羅賓遜全球物流 (CHRW) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson second-quarter 2004 conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Wednesday, July 21, 2004. I would now like to turn the conference over to Ms. Angie Freeman, C.H. Robinson Director of Investor Relations. Please go ahead. Ms. Freeman.

Thank you and good morning everyone. On our call today will be John Wiehoff, CEO, who will discuss the highlights of our second-quarter performance, and Chad Lindbloom, Vice President and CFO, who will provide some comments 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 will turn the call over to John Wiehoff, CEO, who will begin our prepared remarks.

Thanks Angie. Good morning to everybody, and thanks for taking the time to listen in on our call. We're going to keep the same format as the previous ones with probably about 10 to 15 minutes of prepared comments and then about 45 minutes of Q&A, so it should last about an hour.

I would say by introduction in terms of a couple of overall comments on the quarter, first off it was the first quarter in the history of Robinson where we had more than 1 billion of growth gross revenues, which was something we were proud of and a landmark in our growth towards achieving a larger company. And in general I would say from an overall environment standpoint it was really no surprise from what most all of you have probably read or heard with everybody else. Obviously we saw a lot of demands for freight. Our transportation gross revenues increased more than 20 percent. And there also was a tightness of capacity across all modes, which resulted in net revenue transportation growth of somewhere around 17 percent. So from an overall environmental standpoint it was very much what we've talked about in the past in terms of high freight demands and continued growth opportunities for us and getting more freight in the marketplace, but challenges on the capacity side.

I would say in terms of overall themes and attitudes, just to give you a flavor of kind of what went on in our Company and our meetings over the last quarter, is that really for the first time in a long time you have a lot of the transportation managers in the industry who are dealing with pretty significant cost increases and challenges in getting their freight moved that they haven't had to deal with for a long time. So a lot of customer activity and a lot of customer meetings working in the marketplace with the overall theme of there really is a lot of stress and challenged. And our primary goal is to really help our customers get their business needs accomplished and get their freight moved.

So that was generally what our themes were and what we focused on. I'm going to make a few comments kind of by each mode. But one other thing I would say is that as we go through this period of time with higher stress in the marketplace and lots of growth opportunities for us one of the things that continues to become apparent to us internally is that the integrated model with having all the different modes of transportation and trying to combine our services really does give us more flexibility in terms of truck versus LTL, truck versus rail, international and domestic activity; that when you go through a period of time of higher challenge like we are now, that it gives you more opportunities to discuss a lot of different options with your customers. So we feel very good about the long-term growth strategy, and the comment in the earnings release about feeling good about our integrated model and our approach to the marketplace continues to feel good to us.

Specifically by mode, then, comments with regards to some of the business breakdown. On the truckload sector, no question that there is a capacity shortage and we continued to see rate increases in general across the board. It varies quite a bit depending upon the types of freight and the region that its in. But for us what that means is continued challenge of trying to add capacity. We continued to sign up several hundred new carriers per month. Again, we've discussed before that we do have a fair amount of churn in the carriers with some of the smaller ones going out of business. But very high levels of a new capacity being added. And one of the things that we pride ourselves in is really having high quality control and good disciplines to go out and find new sources of capacity, which was really critical to how we executed during the quarter.

If you look at the truckload revenues and the gross revenues growing faster than the net revenues, again a concept we've talked about quite a bit in the past is recognizing that there's two different types of arrangements in general -- there's the generalization that we have contractual commitments and the spot market or transactional stuff. And during this period of time in terms of helping our customers get their freight moved, where we have contractual commitments is largely where we see a lot of the margin compression, where in an environment of rising costs and rising rates and challenges we're living up to rate commitments and earning less money; less margin on a lot of the transactions to help fulfill the commitments that we've made and operate during a tight environment. In addition to that, there are spot marketer transactional opportunities where we're working with surge (ph) freight and more expedited or overflow type stuff where we do have more opportunity to earn typical margins on that business. But it's more challenging to try to come up with the capacity and help meet needs of unplanned freight sources in the marketplace as well too.

So when you put those two together, we did obviously incur some margin contraction during the quarter, but it's a mix of all different types of activity. And in aggregate, like I said, the goal is to balance the demands in the marketplace and help our customers get their freight moved.

We combine our LTL and truckload revenues together. The LTL revenues, because of the definitions it's difficult to make decisions on some of the multiple pick freight as to what exactly category it would along in. But our LTL mix within our LTL and truckload freight continues to grow at a slightly higher rate than the pure truckload stuff. And we continue to feel positive about the modal mix of working with both truckload and LTL services.

As far as Intermodal goes, we did continue to have nice volume increases and feel very confident about, like I said earlier, expanding our integrated modes and working with all the different modes of transportation. We did see a pretty decent margin compression on the Intermodal side with some of the challenges in that industry with service issues and price rate increases and stuff. We were not able to grow our net revenue as fast as we were the gross revenue.

In addition, we have discussed before that in our Intermodal business we do have a fair amount of transactional or spot market-type Intermodal services where we're constantly comparing today's rate for truck versus rail. And as price increases went, more of the freight from a growth standpoint probably went back to the truck side during this quarter.

