羅賓遜全球物流 (CHRW) 2004 Q1 法說會逐字稿

Welcome to the C. H. Robinson first quarter earnings conference call. At this time all participants are on a listen-only mode. Later we will conduct a question-and-answer session. At this time if you have a question, you will need to press star one on your touch-tone phone. As a reminder this call is recorded for play back. And will be available approximately 2:00 p.m. eastern time today. If you need assistance on the call, please press star zero and an operator will assist you. I would now like to turn the conference over to Angie Freeman, Director of Investor Relations. Miss Freeman please begin.

Good morning everyone. On our call today will be John Wiehoff, CEO, who will provide an overview of our first quarter 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 risk 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 who will continue with our prepared comments. Thank you Angie. Welcome everybody to our second quarterly conference call at C.H. Robinson.

We don't have a lot of prepared comments or thoughts, but I'll share a few and Chad will make a few comments and then we'll have the majority of the time for question and answer. I think the first and most obvious thing to talk about probably is the market place with regards to the truckload enenvironment. And I don't think there's any secrets or surprises out there, it is what you're seeing in a number of other places and what we generally expected coming into the year, that the freight volumes and the freight levels are on the increasing part of the cycle. And that trucks are generally considered to be tight or more difficult to find during this period of the cycle in the transportation market. So just, again, to talk through what that means for C.H. Robinson,

as we've talked frequently in the past, we have a couple of different general parts of our business, the contractual part where we have more of a fixed rate commitment, so at this period of the cycle, when we've got customer commitments and trucks are tight and rates are generally increasing, it does put some margin pressure on our business, where we have to pay often times an increasing cost of higher, and it has a compressing -- margin compressing impact of the portions of our business that we have contracted out with those customers. The other impact on the generally the other side of our truckload business or the more transactional business is that when equipment is difficult, it is difficult for everybody and we generally have more opportunities for spot market or transactional business which can lead to higher volumes and more activities, so what you see in the first quarter of 2004 for C.H.

Robinson is high gross revenue increases on the transportation side, some margin compression compared to previous quarters due to the tight truck market and the margin compression that we have on those commitments. So in terms of why the capacity is tight, there's been a lot of discussion about that over the last year or so leading into it, our general sense of it is that there is a number of contributing factors, there's been a lot of discussion about the hours service regulations. Our sense is that relative to our business that it probably had some impact but not a large impact, and it happens to be more to specific types of freight and specific lanes, so it was probably a contributing factor but too early to tell to exactly what extent. In general, it's just the overall supply and demand of freight versus trucks and that freight levels are increasing and the capacity side has not been able to respond as quickly as the freight levels are increasing, which would be very typical for this part of the cycle. In addition to the truckload business, what you see is pretty significant growth in our intermodule business, I believe that is for a number of factors as we continue to emphasize growth and sales on the intermodal side and selling a multi-modal approach to our customers in the market place, we have continued to emphasize that and feel we've done a good job of making intermodal more available and making our customers more aware of it as an option for them to take advantage of. Clearly the, you know, continued higher service levels of truck-like type services that the railroads offer makes their products more competitive to the truck conversion opportunities that is we look for in our business.

While there is and has been some well publicized rail congestion and service issues in the rail industry over the last quarter, we do think that there's the potential for some impact, short term on our intermodal business relative to that, but feel they are temporary issues and still are very positive about higher growth rates in our intermodal business and continuing to look at rail as a growing component of what we're capable of and offering it to our customers. Just the last couple of comments then in terms of a little bit more internal focus within Robinson, our people in our network, you see we added two locations during the quarter, one is a general new office opening in Chattanooga, Tennessee, which is the continuation of our Star Network growth of using internal people and internal resources to open a new office.

The other one was an acquisition in Toledo that was previously announced and became another location in our network to provide domestic transportation services, so the expansion of the North American network through growth by acquisition. So we continue on our strategy of expanding our network, investing in new geographic locations, and investing in new teams of people and new customer relationships via acquisition, wherever it makes sense. We added 119 people in the quarter, we talked at the end of '03 about the fact that we do expect to continue to invest in our network and grow our people.

We work very hard on our disciplines as to how and when to add people and make certain that we have the business to support it and the right levels of productivity to justify it. We are in a period of time as I described in the cycles where we are taking on a lot more business and spending a lot more time building relationships to look for that truckload capacity and taking on incremental customer relationships, so we added people in the quarter to help facilitate that growth. Last comment I would make, as we did previously announce and discuss all of the ramifications of adopting the new accounting standard [inaudible] 123 for the accounting for stock options and restricted stock. We are about a year and a half into our conversion to a restricted stock program here at Robinson that we feel was the right decision for us, and feel even better about it as time wears on.

