believe that attracting and training and developing talent is one of the most important core competencies that we have, and our longer-term strategy and plan that we laid out last year would have us growing our headcount much more proportionate to our net revenues in the long term.
The results that we had in the second quarter were very much in line with what we were targeting and hoping for at the beginning of the year. That reflects much more of a 2014 strategy and approach to the current market condition and our past investment activity. Coming into 2015 and going forward, we would expect to continue to go after those productivity initiatives and leveraging our network, but that headcount increases would likely correlate much more to our longer-term net revenue expectations.
Thanks, John. Second question is for Chad. Truckload net revenue was up almost 16%. The rest of each of the company's divisions, net revenue grew slower than that rate, causing overall company net revenue to be up 10%. Why would personnel expense for the whole company be up 16% if the largest category of net revenue or 60% of the company was up the most at just shy of 16%? Even with 4% headcount growth, the remaining 12% driven by variable compensation exceeds the total company net revenue growth. I would have thought there would have been a higher operating contribution margin on these incremental net revenues.
Thanks, Tim. As I mentioned in my remarks, our average headcount in the second quarter was up 4% compared to last year's second quarter. Our incentive compensation drove an increase of 10% to total compensation expense during the quarter, with the balance made up of salaries and other increases of 2%. Last year, we discussed that many of our growth-based bonus and equity programs had zero expense due to the lack of earnings growth. We mentioned during that time that once earnings started to grow again, these plans could cause our personnel expense to grow faster than our net revenues, but stated that would be a good problem to have. That is indeed happening. Our compensation programs and practices have stayed consistent. Our earnings are growing, and we have experienced personnel expenses growing faster than net revenues. We still feel good about the overall variability of our cost structure.
We expect fluctuations to continue in our cost as a percentage of net revenue. As we discussed earlier during the call, we are constantly managing to balance growth and efficiency initiatives.
Okay. Thanks, Chad. The next question is about competition, and it reads: Some competitors seem to be branching out into other services beyond just freight brokerage. Do you feel the need to add any additional services as you look strategically into the future to complement your already strong service offering?
We do believe that one of the most important strategic decisions that any transportation company, especially a third-party one like us, makes is around what the scope of services will be. It is clear that, especially over the last decade, that as shippers have looked at more of an integrated supply chain and an integrated transportation service, that having the wherewithal and perspective on the various options in the marketplace is an important component of how you go to market. Yes, we do feel some marketplace pressure and opportunity to continue to look at the scope of services and to make sure that we have a broad offering and can interface with our customers in a way that makes sense to them.
When you think about the universe of third-party logistics or logistics and supply chain opportunities, where I like to think of Robinson being on that continuum is that we do focus and have focused very heavily on broadening our transportation service offerings, the investments in less-than-truckload and intermodal and freight forwarding and European transportation. In addition to that, when we go beyond transportation, a lot of our emphasis has been on transportation management services and the technology associated with that kind of bundled transportation offering.
From our standpoint, the way we've been responding to that competitive landscape is by expanding our services and focusing on a more global offering, focusing in on the various modes of transportation that we see as highly interchangeable with each other around consolidations and routing and mode selection and all the rest of that, and all of the different consultative and technology services that would come with that. Obviously, there's a lot of things around procurement and inventory that you can go even broader within the supply chain that we continue to look for opportunities or see what makes sense there.
I think it is important, too, at least from our point of view, that probably the most important thing is in that menu of services and scope of offering that you go to the marketplace with, that you do have the ability to actually integrate them and to perform the execution and operations in a world-class manner. Just having a broader menu of services doesn't do much for you. I think you have to be competitive with each of them and really know how they work together in order to be effective with them. That's probably how we would sum up our strategy around the competitive landscape and the scope of services and how we continue to look at what makes sense for us in our go to market and how we think we can best compete.
Thanks, John. Next question is for Chad. How much additional expense is being incurred related to bonus accrual on a year-over-year basis and versus 1Q14?
Thanks, Tim. I think I'm going to broaden the question slightly to talk about our incentive compensation, which we include our bonuses, commissions, performance-based equity, and profit-sharing expenses in our definition of variable or incentive compensation. As I mentioned in the last question I answered, end of my prepared remarks, the increases in these expenses drove a 10% increase in overall personnel expense or approximately $21 million of additional expense in the second quarter of 2014 compared to the second quarter of 2013.
Okay. Thanks, Chad. Next question for John, again around competition. Can you discuss the current competitive environment in the truck brokerage market? Are you concerned about other participants being willing to do the same business for a significantly smaller margin going forward?
