羅賓遜全球物流 (CHRW) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the C.H. Robinson conference call for the fourth quarter and full year 2003. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for playback, and will be available at approximately 3:00 PM Eastern Time today. (OPERATOR INSTRUCTIONS). I would now like to turn the conference call over to Angie Freeman, Director of Investor Relations. Thank you. You may begin.

Thank you, and good morning to everyone. On our call today will be John Wiehoff, CEO, who will provide an overview of our fourth-quarter and full-year performance, and Chad Lindbloom, Vice President and CFO, who will comment on our operating results.

I would like to remind you that comments made by John, Chad or others representing C.H. Robinson may contain forward-looking statements, which are subject to 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 the call over to John Wiehoff, CEO, who will begin our prepared remarks.

Thank you, Angie. So welcome, everybody, to the first-ever C.H. Robinson investor relations conference call. We just finished our sixth year as a public entity, and we feel like it's been a very positive experience, in terms of building the relationships with our shareholders and other people in the marketplace. And we feel that it is kind of a natural evolution that, as our following has become larger, that perhaps a conference call format would be more beneficial to everybody. We do think that it will be a part of our permanent practice going forward, so we look forward to having future conference calls at the end of each quarter. And we welcome any feedback that any of you may have along that line.

From a format standpoint, as Angie said, I have a few comments. We've tried very hard, over the past couple of years, to put everything relevant in our press release and in writing. So I'm going to follow up and reinforce some of that with a few comments, and then Chad will talk through. And we believe the primary focus of the conference call will be to allow question-and-answer time.

So, first off, in terms of the year 2003, to put it in context from a C.H. Robinson perspective, we thought 2003 was a success. We were very happy with it. To put it in context, when we went public six years ago, we said at that time that we had a 20-year track record of 15 percent growth, both at the net revenue line item and at the operating income and EPS line, and that that was going to be our goal for the foreseeable future. In the six years as a public company, the first three or four of those six years, we were exceeding those growth goals. And probably the most common asked question was, shouldn't 20 percent be a more appropriate target? The last couple of years, we have had an economic downturn. We've had a little bit tougher environment to perform in, but we've continued to achieve our 15 percent earnings growth goals, but less than that from a net revenue standpoint.

From a year ago, if you read our annual report, we said that our growth objective a year ago was to return to double-digit net revenue growth and continue our long-term objectives. And so, looking back on the year 2003, we finished with 12.6 percent net revenue growth and 17 percent operating income growth, and felt very positive about what we accomplished in the context of our longer-term objectives. So management felt good, the Board felt good and we feel 2003 was a success.

In terms of highlights, when we talk about the Company, we most almost always start talking about our people. From the standpoint of people, we did add right about 300 new people to our company this year. We feel pretty proud of our disciplines, in terms of how our branch managers and our business leaders are involved on the front line, in terms of making decisions about who and when to add people. And the fact that we were able to add almost 300 people to our company this year to us is a sign of business growth and expansion of the resources. When you are a service company like C.H. Robinson, bringing in new talent like that is really what it's all about; it's the fun part of the business. And you have to stay to your discipline of deciding when and how to do that, but we feel very good about the caliber of the people that we brought onto the Company, and the foundation for continued growth that 300 more good employees are going to bring for us.

In addition to adding people to the network, one of the other things that we felt positive about in 2003 was the implementation of a new restricted stock program. Again, we have a long history of significant employee ownership in C.H. Robinson. Even prior to the IPO, as many of you know, it was a very important part of our culture. We have used stock options for the last five years or six years, in terms of providing employee ownership opportunities and equity incentives to management. During the current year, we put a lot of time and effort into communicating and implementing a new restricted stock program that we think is going to be an even better tool, and give us greater employee retention and incentives to be a part of Robinson on a long term, from an equity standpoint, as well. So that was another thing that happened during the year that we felt very positive about, from a people and long-term growth development.

The second point I would raise in addition to people is, if you look at our offices, you probably noticed that we added seven offices during the quarter. We added seven offices in North America during the year, six of them during the quarter. The locations for those offices are Jackson, Tennessee; Jonesboro, Arkansas; Dayton, Ohio; Harrisburg, PA; Kenosha, Wisconsin; and Norfolk, Virginia. We've talked a lot to you in the past about the time and discipline that we put into expanding the network of offices, and giving people in our organization an opportunity to be successful on a local basis, by building local customer and carrier relationships, and then tying those offices together with what we believe is very good technology and communication tools. So we put a lot of effort into the growth and expansion of the network. The fact that we had so many in one quarter is maybe a little bit more of a coincidence than anything; it's a year-long process where we select candidates in target cities, and then things like data lines and leases at all the rest of that is just sometimes a matter of when they all come together. So it was a culmination of a lot of effort throughout the year in 2003 that those offices opened at the end of the year.

So people growth, office growth, growth in the network -- all things that we felt very positive about.

We added one freight forwarding office to the network in Hamburg, Germany, at the beginning of the fourth quarter. A year ago, we opened our office in Hong Kong, and then Hong Kong had a great first full year under the Robinson network. And we are excited about the continued opportunities to grow the network in a number of locations that we have, to make the people that we bring in even more successful.