The accounting for that restricted stock program as well as the restatement and the accounting and expensing for the stock options in the past is something that we feel was the appropriate thing to do to make our financials comparable for all the periods that you're looking at, and are positive about having the uncertainty surrounding it behind us, and we feel like we have a good long-term program in place and can go from here. So we were happy with our first quarter, we feel like we have achieved our goals and I touched on some of the highlights, with that I'll turn it over to Chad to run through some of the comments on the financials.

Okay, thank you, John. John gave you a good overview of our operations and what happened during the quarter. I'll hit what I think are the high points of the numbers, and then we'll turn it over for Q and A. For the first quarter our transportation gross revenues grew 20% driven primary by volume growth. Our transportation growths profits grew 14% to $129.8 million. The primary reason for the difference between the revenue growth and the gross profit growth is what John mentioned, in that tightening truck market, which caused some lower profit for transactions at some of our contractual truck business. Our intermodal business increased volumes to give us strong gross profit growths of 37% in the first quarter. Our volume growth was driven by our new intermodal customers, growth of existing customers and on most conversion from truck due partly to the tight truck capacity markets. Our international ocean business was down 6% for the quarter.

We had a strong first quarter in 2003, due to many of our customers preshipping in advance of a general rate increase of ocean carriers that went into effect during the second quarter of 2003. Our air gross profit grew 126% this quarter. Our Hong Kong office is managing more air freight through our own network rather than through agents. And we had increased volumes with several large international customers. Miscellaneous transportation gross profits increased 27% for the first quarter, this was 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 we haul for them. This growth in transportation management fees was offset by a decline in our customs brokerage fees. Sourcing gross profits were flat in the first quarter, we continue to see the long-term trend of growth in our integrated relationships with large retailers and food service providers, offset by a decline in our transactional produce business.

Information services gross profit increased by 9%, primarily due to transaction growth. Personnel, our largest expense decreased slightly of the percentage of gross profits to 51.9% in 2004 from 52% in 2003. This includes the expenses of adopting the fair value recognition method of SFAS number 123 as many of you have already factored into your models, the net increase to personnel expense relating to the adoption of 123 was approximately $2 million for the first quarter of 2003 and for the first quarter 2004. The adoption of 123 has also increased our effective tax rate as there is no tax benefit for many of these expenses. That concludes our prepared remarks, we will now take questions from our investor audience.

Thank you. We will now begin the question-and-answer session. If you would like to ask the question, please press star one. To withdraw your request, press star two. If you are on a speaker phone, please lift your handset before entering your request. One moment, please for the first question.

The first question comes from Scott Barr with Smith Barney.

Yeah, good morning, all.

Hi, Scott

Hi, Scott.

I was wondering, two things, actually, maybe three, one last quick following question. Could you give us some help and -- I think I know this, but refresh us on broadly what your mix is, of contractual versus spot visits. I realize that may move around, but perhaps give us some broad ranges, is it sort of 75/25 or directionally, what might that range about?

The way we like to think of that, Scott, is that we have 16,000 customer I.D.s and that in reality, is a continuum of relationships and commitments with one end of the spectrum being, you know completely you call we haul -- no commitment of anything until a single load is established. On the other end we have longer term contracts where there are committed services and committed rates, generally not more than one-year. But to think of it, we have our top 100 customer that is make up right just under 40% of our business. 38 or 39% of our business. And we think the majority of those 100 customers have some sort of committed rate or contractual type environment. And there is transactional freight within those top customers and there is also some, you know, price commitments or contractual relationships in the smaller customers as well too. So at times, we would say 60/40 or half and half. It really depends upon precise definitions.

Okay. And then I note in the release and obviously you all have seen these markets and seen cycles and rely upon that history as will as just sort of a sense markets, but you note that with obviously the constriction on capacity and some of the pricing action that you're comfortable or believe there'll be greater carrier entry or capacity. I'm just wondering are you relying on past history or are you actually seeing some hopeful signs in terms of developing new carrier relationships or seeing actual capacity come on or is this more just a sense of history and a sense of markets that's driving that statement?

We, you know, throughout 2001 and 2002, there was a lot of discussion around the high volumes of bankruptcy and the decline of the universe of carriers out there. Our experience in the last several quarters has been that we continue to see higher than normal signing up of new carriers and another data point is the backlog of new trucks that are on order in terms of the capacity coming into the marketplace, which is also confirmed to be at a very high number. So we do, in addition to our historical experience of knowing that that's what always happens at this part of the cycle, we do have some data point that is suggest it's already been happening for several quarters.

and then this last quick one, which is more informational and maybe this is for Chad, it's just - sorry for the nit but, Depreciation sequentially fell, did you have retirements of some of your computer equipment ecetera, and the new equipment is just coming in at a lower cost in terms replacement, or why did D&A sequentially fall?