We've discussed in the past that the market By our perspective, is more competitive today versus 10 years ago. Not necessarily for competitors, because there always has been 10,000-plus brokerage licenses and third-party competitors. The real difference being that there's many more substantial companies today and many more companies that are aggressively going after share and scale to try to compete in the truck brokerage section. It is a more competitive market. That's part of how things are changing in our industry. With regards to our perspective or concerns around margins, I think really what that sort of speaks to is pricing strategies. I think there's probably a couple of subsets to it. One is to the extent that some competitors appear or seem to be taking the strategy of trying to buy market share or take less margin in order to get scale.
That's certainly one element that we have to pay attention to around, is that sustainable? What is the right kind of pricing opportunity there? The other thing that we focused on a lot, and the industry has too, really is around the pricing sophistication and segmentation. Those contractual customers and the pricing that's appropriate with it versus how the market might be moving, and all the discussions we've had over the last couple of quarters around when the market moves significantly like it has, how and when is it appropriate to renegotiate your annual contracts, and how do you adapt to a transactional market and balance both of those components?
In this increasing competitive market, I think it really comes down to segmentation strategies and pricing strategies and making certain that we feel good and confident about our returns, our pricing disciplines, and our long-term returns on the business that we're going after. We do spend more time observing and analyzing competitor behavior around pricing to make certain that we're doing the right thing for our shareholders.
Thank you, John. The next question for Chad. Can you give us a sense for what the net revenue trend looked like throughout the months of the second quarter and how you would expect it to play out in the third quarter? Did it pick up or lose momentum as we progressed throughout the quarter? How should we think about this against a backdrop of minimal volume growth in July? What's behind that?
Sure. On a per business day basis, our consolidated net revenue growth was stronger in May and June than it was during April. That same trend was true for our North American truckload business. Our North America truckload net revenue margins expanded at an increasing rate as the quarter progressed. That comparison is based on comparing each month of the quarter to 2013's months. Sequentially, month to month, our net revenue margins did not expand during the second quarter of 2014, as it is normal for June to have the lowest net revenue margin of any other month during the second quarter due to seasonality. On a per business day basis, our volume growth was slightly lower in June than the quarter as a whole. That trend has continued into July.
We are continuing to be selective with the transactional opportunities that we commit to in repricing our contractual business based on current market conditions. As we have mentioned in the past, every time we adjust pricing upward, we risk losing the business. While we have continued to grow volumes with new opportunities and expanded our relationships with many customers, we have lost some business through our pricing disciplines. Overall, we feel very confident about these activities and feel that we're doing what's best for the long-term interest of the company and the shareholders.
Thanks, Chad. The next question, again, for you on negative loads. Can you give us a sense for how your negative loads have been trending relative to the first quarter and last year? You mentioned that they were elevated in the first quarter. Did you see an easing of that in the second quarter? Have you been successful renegotiating more contracts with customers to pass along your higher purchase transportation costs?
Sure. Part of that question is repetitive with the previous question, I'll answer primarily about the negative loads now. We mentioned on our first quarter call that our negative loads or loads where we lost money were extremely high during the first quarter. During the second quarter, our loser loads fell sequentially but were up slightly compared to last year's second quarter. In the second quarter of 2014, our loser loads returned to a range that we consider normal compared to other second quarters. Normally, June is the month that we have the greatest frequency of loser loads. June 2014 has the highest ratio of these loser loads compared to any other month so far in 2014. On a positive note, though, June 2014 had a smaller ratio of loser loads compared to June of 2013.
We believe that this is further evidence that we are being appropriately disciplined in our pricing practices.
Thanks, Chad. Next question for John about the routing guide. Is the route guide still at elevated levels despite being lower than first quarter, probably?
This question really ties into the truckload capacity and the comments around the tightness in the marketplace. There's a variety of metrics that we would look at to reach the conclusion around how tight or how difficult it is to source capacity when we assess the marketplace. We look at a number of things and have conversations with carriers to understand the pricing. Route guide metrics are one of the important metrics, which is for those customers that have automated processes for determining which carrier gets the shipment. In our vocabulary, the higher or elevated those route guides are reflective of the fact that shippers had to more frequently go to multiple carriers to find the capacity and get routed.
Those route guide metrics did remain higher in the second quarter of this year compared to a year ago, but did ease some off of the first quarter, where the weather was really probably causing some accentuated spikes in the difficulty of sourcing capacity. The route guide metrics do support the conclusion that I stated earlier around it still being a relatively tight truckload marketplace, but some easing compared to the first quarter.