The third point that I would emphasize or highlight that we felt positive about in 2003 is from a relation standpoint. One of the data points that we track and have talked about a lot in the past is both the number of active customer IDs, as well as the number of qualified carrier and service provider relationships for vendors that we have in the network, as well, too. We've talked about having 15,000 active customer IDs. We grew somewhere around 1,000 active customer IDs, and think 16,000 active customer IDs that we have at the end of 2003 is representative of the fact that we continue to penetrate the market and expand our reach of customer relationships.

Similarly, on the carrier side, we've talked about having more than 20,000 carriers under contract, or qualified to do business with us in the past. We added a tremendous amount of carriers in 2003. We're right about 25,000 qualified carriers in our contract network right now, which means that we have that many carriers available to do business. As we've told many of you in the past, those numbers are only one indicator of what we have access to. Obviously, there is a lot of new and small providers in there that we may be doing very limited amounts of business with, but nonetheless, it's at least one measurement of kind of the scope of our interaction of relationships into the marketplace, both on the customer and on the carrier side.

We had a lot of discussion this year about the stress on the truckload side of the marketplace, and the fact that there were a lot of new carriers coming in, and we were signing up a significant amount of them, in terms of trying to develop a relationship with them and grow the amount of business that we do with them.

The last point I would make on 2003 is with regard to the expansion of services. You put the people out there in the network, and you put them with the right incentives and put them in the right place. And then the last part of it is, what are we doing for our customers, and what are we doing for our carriers or grow our suppliers out in the marketplace? Over the last decade or so, we've been working hard on expanding not only just the different modes of transportation and services that we provide for the customers, but then sewing those services together with a lot of value-added things that we're doing for the customers and carriers, as well, too. We definitely saw a continuation of that in 2003, where we have a number of very fun, successful customer stories where we're providing more integrated logistics supply-chain services, whatever other buzzwords you want to tag on there, in terms of referring to the expansion of services that's going on in the marketplace.

So those were some of the highlights for 2003. Again, we thought it was positive -- addition of people, the addition of offices, the growth of relationships on the customer and carrier side, and the continued evolution of services and expansion of things that we're doing in the marketplace.

Specifically in the fourth quarter, one of the things that we talked about in our press release is the accelerating freight volumes. And I guess it's been no secret to everybody that there has been some economic recovery and some increasing freight levels during the fourth quarter of 2003. And we certainly saw that, as well, too. When we've talked in the past about the relatively predictable cycles of supply and demand in the transportation industry, from our view, the fourth quarter was just a continuation of what we've been talking about in the past, where there were a lot of incremental freight opportunities in the marketplace. The challenge was to find capacity, which gives us volume opportunities, puts some pressure on the amount of margin that you can make per shipment, because you are generally working harder or having to pay more to find that capacity. So that's the part of the cycle of the marketplace that we're in, where we saw strong volume growth with some pressure on margins.

As I said before, one of the things that a lot of our people end up working hard during that part of the cycle to source new capacity and try to solve our customers' problems, and build new relationships in the marketplace by recruiting more carriers. And we certainly experienced a lot of that in the fourth quarter, as well, too.

So those are really my comments for 2003. I would talk just briefly about 2004 before I turn it over to Chad. First off, I want to reiterate that our company's practice has never been to give guidance, and we are not going to give guidance. I talked earlier about our long-term growth goals, and we continue to have a long-term growth goal of 15 percent. What that means is that we do our planning, we talk about adding people, we talk about opening offices. And we think in plan for long-term 15 percent growth. And that is still very much a part of our culture, and very much a part of our goals in planning. We've been achieving it for the last 25 years, and we feel very positive and have a strong outlook going into 2004.

With regard to 2004, if we do see continued economic recovery, we would expect that there would be some continuation of what I talked about in 2003, that perhaps freight levels will exceed capacity, and that as part of the cycle, the challenge will continue to be to find new sources of capacity, to look at mode diversification, to look at different routings and to look at different options to try to help meet the needs of the customer and the freight on that part of the cycle.

The other point I want to make a quick comment on is coming into 2004, and I know during this year, one of the main subjects of conversation on the transportation side has been the hours of service regulations. And we really feel very comparable to how we talked about that last year, is that it is a pretty significant thing in the transportation marketplace. We don't see it as having a very material impact on our business. All of our people have been aggressively talking with our customers, and making sure that everybody understands the ramifications, the potential ramifications of it. As most of you probably know, it's not going to be fully enforced until March, and a lot of the aspects of it are going to have a ripple effect, in terms of people understanding them and repricing and adjusting throughout the time. So we do expect that it's going to have an ongoing effect throughout 2004 that we will have to stay abreast of, and be having a lot of conversations with our customers and carriers about, but we do not expect that it's going to have a material impact on our business.

Those are my comments for 2003 and 2004. Again, to summarize, we felt very positive about the year, and are looking forward to more success in the future.

So with that, I'm going to turn it over to Chad to make some comments about our operating results.