Well we - our computer equipment we depreciate over 3 years and we often use it longer than that.

Okay.

So there is going to be some fluctuation in depreciation just based on the timing of when equipment is replaced or when we deploy new equipment.

Is it fair to say that 1Q is a good run rate as we think about '04 in terms of a base of D&A to start from?

It should be a good place for a base, yes.

Terrific, thanks very much.

Ed Wolfe with Bear Stearns, you may ask your question.

Good morning, guys.

Ed.

John, just a little bit of a follow-up on the overflow freight. I'm guessing that if the economy's feeling better and customers need more trucks, they're having trouble finding it from their [inaudible] carriers right now because of drivers, and is that where you're starting to see some, some ramp up in the -- on the gross side of the truck revenue? Is that a lot of overflow freight?

Yes, that would be what we would call the transactional freight and again -- on that universe of customer relationships where there is a less committed or less integrated relationship, it's not always 100% clear as to exactly why the freight is coming to us, because we don't participate in bids with you know, the total freight necessarily, or see the whole universe, but the strong assumption is that when people bid out their freight and contract for certain percentages of it, and their actual volumes start to exceed that by meaningful amounts, they need help.

Okay. And on the suppliers side, your case said you're ramping up toward 30,000 suppliers, where are you on that? And is this kind of normal behavior coming into an improving economy, or is this something different than you've done in the past?

You know it feels like it's very typical of what's happened in the past. We have commented previously that, you know, perhaps what's been unique about the last four or five years is maybe a little bit more severity to the swings up and down in terms of available capacity or surpluses of capacity, but in terms of the general trend back and signing up of new carriers, it feels rather common in terms of how the cycles have gone back and forth. I do not have a precise number for you in terms of how many carriers we signed up during the quarter, I do know that it was several hundred per month and that we, you know, are progressing towards that higher number of 30,000, that the challenge in being precise with that number is that there's a lot of churn within the smaller carriers on there. And at times the, you know, the new carriers that we're signing up in some cases replace or supplement some of the older ones, and so it's harder to get a good number, but it's growing at a much faster rate than it has in the last couple years.

Are there any costs while you're in the process of ramping that up that level off over time or is it minimal?

You know there's some extra stress and strain on the corporate carrier services group here that works with the branches to qualify them and sign them up, but it's nothing that you would see in the financials.

Yep. I see personnel expenses with the restatement regarding the options, that year-over-year is actually down modestly as a percentage despite 115, or I think that was the number of extra employees you had over a year ago. What's improving that's offsetting the head count?

I think that's about growth, Ed, you know, that whenever we've gone through periods of time with high growth, I mean, the business is -- there's some leverage in the business, we have some corporate expenses, and as we grow, we're hiring generally less experienced or people right out of school to, you know, to come into the network and train them as we've discussed in the past. So I think there's really nothing that -- I mean, a tenth of a percent is not much of a move anyways, but there's nothing that sticks out at us as being significantly different or unusual. It's just growth and productivity of the model.

Yep, and can you talk just sequentially taking seasonality out of this, you know, year over year how the trends played out through the quarter, in terms of demand and how you're managing it, and maybe gross -- the net revenue growth? But also in terms of hours of service, has that been more impactful in March and April than it's been in January and February? Or has it been modest throughout the whole quarter?

You know, I -- since it's so difficult to identify the precise impact of the hour of service thing, we didn't think it was significant during any of the months of this quarter, we do think there's the potential. Especially like I said before, on specific types of freight in specific lanes with multiple stops or different consolidations and stuff, where, you know, I'm sure there will be certain customers or certain carrier where's there is a tremendous impact regarding how that can run, but we did not see anything real meaningful, consistent in our business, or anything different from month to month within our quarter.

So, so net revenue and gross revenue track pretty consistent throughout?

If you adjust for the number of business days.

Yes.

March had two extra by business days compared to last year's March.

And Chad, just two quick questions. Can you talk a little bit about cashflow, the working capital worked against you? You had 11 million in change in Cap Ex, is 30 million still the gross Cap Ex guidance for the year? And is working capital? What - what swung against you? And is that seasonal or how is that going to play out?

Well, the guidance we gave on working capital was during last quarter's call, with 20 million of incremental for some real estate transactions primarily in Chicago, and a little bit here. We did have roughly 9.5 million of that 20 million spent in the first quarter which was buying the actual building in Chicago, and now we're in the middle of a construction project and should move into it sometime during the first quarter of next year. So nothing has changed on our Cap Ex guidance.

And in terms of cashflow collection and --

No, we lost, we lost about a day compared to the fourth quarter on our accounts receivables. When you look at days of sales outstanding. But if you look - if you look at last year, you saw the same phenomena. And March is always the biggest month of the quarter. So it actually, when you're looking at a whole quarter's activity and it's all the receivables from March, just because there's so much more activity it does look worse at the end of March than it is in reality. But we're very comfortable with our accounts receive ability and where we are in collections.