Thanks, John. The next question, again for you. In the past, you've talked about your long-term growth goal of growing volumes and gaining market share. CHRW has been focusing on margin improvement and efficiency since late 2013. When do you plan to grow volumes market share again, and would you be willing to allow net revenue margin to move lower in order to grow share?
Started to talk about this a little bit earlier around that tug of war between growth and efficiency and how we have in the past and will continue to adjust to market conditions by balancing those two forces. Obviously, depending upon the marketplace and competition, we'll try to find the optimum balance of growing our business and accepting the right sort of margins that the market will give us around that. The short answer to the question is yes, if we have to, we will tolerate some margin compression in order to get growth in our services. In the long-term strategy that we laid out in that investor deck, and when we look back over the last three or four decades, the market share gains and the growth in the company are an incredibly important part of the foundation and what we need to continue to do to succeed.
We will be aggressive going after those market share gains in the long term like we have in the past. Exactly when will we do that? I think that's an ongoing topic that we literally discuss weekly around here, around what's happening in the market condition, how are our productivity levels. While we talk on these calls about top-down guidance and direction around our thoughts for the year, that's certainly true, and we do that, and our network supervisors will be working with each of our offices to figure out what makes sense around those decisions. We do already have offices that are investing more aggressively in growth, depending upon what their opportunities are and how they're adapting. I think as this year wears on and going into next year, you'll see more aggregate activity around that type of investment.
Thanks, John. The next question's for Chad. CHRW plans to increase the return of cash to shareholders via dividends and stock buybacks. Can you provide the framework you plan to use? What dividend payout ratio are you targeting? How much debt are you comfortable with, either measured by debt to EBITDA or debt to capitalization?
Sure. Our capital management philosophy is consistent with what we outlined at our investor day last November. We target returning about 90% of our annual net income to shareholders through a combination of dividends and share repurchases. This is not a commitment to do that every year or every quarter, but is our overall philosophy. If we have other needs for capital generated by our earnings, like increases in working capital or acquisitions, the amount of cash returned to shareholders may be reduced from time to time. Our current targeted dividend payout ratio is 45%. We are managing the ongoing returns of capital shareholders to maintain a debt-to-EBITDA ratio of approximately one to 1.5. For the right acquisition opportunity, we feel that it would be prudent to go up to 2.5x EBITDA for total debt balance. We currently have covenants that limit our debt to capitalization to 0.65.
Thanks, Chad. The next question, again for you. What was the amount of bad debt provisions in second quarter 2014 and second quarter 2013?
Our provision for doubtful accounts was $4.9 million in the second quarter of 2014 compared to $3.3 million in last year's second quarter. As I mentioned earlier, this increase was primarily due to the increase in the size of the receivable portfolio. The increase in the size of the receivable portfolio was driven primarily by our growth in gross revenues.
Okay. Thanks, Chad. Next question for John on global forwarding strategy. Given the sluggish international air and ocean freight forwarding trends, how is Phoenix performing relative to expectations and their ability to attract new business? Where also do we stand on the integration?
When we looked at the Phoenix acquisition, it's coming up on almost two years ago now that we closed that deal, we had a lot of discussion about the industry and the excess capacity, margin compression, where would things go. In terms of our return on investment and valuation assumptions when we made that investment, we felt strongly about the cultural fit and the scale opportunities and the longer term synergies that would come from that. A couple of years into it, we are achieving our base case scenarios, and we're happy with the return on the investment, and we feel like our integration plan is on track, as I mentioned earlier, a couple of years into it.
I think at acquisition time and since then, we've also commented that really the upside and perhaps the most potent synergy around the acquisition would be the cross-selling opportunity and really the revenue synergies of stronger growth that hopefully can come from tapping into the domestic and international customer bases and exposing broader transportation services to them. As we talked on the last couple of calls, because of the integration strategy, we really didn't start to push that more aggressively until this year, and we do hope to continue that over the next several years. We've had some early successes, but not enough to really move the needle in terms of our overall net revenue growth rate. I think our team feels very optimistic about the offering that we have and the go-to-market strategy and the account management practices to execute that in the future.
The overall reaction is we're on track with our integration. We are achieving the base case scenario of the valuation assumptions, and we feel very good about the investment. We did not quantify or attempt to value the revenue synergies and the longer-term real benefit that could come above and beyond that, and we're aggressively going after that today in what is difficult market conditions. Hopefully, at some point in the future, we'll be able to get a little bit more support and tailwind from the market conditions to help achieve that. Despite what we've seen the last couple of years, we feel very good about the investment.