Thank you, John. John give you an overview of our great year. My comments will focus on the operating results for the quarter. As always, my discussions will focus on gross profits, and the profitability and expense ratios I use will be as a percentage of gross profit.

For the quarter, our truck gross profit grew 11 percent to $120.4 million -- I'm sorry, our transportation business grew 11 percent. Our truck business grew 9 percent. This growth was due to transportation volume growth in both truckload and less-than-truckload, as our profit per load decreased slightly. Our profit per load was still within the realm of what we would consider normal for a fourth quarter but, as John mentioned, the capacity market was a little tight. Our growth came from increased share with large customers, as well as adding new customers throughout the quarter.

In our intermodal business, increased volumes and margin expansion drove our strong gross profit growth of 25 percent for the quarter. Our volume growth was driven by our aggressive sales efforts, as well as a stronger focus on mode conversion opportunities for our customers.

Our ocean business was up 7 percent for the fourth quarter. Our air gross profit more than doubled. This extraordinary growth is mainly because we had increased volumes of several large customers, and our Hong Kong office is now managing air business, rather than sharing those revenues with agents in Hong Kong.

Miscellaneous transportation gross profit increased 23 percent in the quarter. This is primarily due to an increase in our transportation management fees business, where we are managing shippers' freight with their core carriers through our system, in addition to the freight that we are hauling for them.

Sourcing gross profit increased 17 percent to 11.8 million. The strong growth was due to a combination of increased volumes with retail and foodservice customers, and also the fact that we had a pretty easy comparison in the fourth quarter of 2002, which was a tough quarter for us. Information services gross profit increased 11 percent to 7.7 million, primarily due to transaction growth at T-Chek, our fuel card subsidiary.

Personnel, our largest expense, grew as a percentage of gross profit to 49.5 percent from 47.7 percent for the quarter, and to 49.8 percent from 48.9 percent for the year.

As John mentioned, we implemented a new restricted stock program in 2003, and this increase is largely attributable to that program. Expense for the restricted stock grants is variable, based on the growth in Company earnings. For 2003, this expense was 7.6 million, as John mentioned.

SG&A decreased 10 percent, to 23.5 million from 26.2 million. In the fourth quarter of 2002, we recorded a charge of $4.3 million related to a lawsuit settlement. Excluding this charge, our operating expenses as a percentage of gross profit decreased slightly to 16.8 percent. Many of our expenses are variable, but we did gain some leverage with our gross profit growth.

As our earnings release mentioned, we believe our capital expenditures for 2003 were consistent with historical levels and what was expected. For 2004, we are planning for some additional CapEx related to office space. In January, we purchased a building in Chicago that will have about 80,000 square feet of office space. Chicago Central is a major operating center for us, and this building will give us room to grow in future years. In Minnesota, we also outgrew our current office space, and so I've leased a new 58,000-square-foot building in Eden Prairie. Combined, these projects will have about 20 million of CapEx over this over the course of 2004. Beyond these real estate expenditures, our CapEx should continue at rates consistent with historical levels.

Our balance sheet continues to be strong, with no debt and approximately 244 million in cash and short-term investments. Our first priority for the cash is growing the business, as we do require some working capital and a small amount of CapEx to grow. In 2003, we increased our dividend by 50 percent, raising our dividend payout ratio from between 20 and 25 percent of earnings to 30 to 35 percent of earnings. We are always looking for acquisitions to redeploy the cash, but those acquisitions must fit our culture and enhance our growth opportunities. If our cash continues to build in 2004, and there are not substantial acquisition opportunities, we will look at other ways to return more of the cash to our shareholders through another increase in the regular dividend, special dividends or share repurchases.

That concludes our prepared remarks. We will now take questions from our investor audience.

(OPERATOR INSTRUCTIONS). Ed Wolfe.

Bear Stearns. Can you talk a little bit about revenue growth opportunities? You talked about opening up seven new offices in the quarter. How many did you open up in the first three quarters last year, and how quickly can you leverage that into increased growth, do you think?

The new office openings themselves take quite a while to become material contributors to the results because, as we've talked about before, we generally are starting with two or three people, and it takes them probably several years before they really can grow enough mass to start to show up, where the revenue is really going to start to contribute. So for, it's more about having people who are ready to go do it and go in -- we do have a pretty established track record of success of being able to find new sources of freight and new capacity relationships when we put people into those marketplaces. So it's almost like planting seeds, more so than being able to quantify what period of time those revenues are going to come or contribute. I don't know exactly how many we opened. Are you talking about 2002 now? In terms of --

No; I was talking about the first three quarters of '03.

Only one, one office in North America in the first three quarters of '03. But again, we were working on all seven offices throughout the year. The fact that a lot of them pushed back into the fourth quarter -- they were spread October, November, December. And we are targeting 7 to 10 new offices in 2004, as well.

Can you talk a little bit about -- in the press release, you talked about large new offices in Chicago and Minneapolis. Does anything in Chicago have to do with American Backhaulers, and your view of growing that core there, or is that separate?