From an International forwarding standpoint we had decent growth from a volume standpoint, like our earnings release said, on the Oceanside. We did not grow percentage-wise vary significantly because of last year's comparisons. But from the standpoint of looking at new customer activity and growing the network we felt pretty positive about the success in the quarter.

We did a press release earlier talking about the acquisition of our agent in China, which happened on the last day of the quarter. So we're excited about having an owned presence in China, and continuing to kind of build or grow our international forwarding network across new locations.

On the sourcing side we did have, again, some growth that we were proud of in terms of new services and expanding relationships with some of our customers. You may have noticed that the gross revenues on the sourcing side actually declined for the quarter. Again, the driver there is the fluctuations in commodity prices with things like strawberry and lettuce and different commodities that we buy and resell have a fluctuating gross cost that we incur, both a smaller cost of purchase and then a lesser sales price when we pass them through. So we had much of the same continuation of business trends and growth that we have talked about in the past in sourcing with a decline in the gross revenues for overall changes in the commodity prices.

And then with T-Chek in our Information Services, it was transactional growth as we just continue to expand a little bit of market share and more load counts with current customers that we have.

So moving out of the modes and the growth, the other comment that I would make about the business in the quarter, you probably noticed that we added a fair number of people during the quarter. Year-to-date we have added a net growth of 289 people, which we have talked in the past when we look at our business and we look at our management metrics, it has been and it still is our expectation that over a longer period of time net revenue, operating income and EPS will grow at comparable rates. And we do have lots of productivity initiatives and things that we do to try to improve our leverage or improve our model. But in general, the idea is that we're a service company and that when we are successful we share more of the rewards with our people. And we also take the opportunity to invest in additional people to continue to grow the network. So the fact that we've added a fair number of bodies during the year is something that we would expect and we would expect continue as we execute our model, and feel that it's a good thing for us to invest in the future and stay disciplined to the model that we have had in the past.

So those are really my comments. I will turn it over for Chad for a few comments, and then we will open it up for questions.

Because the details regarding our operating performance are covered in pretty good detail in our press release, I'm going to keep my comments brief and focus this part of our conversation on our cash flow and cash position.

We have consistently talked about our uses of cash being investing in working capital and capital expenditures to grow our business, strategic acquisitions, dividends, and share repurchases. I will comment on the current status of each of these.

First of all, with working capital. As of June 30th, our accounts receivable balance relative to the growth amount of business we are doing is consistent with historic levels. However, our accounts payable has decreased relative to our gross business. This drop is primarily due to the increased usage of a quick pay program we have for our truckload carriers. CHRW has had this quick pay program for more than five years. The quick pay program is attractive the carriers who want to speed up their cash flow in exchange for giving us a discount.

As John mentioned, we have continued to sign up many new carriers; many of these carriers are small. These new carriers, as well as others, are electing to use our quick pay program more than ever. Usage is at an all-time high. The program helps our carriers and we received a discount. The negative is its impact on cash flow, especially during times of increased usage as a percentage of the total business. We believe this program is a good use of our capital, though.

Capital expenditures -- as previously discussed, in the first quarter we purchased a building in Chicago. During the second half of the year we (indiscernible) capital expenditures to remodel up and furnish this building and to furnish a new leased building in Eden Prairie. We also have other capital expenditures planned as in prior years to accommodate the growth and to improve and maintain our technology.

Acquisitions. We have closed two small acquisitions this year and are actively looking for others that meet our strategic and financial return criteria. Our current cash position increases our flexibility in pursuing these opportunities.

On our dividend, last year we raised our dividend pay-out ratio to 30 to 35 percent from our previous target of 20 to 25 percent. We plan to continue to adjust our dividend on an annual basis in the fourth quarter and to keep our pay-out ratio in the 30 to 35 percent range for our normal dividend.

Share repurchases. We have and will continue to buy shares to reduce the dilution of our employee equity awards. At this time (indiscernible) the only share repurchases we've done since being public for the last seven years.

On our overall cash balance, we currently feel comfortable with the cash balance but will continue to evaluate it. If the cash balance grows to a level we don't feel is appropriate relative to the potential opportunities we see to redeploy the cash, we will return it to our shareholders. We would decide between a special dividend and further share repurchases at that time.

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

(OPERATOR INSTRUCTIONS) Scott Flower, Smith Barney.

Good morning all. Just a couple of quick questions. One was -- and I know that you all have been building the modes out for awhile and that's been a conscious part of the strategy. I'm just wondering, as you look at the current environment, does it make it in your mind more important to broaden out? Have you learned some things from having those multiple conversations or is this just a continuation of what you've always seen? I'm just wondering whether the current capacity environment has heightened your sense of the value of having those multiple modes as you dialogue with customers about alternatives.

I don't think our relationships with our customers from that perspective have changed much in the last couple years. I think probably over the last -- really since we went public probably seven years ago it's been a very consistent approach, and we have felt kind of the growth of those benefits.

I would say probably the bigger issue is that obviously we don't have the same scale and leverage of execution on Intermodal or LTL or some of the other things that we haven't been doing for quite as long. So all our results end up being a little bit choppier. And we have to deal with some issues because of where we're at in our growth cycle on those things.