Okay, thanks a lot guys for the time.

John Larkin with Legg Mason, you may ask your question.

Yeah, good morning, everybody. Just a question on the tax rate, would it be smart to extrapolate out through the rest of the year, the first quarter tax rate to reflect the change in accounting?

It's going to be far less predictible than it was before we adopted 123. I would say it will be somewhere between where it was for the first quarter and somewhere between where the restated 2003 rate is. That's kind of the range, but it is going to bounce around depending on specific option exercises of employees which are impossible to predict.

And you had talked with Scott earlier about the percentage of the business in the truck brokerage arena that is contractual versus transactional could you also talk a little bit about the split perhaps between truckload and LTL? It sounds like maybe you're picking up a little more LTL business as well?

LTL is a business that -- part of the reason why we don't precisely break it out is because there are a lot of definitional questions around it, but for many years now, going back several decades, we have been doing things like multiple pickup, multiple stop freight with truckload providers, and our primary means of classifying it internally is classifying it by the type of provider as to whether it was a truckload provider versus a -- you know, traditional LTL provider. So we've -- we would estimate that our growth LTL volume is somewhere around 10% of the truckload category, but could you make that number smaller or greater depending upon your definition and it has been for several years now, growing faster off of a smaller base than the pure truckload activity.

Okay. And then just one final question on insurance. Insurance has been a big issue over the last two or three years for the trucking industry as premiums have risen dramatically. Historically brokers have been more or less insulated, I guess, from that, because the carriers with whom you contract, I guess, have to had their own insurance. Do you feel like that barrier of insulation is as solid as it ever was or do you worry that you know, some intelligent lawyer one day may penetrated that layer as I think he may have a year and a half ago or so?

I think - you there's several issues surrounding that. One is the much hardening of the insurance market. I mean, the biggest thing for us and others is that insurance premiums and insurance costs are way up, because of the hardening of the market. And as we all know during hard markets they're far, more reluctant to pay claims as well too. So, you know, you've got phenomena that's driving up tension in terms of what claims insurance companies will pay, and how they're pricing the premiums and what the economics are to all of the providers. The second thing is, we like many companies, our business is evolving and changing a lot, where we've got all kinds of different relationships with regards to integrated services and greater commitments and taking on different levels of responsibilities, and when you get into ultimate liabilities in these types of situations, it depends upon the facts and circumstances which are changing all the time.

So, there are lots of moving parts in the marketplace out there that, you know, continue to change the landscape just like a lot of other things, and I don't think there's been any change that I'm aware of in terms of law, or interpretation, or smart lawyers or anything like that, it's just the evolution of the industry.

All righty.Thank you very much.

John Langenfield with Robert W Baird

Good morning, nice quarter.

Thank you.

A couple things here, first profit per transaction John, that you talked about, just judging from history, given the supply and demand dynamics that are out there now, would you consider the level typical?

Yes, if it's within the ranges of the last 20 years of what we've experienced in the cycles.

Okay. All right. It sounded like that. And then on the contractual business, I know you're out there, and it's hard to get numbers around this, but maybe just some qualitative sense, rate increases on your contractual business, what are you trying to achieve there? Clearly the asset base truckload players are 5 plus percent yield increases, so I'm curious how you guys are looking at it when you're locking into these six and 12 months contracts?

I think what's been unique, if anyhting, about the last couple of quarters, particularly with pending hours of service, impacts and all the rest of that is that the range of things -- I have heard specific examples of double-digit rate increases. I've heard lots of low single digit type increases, and I know that there are meaningful chunks of freight that are still moving at the same rates as they were a year ago, because our business moves around so much, we don't really have great information on scrubbing that to an Apples to Apples per lane pricing like a truck line would - would be able to, but, you know, I think that the difference is, that there's greater range and greater volatility within those types of increases, and for the -- you know, the first time in a while, the average increases is probably closer to 5% than zero.

Okay. Good. Yeah, that's kind of the color I was looking for. And then, on the intermodal piece, obviously great performance there, you make the comment about service, potential service impacts, have you seen any of that yet?

The biggest thing that we've seen and are concerned about seeing more of is if the trains don't run as frequent and don't run on time, it will limit the total volume of capacity access, it will limit the number of containers that go back and forth on them. And so, when you have a tight truck market and shippers are as willing as ever to look at service alternatives, one of the key criteria is box availability and train availability and it's not a great time for those to be less rather than more. So, that's what we have seen some of in the first quarter and what we are concerned about limits on availability of capacity for the remainder of the year.

Okay. But clearly, I guess in the first quarter, it doesn't look like it was that big of an impact given your ability to grow that - grow that segment?