Well, what triggered both of the real estate decisions were the expiration of leases. Out of our 4,100 employees, we have about 800 in Minneapolis and pretty close to 1,000 in the Chicago area. And we had simultaneous leases on a couple of facilities in Minneapolis that expire a year from now, and we also have a lease in Chicago, the building that was the American Backhaulers building expiring, as well, too. So we went through a real estate sourcing and evaluation process that resulted in the decision to take on new leasing space here in Minneapolis, and to buy a building very near the one that we are in in the Chicago area. So it's really just a continuation of the strategy that has been in place in both cities, just representative of the fact that our leases expired.

I remember several years ago, when you purchased Backhaulers, one of the down-the-road decisions was going to be possibly you could move some of Minneapolis to Chicago, or some of Chicago to other branches, where your sales branches are around the country. I'm guessing from what you just said that you're going to keep it status quo for now, anyway?

Correct.

And just one other question, in terms of directionally, the freight market. We are hearing capacity is tight -- the large carriers, truckload carriers, aren't bringing on much capacity because they are constrained by drivers. Yet we are seeing new truck orders start to mount. What is your sense of the sweet spot for C.H. Robinson? Is there some point where demand is strong, and yet capacity comes back in the market, or is it some point on the other side where there is a lot of capacity and demand is slowing down? Is there one spot that, if you had all your druthers, you'd like to operate in forever?

No. I actually think our goal is to not have sweet spots. A big part of the value that we're trying to add to the marketplace is to remove some of that volatility for our customers, and make it easier for them to help manage their business. So the message with Robinson from the beginning has been that we try to provide long-term, stable value by managing through all those parts of the cycle.

What are people are stressed by, and what is challenging to us clearly changes during the various parts of the cycle, but we've held a pretty confident view over the less couple of decades that it's just the supply and demand cycles, and we're going to work through them and try to provide consistent service, consistent access to capacity as best we can during those cycles, and try to manage our participation or profitability, and it to be a pretty consistent thing throughout it.

You've certainly done a great job of that. Thanks a lot.

Alex Brand.

BB&T Capital Markets. A couple of sort of bookkeeping-type questions. I just want to confirm that the sequential jump in the G&A -- was that primarily related to the new office openings?

Yes. We had a lot of relocation expenses for the people, to get them moved, as well as the startup costs of the new office. So that definitely contributed to it.

And you mentioned a restricted stock expense for the year. Did you say what it was for the quarter?

I did not, but it was about 2.5 million for the quarter.

Now, I have a question about intermodal. Obviously, you've been growing that business rather rapidly. And my question is, can you talk about the sort of mix of organic growth versus conversion business, and can you talk about -- I'm not seeing any real yield or margin dilution, so I guess you are getting pretty good margin sell-through on that business. Is that something that you think is sustainable, and where do you think you can go with that?

Well, from the intermodal standpoint, we believe that our participation in the intermodal industry probably has a greater portion of truck conversion type activity than most IMCs, or probably any other IMCs out there, probably half-and-half, in terms of our business of looking at the growth being from truck conversion versus just providing traditional intermodal-type freight to the freight that has previously gone intermodal.

So I think there's a number of things that are contributing to it. Clearly, tight capacity -- a lot of shippers are looking for more alternatives, and looking for ways to get things done. Over the past couple of years, there's been a lot of cost pressure because of the economic downturn. And as everybody knows, intermodal is generally - especially on a longer haul -- a cost-savings opportunity relative to truck. People have been ramping up and fearful of cost increases from hours-of-service issues with the trucking side of it. So there are lots of reasons why shippers -- and the last point is probably the improved service levels at the railroads. That went sideways a little bit this year, but had been improving for a long period of time.

So there's a lot of positive trends towards intermodal being a more attractive opportunity, and I would say that we're approaching intermodal the same way that I described we're trying to approach the entire business, which is we try to be fair to all of our customers and providers, that we're going to take a consistent margin for the value that we add, and try to keep our business so that we don't have an economic incentive to sell one mode versus the other mode. We're just trying to offer whatever makes sense, make a comparable margin on either type of mode, and sew it together with like the value-added stuff I was talking about, where we can provide routing and mode selection services for the customer.

In terms of where you are going with intermodal, from what we hear, the competitors don't see you much on national bid, big-bid type of business. Is this a business that ultimately you want to grow to the point where you are going to compete for more of that national bid type of business? Are you sort of content to try to pick off -- I don't know if you would call it spot-type business. But maybe you can just characterize it for me, sort of the contract opportunity versus the spot opportunity.

Sure. I guess the way I think of that, Alex, is that we have always prided ourselves on being sort of a bottom-up marketer, that we're going to build capacity and capabilities one person at a time and one relationship at a time. And we are growing our intermodal business, and have pretty significant growth and expansion plans for it. But as you build up your volume and build up your capabilities to jump up and take on 30,000 or 40,000 shipments at one time on a big national bid, that's a stretch for a smaller company, if you can really execute on that and do a good job. Our capabilities are growing all the time, and absolutely we're going to continue to expand what we think we're capable of doing, and get more aggressive. But were not going to overcommit; we're not going to sign up for things that we can deliver the same high quality of service to the customer that we have in the past.

Jon Langenfeld.