But I would say more with customers and in the marketplace it's just kind of more confirmation that we feel good about that direction.

I know the number that we see on an aggregate basis is a mélange things, but the net revenue margins obviously improved slightly in this quarter versus first quarter. Is that just a mix effect of which products did what? Or was there actually some improvement in terms of the individual product margins? I don't want you to talk about the individual product margins; I know you probably won't. But I want to get some sense of whether it's an aggregate mix effect of what products came in or whether you actually did a little bit better as you manage capacity in the marketplace.

Aggregate mix is the issue.

Terrific. Thank you.

Edward Wolfe, Bear Stearns.

I apologize. We just have some noise here and I hope I'm not repeating what Scott just said. One of the thoughts -- questions that we have has got to do with Intermodal's net revenue changing so much. I know these are small numbers, but year-over-year last quarter versus year-over-year this quarter. And how much of that has to do with the railroads pushing operates and you not being able to pass it through? And how much of that has to do with your own decisions to move capacity in different ways?

There was a lot of little things that pulled together to end up in that result; pretty much everything you mentioned. There were rate increases. There were service shifts where we for service issues had to move in some instances from one rail to another rail and other instances from rail to truck. And then because of the service disruption in the Intermodal world you have lots of components around cost of drayage and efficiency of execution that we weren't as good at this quarter because of all of those transitions.

And we did talk quarter ago and we were kind of expecting some of this, seeing some of the disruption in service levels at the rail. So we have talked in the past -- we do not have asset commitments on the Intermodal side; we're more transactional than probably some of the other Intermodal providers that you're aware of. So we are more susceptible to market conditions in terms of the volume of activity that we put through there and how much money we make on it.

Having said all that, given everything that went on during the quarter, we still had pretty decent volume growth and feel pretty good about our increasing level of competency and participation in the Intermodal piece.

Do you think going forward you can pass more of that rate through and the net looks starts to look more like the gross on the Intermodal side as we go out?

It's hard to say. One of the reasons why we don't give a lot of specific guidance is because we are very dependent upon the service levels of the rails, and what decisions they make on pricing, and how the truck and rail modes play off of each other. Like I said before, for us it's all about trying to stay flexible and having competencies in all of them.

Certainly it's our goal long-term that gross net revenue, net revenue, and profitability correlates on all this stuff as we sort of rationally move everything to where we think it should be best service (ph). Long-term that would clearly be our goal. But from a quarter-to-quarter set perspective, there's just a lot of things that can happen that affect it.

In John's prepared comments he mentioned that the spot Intermodal business, kind of the truck conversion business, there was less of that in this quarter than in previous quarters. And that business tends to have higher margins than the more dedicated Intermodal freight, which is another part of the gross revenues growing faster than (inaudible).

What are you seeing on the truck capacity side? You have talked now for several months about more smaller guys and signing up more potential carriers. Are you starting to see -- it's been six or seven months now of accelerated truck orders. Are you starting to see some of this get into the marketplace or directionally is capacity getting even tighter?

I definitely think there's capacity coming into the marketplace. A lot of the discussion I think -- there's no question that freight levels have been accelerating for the last 12 months and that capacity has been coming on to address it. We feel like especially in the carrier community that we interface with that we have added capacity and that there are signs of growth and additional capacity in the marketplace.

The big challenge going forward that nobody has perfect visibility to is as we go into the fall peak shipping season how will those two forces -- how will the supply and demand balance with each other? If freight levels continue to accelerate even with additional capacity it could be a very demanding fall in terms of margins and all the rest of that. You just don't know. You don't know how those two forces will play.

In terms of supply and demand, freight levels and capacity, it's our sense that clearly both sides are elevating.

Can you talk a little bit -- we've heard there's been some general data that suggests a consumer slow down a little bit in June and July. Have you seen any slowdown in any of your consumable or retail stuff? And how is July year-over-year versus, say, May and June year-over-year?

We don't comment on July. In terms of within the quarter, really we didn't see any trends of note or significance throughout the end of the quarter.

Directionally can you just, without commenting on July, talk about if you have seen any slowdown in consumer?

Through the end of the quarter we did not, no.

The through July you won't comment on?

No.

On the cash flow side, if you look year-to-date there really hasn't been free cash flow generated with the working capital swings in the investment and the CapEx, which certainly I think most shareholders would never begrudge you guys. You've shown over a long period of time how to use the -- return the capital and invest in yourself. But My question is we've modeled that by year-end we're going to start to see some free cash flow here. Is that a fair way to model things, that the working capital stops working against you to the same degree, and you start to generate some free cash and the cash balance without any other acquisitions from here; just paying dividends basically starts to rise again instead of modestly go the other direction?

Yes, we expect it to. In fact, we're surprised at the level of participation in our quick pay program, which really cuts close to 20 days out of our accounts payable for those particular shipments. We have leveled off at a certain percentage of our total payments going out and it grew a lot during this year and it surprised us.

When did that start? So when does that start to grandfather?

The quick pay program we've had for more than five years.

But the acceleration you're talking about?

The acceleration has really started this year. We had leveled off. Over about all of 2003 and about half of 2002 we were at a pretty consistent level.

It probably correlates more with the acceleration of addition of new carriers, smaller carriers who would be more interested in that program.