Not a huge impact, no.

Okay. And then finally, Chad, could you remind me, Q1 of last year, I don't think you fully expensed the restricted stock grants at the same rate that you had in the subsequent three quarters. How much did you expend, uh, expense last year versus this year?

Last year's number -- well, in the first quarter we did expense something for restricted stock. We had not designed the specific programs, so we were a little short on the accrual. For the -- for the plan that eventually got designed in the second quarter, but it was maybe $200,000 short in the first quarter and $200,000 long on the second quarter, there was no major difference.

Okay. Good, thank you very much.

James Valentine with Morgan Stanley.

Great. First, I guess, I was wondering, and I hate to keep harping on this contractual issue, but I think it's pretty critical to the longer story. And I'm wondering if you break out the net revenue growth for your noncontractual business, in terms of -- would that be growing at let's say mid teens or even high teens for the spot business for the quarter?

We really can't and don't try to analyze it that way. I mean, you can draw the general observations from reviewing stuff, but it would be impossible to even estimate that.

Okay. And I guess the issue that comes back to your goal to grow 15% EPS. Presuming that means your core business would grow at about that rate and it didn't this quarter, I guess I'm trying to get my hands around, does that mean -- is that simply because there's so much contractual business that will roll over here in the next few quarters that you'll get to there, or is it just structurally unrealistic that the truck division will do that, will grow with that rate? I mean, presumably we're in the best conditions we've been in 10 or 20 years for the truck load sector, and it just seems like we should be at a point of hitting the 15% growth rate if that's truly the goal. Maybe I have too high of a number?

Well, I would say a couple things. We measure growth a number of different ways. We measure it in terms of load count. We measure it in terms of gross revenue, and we measure it in terms of net revenue and we measure in terms of you know, earnings and people, and all sorts of other things. And as we have repeatedly said, you know, we did achieve 15% growth in a number of those categories during this quarter, but the goal at Robinson is long-term 15% growth, that there will be periods of time, you know, where we achieve those and periods of time where we don't. And so, that's what our stated goal is, and I think that we feel pretty confident about the environment and availability to continue it.

Okay. Good. Can I just switchgears here for a minute, talking about growth? In terms of acquisition landscape, maybe talk about what you see out there in terms of size and valuations, obviously, I wouldn't expect you to get into real specifics, but valuations in a sense that you know, are, are sellers being realistic or are they still expecting too much?

Our experience over the last decade or so from an M & A growth standpoint is that you know, the majority of deals don't happen because of valuation, that there are a lot of people who, you know, consistently place different values on the business than we would, so, you know, I don't think there's anything really new or different from that standpoint. I do feel like several years ago there was a very high volume of potential or available candidates that weren't as substantive as at other times, there was a lot of start-up activity in the late '90s and early 2000s, that was technology driven, there was a lot of things that we looked at that probably didn't have the same substance to them as we see now or in other things. So, we continue to look. It's a very fragmented industry. There's a lot of different things out there. And valuation is always an issue.

Okay. And then I guess, kind of tying in this to the last question, can you give us your view on uses of cash here, in terms of the various alternatives because it continues to build, which is a good problem, I guess.

Well, it didn't build in the first quarter because of the one acquisition that we did, and purchasing the building, but in the increase in the dividend. Nothing has really change there. We will continue to look for the right acquisitions but we'll continue to maintain our high standards, both of culture, business model and financial hurdles. We'll always continue to look at, you know, if we feel the cash balance gets too high, we'll figure out one way or another to return it to the shareholders, whether it's an increase in the regular dividend. Special dividend or share are repurchase program.

Would it be fair to say, at least from where we're looking at now, that on an annual basis, we should see a step up on the cash balance?

Yes, that's true.

Okay, great. Thanks, guys.

Alex Spring with BB & T Capital Markets.

Thanks. Can you just talk about -- and I apologize if any of this is redundant. We had some issues there while you were doing your initial commentary. But on the information services business, can that growth reaccelerate and was there anything that specifically impacted the growth in the first quarter?

It can reaccelerate. We are continuing to gain market share in the business, like we talked about with all of our growth expectations on the revenue perspective, those are from the long term perspective, so we're going to have quarters and year when's we do better than that in that business, and quarters and years when we do worse. And right now we're just kind of in the slower growth part of what we expect. But we expect to inch back up into the double-digits going-forward.

And just a reminder, on information services, there's an existing base of drivers and card carriers out there that use our services and there is some increase in the level of activity of loads per driver or loads per truck when freight gets tight and you know, the market has more activity to it, but you know, a low single digit increase would be meaningful, you know, in terms of like, volume increases on your existing customer base. So the real growth rate of that line item gets driven by how fast we're taking market share and how fast we're adding new customers to the mix. And so that's why -- was just a pile on to Chad's comment, what, what it takes to get back to double digit growth there is more new customers.