Robert W. Baird. Good morning. Nicely laid out here. A couple of things -- first on the truckload side, the contractual side of the business, I was just wondering how you are addressing hours of service in terms of pricing. Are you reinforcing accessorial charges, or have you had to do anything there specifically related to those new rules?

I would say on that roughly half of our truckload business where there is some sort of contractual commitment or forward pricing on it, we, throughout the entire last half -- and one of the good parts about the hours-of-service regulation is there was a pretty good lead time and a pretty good heads-up, in terms of it coming. So we had a lot of good discussions throughout the last half of last year, and revisiting of contracts to make certain that there was clarity of expectations on both sides, with shippers and carriers, regarding accessorials and detention charges. And what's happening right now is those things are playing themselves out, as to -- detention charges do appear to be being charged more aggressively, and being more pertinent in the marketplace. So we've had to manage that, and pass them through, and bill them and manage our business to adjust for it.

And then on the profit-per-transaction side, I know you said that's within historical range a little bit of pressure on that. But as you look at the profit per transaction at this part of the cycle, as things presumably are accelerating and capacity is tight, should that profit per transaction stay pretty much within historical ranges, given the potential offset on the spot-market side versus the contractual?

That's a tough question, because we're making sort of global comments here. When you get down by lane, by season, by mode, there are so many different things -- profit per transaction can be affected by the scope of services, like I touched on all the -- about exactly what are you doing for each customer on that load. And then there's the blend of the contractual and transactional stuff, as well, too. So in aggregate, what ends up happening to our profitability or averages is a composite of all of that. So it's really hard to isolate what any one factor's going to do. But, like I said before, our whole goal is to be fair about what we're doing about we're taking out of it, and to manage through all parts of the cycle. And it's going to move around a little bit, but keep it within a fairly normal range.

And then, as far as the restricted stock grant, Chad, is Q4 -- was the expense there a little bit higher than Q3, just given the final true-up of the year?

Yes, it was, and it was also because we had a pretty good Q4.

And then finally, on the locations -- Chicago, Minneapolis -- are you replacing the locations where the leases came up, or are you adding to them?

Yes. In Chicago, our current lease is actually up at the end of this year, so it will be 2005 when the move into the new building. We have to renovate it; it's actually a warehouse today. And in Minneapolis, we're going to be replacing the building that T-Chek is currently in, but it is a net growth of about 50,000 square feet in Minneapolis.

John Barnes.

Deutsche Bank Securities. As you begin to roll in these new offices -- and, Chad, I know you said that the new offices take a while to become a meaningful contributor. But do you look at it on a same-store basis? Can you provide any of that insight, if there was any in the quarter?

We really don't do a same-store analysis internally because, as we said, we open an office of two or three people. So it's not like a retail location where a store is basically a store. We do group our branches internally by size, and do a lot of internal benchmarking and a lot of measurement of when an office becomes profitable, and how profitable does it become, and things like that. But no, we really don't do any same-store analysis.

In terms of other modes of transportation that's out of your truck division, I know you're seeing capacity constraints there. Is there capacity constraints anywhere else? Are you seeing it on that intermodal side? Are you seeing it air freight or ocean freight -- anything else?

There were definitely intermodal capacity constraints in the fourth quarter, as well, too, especially on the West Coast, that I'm aware of. Again, there's these longer-term macroeconomic cycles, but then there's the typical calendar, seasonal stuff. There's not much capacity constraint in January, because there never is. So right now, it's hard to say. I think what everybody is questioning and worrying about is when in the spring here will the capacity crunches really start to hit around the country, and how severe will they be, and how much will the market be able to react? So we are expecting more, soon; but for right now, it's hard to say exactly what '04 is going to bring.

Given that you all do -- your produce business, I think, kicks off in the first quarter. Are you under any pressure in your seasonal produce business? I know capacity in the truck business lighten up a little bit, or the tightness in that capacity lightens up in the first quarter a little bit. But given that it sounds like economic activity is picking up, and things are a little bit better than they were a year ago, yet we haven't seen a lot of capacity come online, are you running into any of that, as you try to find capacity for your produce business?

It hasn't hit yet.

Hasn't hit yet?

But the produce business, as we've talked before, is the one area of the freight world where things can spike in a hurry. The business, depending upon when crops come to market, and depending upon how they are managed or whatever, that can be some of the most volatile, demanding, seasonal, difficult stuff. So it starts in different regions of the country at different times, and so that's why we have our people out in the network close to those people, ready to react, because it can be very volatile.

And lastly, use of cash. You talked again about acquisitions, and you guys haven't done a material one in a while. What's the biggest hurdle on the acquisition front right now? Is it just finding something that's attractively valued? And have valuations become more reasonable or, as the economy is picking up momentum, are you seeing that swing back the other way, and maybe people have a little bit of an unrealistic expectation as to what they should get paid for their business?

It's probably hard to generalize about acquisitions, because we look at them through a couple of different lenses. Some of them are North American market share type things, where it's really more about timing of when do we find the right opportunity, or when is a seller in the right mood for exit strategy or whatever. And valuations on those types of businesses don't seem to fluctuate as much as some of the larger public entities. And then you look at international freight forwarding with our agents and our global growth, and you get into issues of culture and trust and financial accuracy and all the rest of that. So we do put a lot of time and energy into thinking about how and where we can grow through acquisition. And it's hard; for us at least, there's no consistent theme of valuation patterns or attitudes of sellers.