Okay. Thanks, John. The next question is for Chad. Excluding the auto settlement in second quarter 2013, your operating expenses were up 12.5% year-over-year, which is an acceleration versus the growth rate seen in the first quarter and below the 10.2% net revenue growth. Were there any one-time expenses in the quarter that inflated operating expenses? If not, would you expect operating expense growth to mirror net revenue growth for the remainder of the year?
Okay. We've already spent a lot of time. That number combines both personnel expense and other SG&A. We've already spent a lot of time answering the personnel expense questions. Excluding the $5 million auto liability claim in the second quarter of 2013, our non-personnel SG&A expenses grew approximately 3%. Our provision for doubtful accounts was the biggest part of that increase, and we also mentioned in the earnings release that we have lower travel and entertainment expenses during the quarter compared to last year's second quarter. As far as what will the expenses do in the future, we believe that they will continue to fluctuate. Adjusting for just the one-time unusual item of last year that this year's second quarter, the comparison isn't directly comparable, but it is a good ongoing run rate, and there is no unusual items in the second quarter of this year.
Okay, thanks, Chad. The next question again for you. On page five of your deck, you mentioned changes in business mix. What more can you say about that?
That is our truckload slide. The primary change in mix in our truckload business that is impacting the change in our price and cost per mile, which was what the bullet point was about, is that we are hauling more short-haul freight. The shorter the length of haul, the higher the rate is on a per mile basis. Similar to last quarter, our committed rates on long-haul van freight were up in the low to mid-single digits. The 10% increase in our overall customer rates, excluding the estimated impacts of fuel, is driven by a combination of this increase in short-haul freight and a robust spot freight market. Our spot rates grew in the low teens.
Thanks, Chad. One more for you here. What should we expect for tax rate and share count for the remainder of the year? How has management's 2014 CapEx guidance changed?
Okay, thanks, Tim. We expect our tax rate to fluctuate between 38.5% and 39%. Our share count in the future will depend on the amount of cash we generate and the share price. We will continue to follow the capital management practices that we outlined earlier in this call. We still believe that our CapEx, including capitalized and purchased software, will be around $40 million. Previously, we had guided to a range of $40 million-$45 million. We feel we may be on the low side of that range for 2014.
Thanks, Chad. The next question is for John related to M&A. With several large M&A deals recently in the domestic asset-light logistics space, are you considering some larger scale acquisitions would seem to be better use of financial prowess than share repurchases?
With regards to our philosophy or attitude towards mergers and acquisitions, I think when you look around our industry and other industries, you see some competitors that are focused entirely on organic growth and don't look at acquisitions, and you also see companies that are very aggressively acquiring or rolling up a lot of businesses in the space. For us, in our culture, I think you can create value anywhere on that continuum. What we have always believed in and continue to execute is that we want to be predominantly an organic growth company that has very tight, integrated offerings and very high customer service experience. We are open to acquisitions of all size, always have been, and we'll continue to explore those.
When we acquired Phoenix a couple of years ago, that was a pretty large effort for us, and we said at the time that we were going to focus very heavily on completely integrating that and really making it a seamless component of our offering. As I commented earlier, we're pretty much over with that. There's some cleanup to do, but it probably falls more in the range of sort of ongoing things that we have for any of our different service offerings. At this point, we do feel comfortable that in our exploration of the marketplace, if another opportunity comes along, really of any size, we are definitely interested. We continue to have what we believe is a higher filter of strategic fit, cultural fit, and valuation discipline that drives a more limited selection of the number of deals that we're going to do.
For us, at least on that continuum of choices of how to deploy our capital, we feel we have a good balance of where the right acquisition makes sense. It probably does have the highest ROI for us, but that we don't want to mess with our high service offering and our integrated service offering by doing too many. That from a capital deployment standpoint, share repurchases have by far the lowest risk, and they're quick and easy to execute, and we'll continue to do those to make sure that we're fair with our capital structure along the way.
Thanks, John. Next question is again for you on the intermodal strategy. Is intermodal a priority when you think about acquisitions outside of adding more containers or buying an established player? How do you think about increasing your presence in the intermodal market, given its pretty favorable secular growth characteristics?