Okay. And as far as the strategic growth outlook, I presume that you continue to feel there's plenty of growth in the domestic truck market, but talk a little bit about Europe and whether strategically you're still maybe a little more focused in the long term on how you become more international and grow that business?

Okay. Well, since North American, All Modes, [inaudible] truckload and intermodal are such a high percentage of our business, it obviously consumes a high portion of our energy and focus, and, you know, since we are still a relatively small portion of that total market we still feel pretty positive about market penetration and opportunities within that.

We have not at all, in the last ten years -- ever backed off of you know, kind of other two tenants of our expansion, which is building the truckload European network of signing up carriers, signing up customers in Europe, as well as building the global forwarding piece, which is opening offices around the world to do international air, ocean and customs. And so we're still pushing as hard as we can on each of those, knowing that while we've looked at opportunities for bigger investments, we have typically been coming back to the internal growth scenario as the best way to build it or to grow it, so we've been putting a lot of time and energy into trying to hire the right people and target where the next office opening will be, and we're doing well by our own standards in terms of adding volume and adding people both within the European truckload thing, which is up to between 3 and 4% of our total truckload activity, and on the international forwarding side where we're building the business as with the too.

So both still key parts of the strategy, but at this point, you know, remain relatively single digit percentages of the total -- the total mix.

Okay. Thank you.

Donald Broughton with AG Edwards.

Good morning, gentlemen. I must admit I'm a little confused here. You're adding a lot of partners in the truck group. You claim you're seeing a lot of trucks added to capacity yet your gross margin is under pressure again this quarter. Help me reconcile what seem to be inconsistent themes here.

Well, I think, you know, the theme is that prices are rising and trucks are less available than they have been in the past or a year ago. And so our people are working harder to find the right sources of capacity at the right price. Which means that you know, they're looking for new sources, they're looking for additional sources, new capacity is coming into the marketplace, which as I said before, takes time and energy to find and qualify those people and build a track record with them, and build a relationship both ways, so when all that activity is going on during a period of rising prices, we're paying more for those initial trucks. And paying more to establish a relationship and understand the types of freights that are more desirable to them and so it causes some margin compression as we invest in those new relationships.

So you think that margins are going to start to improve here once you move more than a few loads with your new transportation partners, is that what I'm hearing you saying?

I did not say that. As time wears on, we willl be able to better understand what types of freights those carriers desire and do a better job of matching the rates and types of services that would appeal to them. In some cases it will hopefully improve margins overtime. But I don't understand your concern or confusion about contradiction at all. It seems logical and consistent with how we've always explained it.

If capacity is getting tighter than your growth margin ought to be under pressure, because at large you're selling to your customers at contract prices and buying at spot in the rising demand and contrained capacity environment. Spot market price is going to be consistently paying into contract market price, versus the other part of the cycle which you all managed extremely well, and are arguably profiteering, in which either the capacity grows faster then demand or demand falls, in which you can take advantage of the marketplace, buy it spot and sell a contract. When we look throughout the market right now, we're seeing at least of all of the publicly trades truckers, reports of lower truck count not higher truck count, consistently and certainly private carriers we talked to that's a similar theme. We're not -- I understand about the bills, but we're not seeing any actual adds in the fleets, and so I just find it interesting --

I don't know how many of the 30,000 you talked to, but the public trucking companies make up about 12% of the available capacity by our estimation, and you know, a huge portion of the new capacity that we're dealing with coming into the marketplace are very small companies that is the way the cycle has always worked where you see new competitors, new companies, new owner operators entering the marketplace that will -- or, you know, a two-person or four-person truck line, adding a couple of trucks and growing capacity that way.

And I've also seen some of those publicly held trucking companies saying they're losing owner operators right now. I don't believe those owner operators are stopping driving, they're going independent and haul ing.

I see. So you would suspect that the operating authorities being issued by the DOT would be going up markedly.

I would assume so, unless they're running under somebody else's authority.

Because I know the repos right now, or the equipment being taken back, there's a high number of companies that are reporting news on the financing that owner operators are simply handing them the the keys and saying, I'm done.

We don't have any date that -- data on that. I can't confirm or deny that.

As John mentioned earlier, what we do know is we're adding new capacity at the rate of several hundred per month of truck line.

Sure, that makes perfect sense for to you do. Walk me through how your accounting for detention charges, because I know that certainly as hours of service was enacted this is an issue that shippers, what we're all focused on. So when you -- when you have a truck parter hwo feels he's owed detention -- walk me through the process of how that is billed, collected and accounted nor.