James Valentine.

Morgan Stanley. I was hoping just to talk a little bit about truck growth rate. And if we look back to, I guess, mid-2001, there's only one quarter when we've seen truck growth its gross profits faster than 15 percent. And, given your stated goal of 15 percent EPS growth, and this is your biggest division, I'm trying to understand. Is it that the truck brokerage business is becoming more mature, or is it more function of how many offices you've added over the last two years, I guess vis-a-vis the economy, or something else we're looking at? Or is this just going to be a slower-growing part of the business versus your overall 15 percent EPS growth rate?

It's been our view, and still is our view that, despite our size, we're still a very small portion of the truck market, and that the 15 percent growth historically has been largely about taking market share, as well as converting some freight to third-party type freight that previously wasn't. And you can dissect the truck market a number of ways, in terms of identifying what portion of it is favorable to brokerage or third-party type business. And even if you start to carve it up that way and chop the market in half or whatever, we are still a relatively -- you know, less than 10 percent of what's out there.

So it's our view that 15 percent growth and continued market share is still a reasonable long-term growth goal, even on the truck side. When we've analyzed our historic growth in the truck business over the last couple of decades, it gets difficult to kind of dissect what is new freight and what is historic freight, because things move around quite a bit. But some of our best estimates have been that it's probably about half and half, that we get some freight from existing customers and some is just brand-new market share. And when you go through a period of time where you've got lessening market share, and a lot of our customers whose business volumes are going backward and stuff, it's pretty hard to get to that 15 percent. And there were periods of time in the late 90's when we were exceeding that, because we were getting a lot of incremental freight from current customers, as well as continuing our kind of baseline of market share penetration.

So you think it's more of a cyclical/part of the portion of the business cycle we are in, for the slower growth over the last two years, versus any structural issue?

Yes.

The second question -- I wanted to hit on depreciation. I know it's a fairly small cost item, but it's been going down. And I think I know why, because you discussed it in the past with us. But I'm trying to get a feel for going forward, given the fact that you are purchasing two new buildings. And I know the land's not going to depreciate, but the buildings presumably will. And also, I believe you had some IT costs that fell -- in terms of the depreciation expense, kind of fell off because you're using the equipment or software longer than you originally expected. And I presume at some point, you're going to need to replace that. Can you give us some kind of feel for what kind of step-up, or if we are going to see one in depreciation for 2004 or 2005?

The building we are purchasing, we won't start depreciating until '05, because that's when we'll be moving into it. We have not done the internal analysis to know how much exactly will be land value and how much will be building because, as you stated, you don't depreciate the land and you depreciate the building over a very long period of time, somewhere around 30 years. Then there will be the build-up costs (ph). So it will have an impact on depreciation. However, we're only buying that one building in Chicago. The new building we're putting online here in Minneapolis -- we're actually leasing it.

So that will run through your SG&A costs?

Yes, rent expense, just like it always has.

And how about the IT cost? Should we expect a big step-up when you make your next, I guess, phase into technology?

No. We have been more replacing things as we needed to, which is why we keep pointing to historic levels of CapEx. We did the one major upgrade to our networks to truly get to a client/server, PC-based network rather than a mainframe network at the end of 1999, beginning of 2000. Since then, we've been doing maintenance and adding incremental equipment as we needed it.

And the last question is regarding pricing. When these contractual truckload -- when these truckload contracts roll over, given the fact that we are in a tight capacity and it looks like it's going to get tighter, what kind of price increases are you asking of your customers going into '04, given that we are not sure how tight things are going to get later in the year?

One of the things that really differentiates us from most other transportation companies that you probably interface with is we don't really set top-down pricing guidelines or targeted increases. And what happens is, when you go into our contractual relationships, prices can vary tremendously, based upon the difficulty of the freight and the experience that we've had moving it in the past. So we have contractual relationships where multiple stop freight -- where hours of service is going to be an issue, and the freight has been difficult to deal with in the past, where there is double-digit price increases. And then we have other customers, where we have been working with them to streamline it, and things have been getting better and we're doing some load conversion and rates are going down. So we don't really have an aggregate pricing level that we can state for you, or that we even target.

In that example, when you said you have someone going from truckload -- or your truckload rates may be going up double-digit, are those types of customers -- are you offering them the option to go LTL, and are you seeing much of that going on?

We have non-stop conversations with our more committed customers about load building, and quantities of shipments, and pallets versus truckloads versus containers and mode selection. That's basically our method in the marketplace, is to work to earn freight on a load-by-load basis, but constantly building that relationship with our customer to figure out if there isn't a smarter way to do things, or a cheaper way to do things. And that would include everything from load building to mode selection to routing.

But for LTL carriers, you now are saying that there is potentially a windfall here, that they are going to get all this business because the truckload multistops are going to go away. Have you seen an avalanche of those types of conversions by the shippers, or is it more just kind of on a case-by-case basis?