But modeling for cash balance, again assuming more no other acquisitions or anything dramatically different, at the end of the year up 20 or 30 million from here, that's not crazy thinking. Is it?

No, it's definitely not crazy thinking.

One last question. Based on year earlier comments about when you get to a certain position where you're comfortable that you have enough cash on hand and you start to make those decisions between what to do with it, can you directionally give any sense? Is it a number that's dramatically above 200 million? Or are we getting to the point where you're already starting to have some of those kinds of discussions?

The real wild-card there is on the acquisition front, that when we look at kind of growth need under any ranges and scenarios and stuff we feel pretty comfortable about where we're at. But we still have lots of expansion goals, both geographically with international forwarding and other service lines. And there is a pretty healthy backlog or spectrum of opportunities in marketplace that we have continued to look at over the last four or five years. And we have talked a lot in the past about being selective and having pretty strong criteria that we're not going to do deals just to burn through the capital.

But that's the wild-card. And the whole thing is there are opportunities for acquisitions or expansion of all different shapes and sizes that we continue to mull around. And it's really more the balancing of what size transactions will we do and what will we build versus buy, rather than the aggregate amount of capital.

Thank you very much for the time.

Alex Brand, BB&T Capital Markets.

On the truckload part of your business, as you move through the year on the contract side of your business are you making pretty good progress in renewing at higher rates? It looks like the gap between gross transportation growth and net is narrowing. So I'm assuming you're making some progress, but can you comment on it?

Yes. The contracts, the transportation contracts, do generally renew throughout the year. There's probably a slightly higher percentage of them that are kind of calendar-based, but there are all different types of seasonal-type contracts. And as they mature there is opportunities for rate negotiations in them.

The challenge with that is that when we reprice something we're making assumptions on historical buy rates and margins and what things to look at pricing adjustments. And so if your cost of hire has gone up 5 percent and you're able to raise rates 5 percent to pass that through, but in the coming 12 months you have another 5 percent increase in the cost of hire that's not going to give you any margin relief. So it's a constant grind of trying to renegotiate and re-anticipate what the market is going to be like and balance what volume commitments and pricing things you will commit to versus what you're going to try to react to in the marketplace.

So yes, but it's not a straightforward equation that we just reprice and then it's done.

In your sourcing business, the 7.9 percent margin was a lot better than we had expected. Is that type of margin level sustainable?

A lot of the business that we do on the sourcing side is where you're earning a fee-per-case or a margin-per-case of lettuce, for example. So if you're making 25 cents a box of lettuce, if the lettuce is $7 a box or if the lettuce is $30 a box you're still making the same margin or fee-per-case for the distribution or the branding or the types of services that we're doing.

So the margins themselves gross versus net within the sourcing business are a little bit different story or way to look at them. So if commodity prices stay where they are, yes those margins are sustainable. But those margins are really susceptible to big movements for things that really aren't indicative of how much success we're having.

Fair enough. And then Chad, two questions on the cost side of the equation. One is can you just comment if there's anything of note in the sequential decline in G&A? And also, can you comment on the options expense in the quarter?

As far as the quarterly G&A expense, there was a slight decline -- about 400,000 -- but it's relatively where we expected. We're always going to have some fluctuations in that.

On the option expense, it is relatively close to what we predicted, which is approximately $2 million a quarter. And that's in personnel expense.

Great, thanks guys.

John Barnes, Credit Suisse First Boston.

Just this clarification. Can you give us an idea of how much of your business is under contract versus in the spot market?

Since we have such a variety of contracts and various commitments, some of the contracts are really month-to-month pricing and some of them are as much as a year; very few, if any, more than a year. But we generally say half and half. Our best estimate is that there's probably half of the business out there that has some kind of predetermined rate commitment that we're trying to fulfill, and the other half is more get today's quote and see where it goes.

The top 100 customers are 38 percent of the business, and those top 100 customers are generally more inclined to have some sort of committed relationship with us. But with most of our customers we have both contractual and spot market relationships with them where we will move committed amounts of freight at agreed-upon rates, but then we will also try to help out with extra opportunities wherever we can at rates to be agreed-upon.

In talking to a lot of the asset intensive (ph) truckers, they've indicated that shippers are shifting more to dedicated relationships or paying to relocate empty equipment just because there's this genuine fear of a lack of capacity as we get into the latter half of the year. Is that exacerbating an already tight capacity situation for you guys? Are you finding less of that back haul capacity that you've had access to in the past?

I think when you get into this environment that shippers do whatever they can to try to execute their plan and meet their needs. And that sometimes includes committing further out; trying to expand the amount of a loads that they have a precommitment to; trying to tying their relationships with all the carriers. So I don't think there's any single behavior by any group of shippers that really has an additional or incremental impact on the supply of capacity. It's just how everybody reacts during this environment to try to protect their access to it.

But we are growing slower with the largest carriers in our business as a whole.

Okay. LTL is a nice growth opportunity for you guys. Obviously the LTLs have talked a bit about seeing an influx of freight from the truckload side, especially that multi-stop (ph) truckload. Did you all see the same progression -- a little bit more interest in your LTL product than your TL product, especially as the hours of service rules came on?