Our business as a third party is that we're making customer commitments and carrier commitments, and there's a wide array of service commitments and pickup and delivery and different things that we would promise to the customer, and then we hire a carrier to do a comparable service. When there are unexpected delays or detention charges that apply. Depending on, you know, in a high percentage of the cases, we would be billing the customer incremental detention charges and paying the same charges to the carrier, so in our world that with would be considered a load adjustment or a file adjustment where you would put more money on each side of the transaction, and it really wouldn't have any impact on our profitability, it would just increase your receivable and payable and pass through that added activity.

In the real world where we have thousands of commitments on both sides, it's not always the case that we're able to perfectly match every customer commitment and carrier commitment where where we may be using hundreds of different carriers a the same customer. So, in the real world, it's our operating people's challenge to understand and manage the universe of customer commitments and carrier commitments and, you know, protect our profitability while keeping both you know, customer and carrier commitments happy and fulfilled.

Sure. And not an easy equation. How are you accounting for it, though?I mean is it...? I mean obviously, detention is not going to be early on 100% collected?

Well, in the example I gave, the detention charge is incremental revenue and the detention cost is incremental cost to sales that goes into receivables and payables. So then, I think the issue you're referring to is with everybody, but especially third parties, if we're -- if we're incurring all kinds of detention charges or new or unusual detention charges and billing those to our customers in our receivables and paying those to the carriers and the customers don't agree with them, it may take some time for those receivables to age out and see that those customers are short paying or don't agree with the detention charges.

So that's where a number of people have made comments that is some of these hours of service impacts will really only be seen as the years -- as the year wears on, and you either collect or don't collect the full amount that you've billed. So it's -- you know, what's unique to us about -- being a third party versus a truck line is, this is the business that we're in all the time, I mean, we have all kinds of exceptions and add-ons and detentions and fuel surcharges and detention charges and assessorial charges and lots of other things that get added to or subjected from any given transaction at any time, so it's something new and it's something different, but for us, it's part of the business that we're very accustomed to dealing with.

Well, good luck, gentlemen.

Thanks.

Jordon Alliger of Lazard Freres.

Yeah, hi. Um, can you give some sense for the pace -- let's say the contractual business roll off for the year, and make the -- assuming that it does sort of roll off as we move through, are you able to get some sense for the timing of when you might be able to pass on the higher costs of purchase transportation, and could that lead to some margin relief, perhaps as we get deeper into this year?

You know, the expiration or the rollover of the contractual business is a continuum. There is really no one date or one period of time where there's disproportionate chunks, it really depends upon each of our customer's shipping cycles and when and how they bid their freight. And even within some of the contractual freight, there is the ability, with 30 days notice on either side, to in some cases, renegotiate. So, a lot of it, when you get into the day-to-day reality of it is, we're making decisions all the time about how much margin compression to accept in order to help our customers get their freight moved and invest in the relationship and write out the bid cycle that was put in versus when do you have to go back and rebid or renegotiate.

Some shippers bid every year, some shippers bid every couple years, some shippers bid whenever they feel like it. So there is no predetermined dates or formulas, it's a ongoing evolution of relationship and a whole spectrum of commitments that may or may not be changed at different points in time. But obviously, it's our goal that, you know, over time that those margins improve and get back, you know, like I said, we've stayed well within our range of the last 20 years throughout our past several years, we don't see highly unusual or real swings outside of our normal expectancy, but the goal is, that as rates stabilize or as contracts renew, that we will clearly be trying to improve margins.

Thank you.

Brandon Cook with J.P. Morgan.

Good morning, guys, I just had a question on new office openings, I guess you opened two new offices in the quarter, obviously a strong demand environment kind of how that impacts your plans looking out this year, and then also on the international front, just, you know, in terms of new offices do, you have any kind of near term plans and what should we look for this year in terms of international office expansions?

Well, from the standpoint of domestic offices, we had previously said our goal is 6 to 7 offices this year that we would expect one or two per quarter in terms of just expansion of new offices in the network, and sometimes the, you know, just the timing of the offices falls in or around the quarter, so it can be an unusual number. But it was fairly typical in terms of adding one new office and the second one coming via the acquisition, so I would say from a domestic standpoint our -- the first quarter fits into what our longer term expectations were for continued building out of the network within North America.

As far as the international side of it goes, on international forwarding, as we've talked many times, we do have a global network, we rely on agents in a number of parts of the world where we don't have our own offices and we are continually exploring where and if we can open our own offices or have a more dedicated presence and, or change and become more exclusive with those agents that we have out there. Because we have fewer international forwarding offices the opportunity to grow at a higher percentage, or add more of them over the next couple of years is easier to do. So we're working hard to look at more aggressive office opening on the international forwarding side and to look at acquisition of agents or other forwarding businesses that are out there. But it's much more difficult to predict the pace that it will happen at.