We have not seen anything significant or sudden. And there are lots of theories as to how things could evolve as a result of this hours-of-service stuff. But I think, under any scenario, it's going to be at least a couple-of-year, gradual transition.

Jordan Allinger.

From Lazard. Just a question on sort of the product diversification side or line diversification side. Can you give us a sense as to your thinking, not just on what you may do from an air forwarding side over the next year or so, but I know in the past you talked about doing more on a pan-European truck brokerage capacity. I'm just curious; do you have an update on your thoughts and strategies there?

Well, definitely carrying forward with both of them. In the pan-European truck businesses, we have 9 or 10 offices in Europe now that are doing truck services, and we have a total of 14 offices in Europe. The rest are doing air and ocean services. We still feel very excited about what we would characterize, one of our strategic directions is the replication of the North American truck network in Europe. So we have our methodology and our technology up there, and we are opening offices. And the European trucking business is -- truck brokerage thing is about 3 percent of the consolidated load count, in that revenue right now. So we are building it from the bottom up, like I described earlier. But that's still very much a viable part of our long-term strategy of geographic expansion and mode expansion.

And then the international freight forwarding is similar, from the objective of kind of geographic expansion and building around the world, whereas the European trucking thing is a little bit of a stand-alone business. The global freight forwarding stuff has a lot more interdependency, in terms of today, a high percentage of our freight is either coming to or from the U.S., and we're working with agents and other offices around the world to provide better service and expand opportunities there. But then we are also looking for new countries or new contentinents to get onto. And both do a better job of servicing the other end of the U.S. originating or terminating freight, as well as begin a local marketing presence there.

What are some of the areas you may be looking at, sort of globally? Obviously, Asia being one, but --

The emphasis -- you know, most of it is Asia, North America and Europe. And so we feel like we've got a good foundation in North America, but we want to continue to really grow our freight forwarding presence and offices throughout the U.S. And then we're definitely going to be looking for expansion opportunities in both Asia and Europe.

Gregory Burns.

J.P. Morgan. Hi, guys. Very solid quarter. I just wanted to maybe drill down to the truck piece, if I could, a little bit. Your commentary that you're taking increased share of large accounts -- I'm curious; do you think this is a secular or cyclical trend? And I guess what I mean is, are the asset guys right now having trouble living up to some commitments, and that's creating more overflow freight for you? Or are you essentially moving in on them on a longer-term basis?

It's almost like the two pieces of it are where we are serving as a contractual provider on a more dedicated relationship, and then there's the spot market piece. Clearly, like in the fourth quarter, where capacity is tight, we saw some nice transactional or spot-market opportunities to help out shippers, where they had incremental freight needs. Now, that may or may not be because an asset-based provider is failing; it may just be because freight volumes are greater than the shipper contracted for or predicted. And it may be because an asset provider over committed or had a better opportunity or whatever; we don't really know what happens there. But on that spot-market side, in a tight capacity environment, there's definitely opportunities there.

Separate from that, we are trying to find more and more opportunities where, with our technology and our people and our broader solutions, we can play a more dedicated role to outsource or to provide integrated services, where we may be displacing some of the customer contact or some of the process management that an asset provider would have given the past.

Does that type of pitch get a better reception in a tighter-capacity environment than it would have gotten a couple years ago when there was a surplus capacity?

It really depends upon the customer. I mean, there are customers -- it just depends on how they've set up their network and how they plan to manage their freight. Many customers who have a lot of internal resources and have a lot of focus -- in a tight-capacity environment, all they really want is capacity, because they are strained and they don't want to talk about anything other than, you know, pick up my loads. In other instances, it will trigger kind of a reassessment of are they taking the right approach, and should they look at a more holistic solution?

And on the LTL piece, how big a percent of your gross profits on the truck side is that now?

Probably about 12 percent of gross profits. But the --

12 percent of the truck.

Of the truck, yes. The definition of LTL versus truckload is a pretty blurry line.

Because you're talking about the multiple-stop truckload?

Yes, selling LTL but moving it onto truck. We kind of look at that internally, and that's maybe one of our best estimates. But the reason why we don't report on that is because really, there are lots of definitional issues which we don't need to get into. But in terms of where those lines connect, if you pick up three different shipments from three different customers and put it on a truckload provider -- is that truckload or is that -- I mean, there's various combinations of how you can do things.

Right. No, I hear you. But certainly, that piece, however you define it, seems to be growing significantly, in excess of the longer-haul traditional. Is that fair?

I think traditional long-haul truckload freight is being attacked by intermodal; it's being attacked by smaller, more frequent shipments, which would be LTL. It's being attacked by better supply chain and network planning from customers. So I think it's -- yes, I think there's a number of factors that are probably, at least in the last few years, taking away some of that market.

And, John, a couple of years ago, you guys talked about developing pods within the branch networks to -- I think the goal at the time was to better attack the shorter-haul truck business, where, because of how the P&L's work, maybe you weren't getting the sort of cooperation between them to attack that effectively. Are you where you want to be, in n attacking that shorter-haul stuff? Was that initiative successful, or is there more opportunity there?