And I guess obviously you're not directly impacted by this federal court ruling on hours of service, but what do you see as the ramifications for your business if these rules are ultimately repealed or we get some new rules in place?

First off, with the LTL versus truckload I think when you deal with customers and they're trying to figure out how to manage their supply chain and how to ship things, in general for a high percentage of the freight they would prefer to ship it one pallet at a time and get it out of there as soon as they make it. And the problem is that LTL freight is generally much more expensive than truckload, so they're doing the best they can to track freight and consolidate it.

The more efficient that LTL services get and the more rate competitive and service competitive they get, the more temptation there is to use LTL services rather than truckload services. So I think the trend that you discussed about multiple-pick, multiple-drop freight services with truckload carriers, if you get better information management and better service levels and can bring pricing for smaller quantities down, it will expand the market opportunity, and that's definitely part of what we're participating in. We do think that LTL and using better information management to route freight and manage it differently will continue to be a growth opportunity for us.

The hours of service thing, what we had said going into the year is that there are certain kinds of freight that would be much more susceptible to changes in pricing because of the rule changes. And we think in the first half of the year there probably was some pretty aggressive repricing, and more importantly probably some pretty aggressive behavioral changes in terms of avoiding detention charges and wait times for different carriers.

With it going away now you may see the reversion back of some of that. But we were talking about it with our management team and we were speculating that probably the most relevant part of the whole thing is that everybody is just going to be much more sensitive to dwell times and wait times, and making sure that pickups and deliveries are scheduled more aggressively. And hopefully for the industry a lot of those improvements will stay baked into system, even if the regulations change again.

Obviously a lot of discussion about dividends today given Microsoft's announcement. You have talked about the four ways you intend to use cash; if you get above a certain level you would be looking to give some of that back to the shareholders. Would you do it as a onetime event like Microsoft or would you prefer to go the other route and break it up? I think, Chad, you talked a little bit about breaking it up between some share repurchase and dividend. Would you rather just grow the dividend methodically or would you look at doing something in a onetime nature?

We would never want to elevate the regular dividend to level that we couldn't sustain. So if we accumulate a bunch of excess cash it would likely be distributed either through a share repurchase or a special dividend. Again, we'd make that decision on the time based on a bunch of different factors.

Lastly, we haven't heard about some of the legal issues that were raised several quarters ago in a while. Can you just kind of give us an update on where any of that stands with some of the -- whether it was the discrimination lawsuit or what have you?

We have had a couple instances over the last couple of years around liability and whatever that are all pretty much behind us. The biggest one that still remains is a very broad employment litigation class that has all sorts of different allegations and parts to it. And basically it's still active litigation that's been going on for about a year and a half now. And we expect it to continue on at least throughout the end of the year in terms of discovery and motions and all the rest of that, arguing about class certification and different things under some of the employment litigation. So no real change to our previous announcements around that litigation, and it just continues to move forward through the process.

Okay, but in your litigation on that front there's no federal government involvement? You don't have any issues EUOC (ph) or anything like that? This is just a pure class-action lawsuit brought by former employees, correct, or a bunch of different events that they are trying to get certified as class-actions, correct?

That is correct. The EUC (ph) is not involved in that litigation.

Very good. Thanks for your time guys.

Jon Langenfeld, Robert W. Baird.

A couple of things here. First off, on the cash side I know in the past you had kind of said if we are at this cash level end of '04 that's kind of when we need to make the decision point at. I guess the sense now that there are enough alternatives or opportunities out there, that's not necessarily the timeframe to make some of those decisions in terms of buyback or dividends. If that a correct read?

I think the reality is that it changes daily depending upon the different opportunities we're looking at. Like I said before, the real wild-card is the acquisition opportunities and our constant reassessment of buy versus build and how do we expand the network and the opportunities. So depending upon the opportunities that come and go in that realm, and then one day you feel like it's going to be all internal growth and the needs are a little, and then the next day you hear of a different opportunity and you think we better preserve our flexibility; that might make sense. So it really flops around.

That's good news, I guess. John, you kind of alluded to this in your earlier comments, but just want to see if you can expand on it at all. Do you get the sense that customers are looking at this tight capacity environment more than just, A, we have a peak season coming, capacity is going to be tight, and then there's going to be relief? Or do you get the sense that is more that we may be in for a sustained period of tight capacity, so let's look at solutions that are long-lasting beyond just a couple of quarters?

I think it's much more the latter. In the transportation industry we've gone the better part of a decade with flat to declining transportation rates, and that was driven by declining interest rates, by some productivity measures, by a declining fuel costs, by lots of things moving in the favor -- no increases in driver wages to speak of. So now you've got driver shortages, aggressive push-back on wages. You've got fuel jumping up. The cost of new equipment has new emissions regulations and everything. And then you've got just the basic supply and demand on top of that.

And I think the interaction that I've had with customers and with our team here is that there's a general sense amongst our customer base that maybe the general direction is turning and that we could go through a sustained period of rate increases. And even with additional capacity coming into the marketplace, that may relieve some of the increased pressure. But from the standpoint of if we go through a period of sustained economic growth it could be that we go several years in a row where we're talking about yes, there's more capacity, but is it enough to balance the supply and demand of rate pressures? So there's a lot of discussion more towards that sentiment.