Okay. And my other question was just in terms of sourcing net revenue growth is obviously weaker than some of your other categories coming in flat versus a year ago, I was wondering you could just give us a little better sense on that and kind of if you think that that's going to maybe pick up looking out into the next couple of quarters.

Our long term guidance on sourcing has always been flat to 5% growth, we're going to have some quarters where we've exceeded that. We still have those same long term expectations as of right now.

Thanks.

Jeff Fidacarro from Merrill

Hi, good morning, it's Ken Hexter from Merrill. I just wanted to ask you on the employee count. You scaled about 119 for the quarter, a bit stronger than we expected. Is that kind of employee head count edition, should we look for that kind of count going-forward for the rest of the year.

Really those hiring decisions are made at the branch level. We support them centrally with the Recruiting Department. The branches hire based on their activity. So, it's going to be a constant, how much revenue or how many transactions are they adding versus how many people they're adding and we constantly manage to balance that. So it will really grow with the business.

So if the business activity stays consistent I would say that head count growth is going to stay consist.

Very helpful thanks. And then on the sourcing business, if I recall, it was pretty much flat for the quarter. Is this the core sourcing operations, kind of, the losses there outstripping the growth that you're getting from the Wal-Mart type of food sources?

In this particular quarter, they offset each other. The increases in the new -- or the more integrated relationships with our larger customers, we grew there, and we lost some business with the more transactional historic business that we've had.

Is this an offsetting trend that you look for the next couple quarters, or is there a point where your installed base becomes so much more overwhelming of the growth aspect?

Well, obviously since the more integrated relationships have been growing faster over a period of time, there will be a point in time where there's a driving force. Today it's closer to 50/50.

Great. Thank you.

David Mack with J Goldman -- this is our last question.

Hi, guys, good quarter. I wanted to ask you a question. There seems to be a bit of confusion over truck capacity and your ability to grow and margins. Have you made changes to your longer term strategy of managing the company? I mean, are you seeing anything out there that makes you feel uneasy about your longer term strategy.

We have not made any strategy changes. As I talked earlier, you know, the scope of the services that we're providing in the marketplace continues to expand and we do have a number of relationships with both customers and carriers in the marketplace today that we wouldn't have had 10 years ago in terms of , you know, managing more dedicated programs and managing more complex programs, and so we are expanding and changing and growing the company and we are focused on making certain that as we you know, plan to double the size of the company again, that we know and anticipate where that capacity's going to come from and how we're going to gain access to it. So, we are growing and changing with the marketplace and expanding the scope of services that we do, but I would not characterize any of it as a fundamental change to our strategy or how we're managing the company.

In terms of truck brokerage, do you feel, you know, there's been an increase -- or the perception of an increase in competition from some of the larger public companies, whether they're truckload or LTL's or what have you, is your sense that your competitive position there has changed or do you still feel there's ample room for expansion? What's your feeling there?

It's a tough question to assess, because the competition is so fragmented. I mean, there are to our best estimate, tens of thousands of very small truck brokers, and I think probably the bigger trend in the truck brokerage industry is some consolidation. That there are some bigger players that are putting more effort and energy into it. And clearly we're growing and consolidating, and you know that sort of thing, so you know, the landscape of competition probably is changing a little bit. But it's so fragmented it's really hard to get air clear sense of you know, kind of exactly how we would stand against aggregate competition today versus a few years ago.

Do you feel at all that you're overexposed relative to your portfolio right now, over exposed to U.S. domestic truck brokerage? Or are you pretty comfortable with your position and you know, the percent that it makes up as a business?

You know, I guess overexposed kind of relates back to what your expectations are, I mean, I guess from our point of view it is what it is, in terms of our mix of business of how we've grown and managed the results, I mean, it's clearly the largest and most relevant portion of the business today. And I think, you know, when we talk about, you know, the company in the future, we do talk about faster growth and LTL and intermodal and international. And it -- that's not a derivative of us feeling overexposed as much as how we see the changes to the customers and the marketplace that the people that we we interface with more and more all the time have responsibility for all the different freight and all the different modes of transportation and the types and sizes of the shipments that they're dealing with and the sourcing from international locations is changing daily with outsourcing and moving of all that, so, you know, I think if anything our anxiety has been and will continue to be to make sure that what we're offering our customers is evolving with how the marketplace with how the marketplace is changing,rather than you know, being overly concerned about how our absolute you know, mix settles with anybody's expectations.

Great. Thanks a lot.

Thank you for participating in our first quarter 2004 conference call. This call will be available for replay in the Investor Relations section of the C.H. Robinson website. It will also be available by dialing 800-876-0726. The replay will be available at approximately 2:00 p.m. eastern time today. If you have additional questions about our first quarter results, please call me, ang gi Freemen at 952- -- thank you.

Thank you. This concludes today's conference call.