Yes, I would say we are where we want to be. You know, if you went back 10 years ago, we were focusing more effort on long-haul truckload stuff, because in the information world, and from a pricing standpoint, it was just easier for us. And today, it's a combination of more of the freight becoming short-haul, so we've got more short-haul, intermodal and truckload freight opportunities. But then, in addition to that, kind of tying into this whole integrated service offering is that if we're going to work with customers on a broader, more integrated basis, we can't just say we want your long-haul freight. So we're definitely building our competency, and are much more capable today, short-haul and long-haul truckload capacity, and feel like we have improved our internal load-sharing and communication methods to help address that.

And just one follow-up question on the intermodal side. It clearly looks like you're taking share; and I'm curious, John, whether as part of your people addition -- have you been hiring intermodal specialists, to handle the sort of growth and grabbing them from potentially other competitors? Or is that not part of your market-share story there?

We have hired a few people from the industry, but the majority of the people additions and the majority of the sales growth comes from the internal pipeline of hiring. Generally, people right out of school, new to the industry, and training and growth. So most of the growth and most of the people talent that is being applied towards intermodal is coming up internally, being trained and developed within the system. But we have added a smaller percentage of the people from industry hires.

Michael LaTronica.

Excalibur Research Group. Congratulations on a nice quarter. Most of my questions have been answered, but I do have two that I wanted to circle back on, one on hours-of-service. Are you getting any resistance from your customers on hours-of-service charges, and have you been hampered in any way in collecting those, and does that have any impact on the profit per transaction?

It would be an overstatement to say that we're not getting any resistance, because there are so many relationships and so many customers out there. But in general, at this point, our Company feels like we were pretty well prepared for it. We've talked with everybody about it, and there hasn't been a lot of resistance or concern or anticipated impact to our Company in terms of living through it.

So what really happens, the ultimate consequence of it, is that there's more detention charges and more accessorial billed, which will be increasing the ultimate cost of transportation. So we've got to work with our customers and work with our carriers to manage that, as well. So it has not -- clearly, in 2003, in the numbers that we're talking about, it obviously did not have an impact, but we do not anticipate it to have any impact on our margins going forward, either.

And just one final question. Could you give us an update on the recovery of the litigation settlement from last year's fourth quarter? Has there been any progress there?

The only real update is that the trial-ready date is in June, and the trial should actually be later in the summer.

Ken Hoexter.

Merrill Lynch. I just wanted to talk to you about the capacity. Obviously, you said capacity was getting tighter, and we can see that from the industry. But yet, you signed up 25 percent more carriers during the year. Are we seeing the average size of the trucking companies you are signing getting smaller, or how do we read this huge truck number that we saw come out yesterday? Do you see additional entrants, smaller entrants coming back into the marketplace?

It's really hard to gather reliable data on exactly the size and total capacity of the underlying carriers that we are signing up. We try pretty hard with that. But I think, like I said earlier, Ken, it's just one data point. What I would mostly take away from that is that we know, over the last few years, that there has been accelerated bankruptcies, that there's been the freight decline and the economic decline of 2000 and 2001 was really hard on the trucking community. So there's been a lot of churn; there's been a lot of new providers and a lot of new capacity coming in, and our Company has to respond to that, and go find it and sign them up and qualify them and find out the good ones and work with them over time. So for us, it's mostly an indicator that the cycle of supply and demand is alive and well, and that we're finding new sources of capacity out there. And time will tell, in terms of how that sorts out, in terms of big and small and who survives.

Just a follow-up on the sourcing, you know, the migration that we've seen over the past couple of quarters over the wholesalers -- are we seeing that major move complete itself? And also, can you talk about the long-term growth that you see within the sourcing business, as we migrate to the wholesale kind of entities?

In the sourcing business itself, we're providing bundled services for the customers. We're both sourcing the product, as well as providing the distribution services, so the distribution or transportation component of our sourcing relationships shows up by the mode of transport that is moving up above (ph). So, long term, we still expect a lower growth rate on the actual sourcing line item; it's just, like we've said in the past, going to be a little bit lumpier, in terms of up quarters and down quarters, because of the cyclicality of the products and the volatility of the industry with wholesalers and retailers. So the trend is continuing, but we still have more modest growth expectations for the sourcing line item on our financials.

And then on the 7 to 10 offices you mentioned you were opening this year, are those domestic offices, international? Or did you mention that, and I missed that?

Mostly domestic. We do have plans in growth for both. If we're successful in targeting all of our locations and all of our growth, it would be on the high side of the number, and included maybe six or seven domestic ones and three or four international ones. But again, for us, it's all about having the right people in the right place. We don't mandate these numbers and then insist that they have to happen under any circumstance. We have got to follow through on making sure that the people we want to put in those places are ready.

That will conclude the Q&A portion of our call. Thank you for participating in our fourth-quarter and full-year 2003 conference call. Before we conclude, I want to remind you that this call will be available for replay in the investor relations section of the C.H. Robinson Website at www.CHRobinson.com. It will also be available by dialing 888-566-0471. The replay will be available at approximately 3:00 PM Eastern Time today. If you have any additional questions about our fourth-quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.