Intermodal is a priority for many of the reasons that I articulated earlier around integrated transportation offerings and really thinking about the scope of what we go to market with. We are a top five intermodal provider with all of the railroads in North America and do feel good about the presence that we have today. We also know that we don't have the same density and scale as some of the largest competitors, that there is an opportunity to continue to improve there. Absent a significant investment or a merger and acquisition opportunity, the core challenge kind of comes down to the account management disciplines with our customers and with the railroads to make sure that we stay relevant and a part of their go-to-market strategy around the freight that they want to go after.
It's really about either using pooled equipment or our own equipment to make sure that we're going after growth opportunities that our rail partners would support. It includes getting better and more dense range offerings, which are a huge part of the competitive landscape. Maybe most importantly, just making certain that we're interfacing with our customers and exposing intermodal services and intermodal opportunities where it's most appropriate to their book of business to make sure that we stay relevant in that and continue to grow. There are a lot of things that we've done in the past that are under our control that we can continue to do to invest and grow our intermodal business.
Our attitude is that it is a priority and that we will make whatever investments we need to in order to grow that service and make sure that it stays an important part of our integrated transportation offering.
Thanks, John. The next question, again for you on sourcing. When can we expect to lap the dedicated customer loss in your sourcing business and see that segment return to growth?
I think we've talked about in the past that in all of our larger customer relationships, there are multiple commodities or categories, and the transition of the business that's going away began in the last half of 2013. It'll be the last half of 2014, where we'll see the cycle through of the lost business. In our sourcing business, we've also talked about the drought conditions and some of the other challenges that we've had just because of difficulties in the produce industry, that without that lost customer business, that the remainder of our produce business is down slightly the last couple of quarters.
The lost business will cycle through, and we would return to more longer-term growth expectations with sort of that overarching caveat that there are some pretty material weather issues going on and that hopefully those will stabilize and provide a rebound opportunity or some greater growth options going for us. Just from a pure analytical standpoint, the lost business that we know about for sure will cycle out in the second half of 2014, and 2015 would hopefully be a year that we go into with more typical long-term growth expectations.
Okay, thanks, John. The next question is again for you. How is business in Canada, Mexico, and Europe shaping up? Are your expectations being met in these foreign countries?
From the standpoint of our North America surface transportation network, we don't talk a lot about calling out Canada and Mexico because they are an integrated part of that network. We are very proud of our presence in both of those countries. We have six or seven offices in each of Canada and Mexico and have grown them significantly over the last five to seven years. Feel very good about our service capabilities and offerings there and how it is tied into a North America service offering, including the border services that the trucks need access to when they cross. Canada and Mexico are very much an important part of our growth strategy in an integrated North America surface offering, and we feel very good. We've been at it in both of those locations for more than 30 years and have a pretty strong presence there.
With regards to Europe, that's been more of a 20-year investment cycle of the surface transportation and global forwarding businesses that we have over there. Because of the scale and opportunity in Europe, it's a different investment cycle that we're very committed to building out our network and taking market share on both the surface transportation opportunities and global forwarding. We feel very good about our strategic objectives and our presence in the marketplace, our brand, our people, a lot of the things that we're growing on.
It has been more of a challenge from an earnings growth standpoint in Europe, just because of the scale and the overhead that's required and the fact that there hasn't been a great economic environment for the last three to four years to kind of grow into. We feel very good about the long-term prospects of our investments in Europe as well. I mentioned the globalization of our business and how we're focusing in outside of the U.S., Canada, Mexico, and Europe, probably are three of our top priorities of how we believe we can continue to strengthen that global transportation platform and offering that will be a big part of our future.
Thanks, John, this will be the last question. This is for Chad. Given the tight capacity, I would've thought truckload volumes might've been a little stronger. What might be constraining the additional volume growth, albeit GDP remains relatively sluggish?
Thanks, Tim. As we mentioned throughout the call today, we have been disciplined in our pricing practices for all freight and selective on transactional business that we commit to. We feel that we have grown many relationships but culled some freight from the portfolio through these disciplined pricing practices.
Okay. Thanks, Chad, and thank you everybody for participating in our second quarter 2014 conference call. We know that we couldn't get to all of your questions today. We tried to cover the recurring themes, as much as possible. If you have additional questions for John, Chad, or I, please contact me via email or by phone at 952-683-5007. The call will be available for replay in the investor relations section of our website at www.chrobinson.com. It will also be available by dialing 888-203-1112 and entering the pass code 5181255, pound. The replay will be available at approximately noon Eastern Time today. Thank you everybody for joining us this morning. Have a good day.