Good. Great color. Thank you. And then you talk about your contractual and your transactional business. I'm assuming at the second half of the year the balance is more transactional than contractual just given the spot market demand. Is that generally the case?

No, I think it depends upon customer-by-customer and lane-by-lane. But a lot of well-managed customers have seasonal plans where they participate in fall surges and have tried to contract out for as much of that as they could. So even though the volumes peak, there are peaks in the anticipated freight and contractual freight as well too. So if the fall gets really tight and really messy it could generate an abundance of transactional opportunities and stuff. So it could be that way, but I wouldn't say it's -- I would say it's more the 80-20 rule, that 70, 80 percent of the freight is planned out and tried to contract for and some of it is left unplanned. And then depending upon how reality compares to plans, it can grow or shrink from there.

That's helpful. On Intermodal piece is the split similar or do you have more contractual business on that side?

We have probably about a 50-50 mix. I believe that the Intermodal industry in general is more contractual. More of the Intermodal freight is the types of commodities where they have a more committed relationship and a more planned activity to ship it by rail.

And directional volume growth in the Intermodal side, are we talking in the mid-teen type range where you're still significantly taking share from the overall Intermodal growth rate?

Yes.

Finally, just on the cost line. Chad, I know your communications -- one of your bigger cost line items in that I think a contract comes up for renewal here at the end of this year. Any significant changes expected in terms of that cost relative to the percent of gross profit?

No, I don't think we expect a large increase. And we continually get more efficient with the way we're using data lines.

Is that true that those come up for renewal this year?

Yes, I believe it's during the fourth quarter of this year.

Very good. Thanks a lot. Nice quarter.

James Valentine, Morgan Stanley.

When do you guys think you'll see the capacity come back into the truck market to the point where we can see the truck net margins begin to expand? I guess if we assume the economy doesn't slow down too much here, do we have to wait until peak season is over this fall and we get some more Class A trucks, get some production well above 20,000 a month before we can realistically expect that to take place?

It's really hard to predict that. The supply and demand on the truckload side, it is our sense that what creates a tight environment or a loose environment or really drives rate increases or rate decreases is probably a much more sensitive movement thing than people understand it to be. In other words, an extra 3 or 4 percent increase in freight can really change the understanding of supply and demand and what's out there.

So when you look forward through this fall and into next year, like I said earlier we have had lots of discussions around the fact that we could go through a several year period of time where the challenge is continuing to add capacity to meet the ever-growing freight needs. If the freight levels do a digger in the last half of the year it could correct itself pretty fast.

I don't think anybody thinks it will correct itself through the fall peak season, just because there's a lot of momentum going into it. But in terms of next year and the following year, our objective is to really try to stay flexible and react to whatever happens rather than try to predict it because it is a very difficult thing to try to understand.

Right. And you mentioned that. I think it is an excellent point saying that 3 percent could be a big swing. Given that some in the industry believe that hours of service rule caused as much as 3 percent of the industry's capacity to go away and lower utilization would it be fair to think that if these rules revert to what we had last year that we will have as much as 3 percent capacity come back and that could relieve some of this congestion to the point where we might start to see the net margins expand again or is --?

I would not object to any of the theory of what you just articulated. We wouldn't have any evidence that the 3 percent would be a really tough thing to quantify or prove, but certainly there's logic in what you just said. But I have no idea if that is a fact or not.

Can I ask about Intermodal? I am somewhat intrigued by this dispute between J.B. Hunt and Burlington Northern and I think ultimately (indiscernible) J.B. Hunt it sounds like their prices that they're charging customers out west are going to start to go up more significantly than they have in the past. And given that they're the largest player and BN is the largest intermodal carrier, is it fair to assume that if we're seeing in 3, 6 months J.B. Hunt coming out raising intermodal prices significantly that they're a big enough player in the market where we would see then presumably yours and others' rates start to go up where we can see this drag on net margins for intermodal continuing to play out into next year? Or are there enough other things you can do and enough contracts opening up with customers where you can pass that through to them or mitigate the higher pricing?

Those are certainly large players in the industry, and their decisions probably will affect at least to those lanes or those things. But the one thing -- I guess what I would say in general about what we see and hear about that whole situation is to go back to the contractual spot versus spot market type thing, a lot of that freight on the dedicated intermodal stuff is tied up in contractual relationships, both with long-term purchase commitments with the railroad, as well as long-term rate arrangements with the customers in order to provide dedicated services to larger customers. Obviously when you get into an environment of tight capacity like this, they're strain on those contractual relationships because the opportunity in the marketplace would probably be to make a lot more money somewhere else because the market is there. So what happens is you have to look at how they get repriced and how rates get raised to adjust to the marketplace. But if it's all repricing within dedicated contractual relationships you're just going to see rate increases for those customers and revenue increases for those carriers, but not a lot of impact on the rest of the market in terms of supply and demand. If some of that capacity frees up from contractual and becomes more available to others, there could be big impacts on the market.

So without being inside of it and knowing exactly what's going on between those parties or other lots of things like that, it's really hard to predict what the market impact would be.

Good. If I could just ask a question on sourcing. You made some reference in the press release about high service versus transactional. What portion of sourcing's net revenues are high service, even just a ballpark figure?

Probably 30 to 40 percent, not quite half. And just to clarify, maybe you know this already, but when we say high service we have sourcing programs where we're doing quality control, inspection, labeling, routing even on the customer side, replenishment, and category management, and all different sorts of reporting, and merchandising support. That to us is what we mean by high value added, high service type stuff. On the other end of the spectrum it's a box of lettuce without any brand that is just a transactional buy and sell. When we talk about this trend in our sourcing business towards more retail and foodservice, those are the types of customers that have the much higher quality control and service demands that go through that part of the business.

But to the extent that it is more profitable, if it's only 30 percent of the business now the point is I guess we can assume that it could keep growing and be a bigger part of the business for quite a while.

It's higher margin; it may or may not be more profitable, depending upon -- it definitely requires much more labor and much more technology to execute it. So it could result in a more permanent margin growth, but to really understand the profitability and the impact on the Company you would have to get into the SG&A and the business processes that it takes to service the different types of customers.

Great. Thanks so much.

Rick Leggitt (ph), Arbor Capital.

Nice job. All my questions have been asked. Thanks.

Jordan Alliger, Deutsche Bank.

Just a quick follow-on on the contract question. And I realize that a lot of it is anticipatory and no one could completely project the future here. But in general are you seeing the average rates on contract renewals roughly commensurate with what the underlying asset price or the truck price increases are as they come up for renewal?

As they come up for renewal, yes. And the range we would throw out there is 3 percent to 7 percent, and it can be a lot more than that or it can be a lot less.

One of the things that happens in an environment like this is in contractual or committed freight you see increases along that magnitude, but some customers can also experience where their contractual relationships fail and they're going to the spot market for expedited services on stuff they have to get moved, you could see smaller amounts of freight where the rate goes up 50 percent or doubles or whatever. So blended cost increases can be higher than that for customers. But specifically to your question on dedicated or contractual rates, it's in that range. And yes, it's kind of our goal, and we've had success with kind of keeping it in line with what the underlying rate increases are.

Thank you. Just a quick follow-up question. On the Intermodal side, what kind of service are you seeing out of the rails now? Have things stabilized a bit or no real change at this point?

A lot of issues have stabilized in terms of crews and train schedules and all the rest of that. But the real issue is that many of the railroads too are continuing to relook at how they allocate capacity, and what they make available in the marketplace, and how they share it, and how they price it. There's lots of different programs out there in terms of allocating equipment. Since we are a pure service firm subject to the availability of their equipment, there are lots of new factors that will impact this fall in terms of how much equipment we have access to and what prices to add and whether or not it makes sense to put our customers' freight on the truck or the rail.

Thank you very much.

David Campbell (ph), Thompson, Davis & Co (ph).

I just had one question and it may be hard to generalize about this. And maybe you have told me this before, but I can't remember. How do you get new capacity? Where is the new carriers coming from? How do you find new owner/operators. Do you go out on the street, find unemployed people and suggest they buy a tractor? I mean how do you come up with these new drivers and new tractors and new owner/operators and so forth? Or is it just somebody that is already in the business and doing it for somebody else decides to go to work for you?

There's a number of variations on that, David. First off, one of the things that we talk about is there is a fair amount of movement or churn within the industry that we definitely are aware of some level of drivers leaving trucking companies, sometimes the larger ones, to go out on their own and become an owner/operator. Obviously if you're a truck driver, this is the type of environment where going out on your own is less riskier than other times because your access to freight is greater and rates are improving. And so there is some movement where you may hear of a larger trucking company talking about accelerating driver shortages, and in fact those drivers are resulting in incremental sources of capacity at medium and small carriers.

In the medium and small carriers where a lot of the growth comes, there's a number of different things that we see there as well too. There certainly are a number of people who will move in and out of driving truck, depending upon the lucrativeness or the rate structure or what the market is providing. At that level of job there are lots of examples and anecdotes I could give you about people who either farm or do different jobs -- roofing, whatever -- different things that I've run into examples of with people where they come back into the trucking sector when the rates allow a better living in order to do that.

Also, when you get into the medium and small carriers most of them are family businesses of one sort or another. And went rates improve and there's opportunities for profitability, those companies are much more inclined to invest in another piece of equipment, and then they would go out and recruit that driver, likely somebody who they know from their local marketplace or whatever, to expand into it. So it is very much a word of mouth expansion.

I did hear an advertisement on the radio coincidentally a week or so ago recruiting truck drivers into a 6 week training course because there was a strong demand, and within 6 weeks you could be out on the road earning a good living and blah, blah, blah. So there are schools as well, too, that people will come into.

So there's a lot of different sources. But in general it's just the forces of capitalism. When there's a need it will get filled.

Okay, thanks very much.

Ken Hoexter, Merrill Lynch.

Thanks. Good morning. On the accounts receivable data I know you mentioned earlier that it seemed to be -- I think you said it was a percent of revenues that it stayed flat. I just wanted to confirm that because it jumped awfully high this quarter on a dollar basis.

We look at it as a percentage or number of days of the quarter of sales or gross revenues. And based on that measure it is right in the middle of where it's been for the last year and a half.

Just a quick follow-up on a question earlier. You were talking about the flow of volumes though the quarter. Had you noticed an acceleration of volumes through the quarter or had it been pretty consistent during the quarter? Can you comment on that?

Fairly consistent on a per business day, which is how we look at it. The month of June did have an extra business day this year so we (technical difficulty) revenue and activity as the quarter went on. But really I would say overall fairly consistent.

Do you break out the split between truck load and LTL as far as your revenues go?

Not for reporting purposes. We do some analysis internally, but there are a lot of definitional debates as to what is what so we just combine it all to truck for external reporting.

Did you see -- because of the move and the tightness in capacity in TL did you see additional volume shifting over to the LTL side?

We've continued to see growth in what we would most generally define as LTL that's probably slightly higher than the truck load piece itself. It could be because we're marketing that more aggressively rather than a shift in the overall freight supply, but we do see a healthy demand on LTL side.

Then just lastly, on the air side is this where -- obviously with your launch of the Hong Kong office now with the acquisition of the China offices, mainland China offices, is this becoming a bigger focus on the air side? Or can you comment on that because you've got -- we saw the 125 percent year-over-year growth on that revenue side?

Both air and ocean and customs, all those are going to be a greater focus for us. We have talked before about the fact that we have got 12 or 15 customers that make up more than half of that business. So when we're this size the results are going to be lumpier just because fluctuations or the timing in those customers' volumes are going to have a big impact on us. But in terms of our focus and our energy and expanding, looking for new customers and looking for new freight opportunities, both air and ocean, particularly from Asia to North America, yes, it's going to be a much increased focus.

Thanks.

Greg Burns, J.P. Morgan.

Just a couple quick questions. On the sourcing side, John, was there anything in the quarter that was -- I'm just trying to get a sense of the retail business or the high service business for are these one off projects or is it sort of recurring business? Or did you pick up new accounts, in other words? Sourcing revenues seems to be lumpy, and I'm just wondering whether we're accelerating here or whether we should or should not extrapolate what we saw in the second quarter.

We continue to pick up some new business on the retail or foodservice side. That tends to be more dedicated or committed business. But it really, like we have talked before, in our broader growth rate goals of 15 percent we do not have those on the sourcing side. It's mid to low-single digits. The real fluctuation I think is more the transactional business being much more lumpier and kind of bouncing around from quarter-to-quarter based on commodity prices. So we do think there's long-term growth potential there, but just not at the rates that the transportation side of it.

Is it still a zero-sum game where the growth in the retail side of your business is coming at the expense of some of your transactional customers?

We're hoping that that transition -- I think 6 or 7 years ago we talked about the retail stuff being 20 percent, and now it's maybe closer to 40 percent. So hopefully there will be some slight acceleration there as that becomes the more dominant part of the business. But as we become more focused on a smaller list of retailers and foodservice companies that we're working with there, then the volumes will become a little bit more subjected to fluctuations in their business activities. So it's just a smaller piece of the business that's probably going to be a little bit lumpier than the transportation side, but we do have hopes to improve it.

Chad, a question on the working capital. Sounds like quick pay is driving a lot of things we saw there. But I'm just curious -- you didn't mention it, but I'm just curious whether the mix was Intermodal and also customs which has been occurring the last couple years, if I recall, has different transportation payable demands. As you become more successful in some of the other segments should we see different working capital characteristics, I guess number one? And then two, can you speak particularly on the international and the customs side what you're doing there in systems? Are these billings running through your existing infrastructure? Are you having to put in new systems there?

On the systems questions first, all of North America is on the same system, including the international freight forwarding activity. All the Europe truck business is on the same system. So basically 95 to 97 percent of the business is on one core system. But some of the newer offices, be it acquisitions or small freight forwarding offices on other continents, are on different systems.

(multiple speakers) working capital between modes, you're right that it is different. Our numbers are dominated by the truck business. Ocean tends to require more working capital investment. Air is about equal or less than truck. And customs it depends if you're advancing duties or not. And we do as little of that as possible.

But assuming the mix -- assuming the international mix does increase, taking quick pay out of the equation, which sounds like that is going to normalize, would it be fair to assume that maybe working capital might be a little larger going forward? Is that reasonable?

That is reasonable if the growth is in ocean.

Thanks a lot guys.

Jack Waldo, Stephens, Inc.

I wanted to ask about your European operations -- I think they were 3 or 4 percent revenue in the first quarter -- how that changed and what are you seeing over there right now?

Europe grew slightly faster from a growth and from a revenue and net revenue standpoint than the North American truckloads, so it still remains between 3 and 4 percent. But had a very successful quarter and is having a good year. We feel as confident or as positive as ever in terms of building the truckload network across Europe and continuing to grow that business.

We are pretty certain that we're going to have to build it; that there really won't be any opportunities that we know of that will allow us to let it become a much higher percentage and in a real fast period of time. So it's all about developing the talent and being able to open other offices.

The only other comment I would add in terms of positive momentum with regards to the European trucking business in particular is that with the recent inclusion of incremental countries into the European Union there are more countries and more capacity access that is getting blended into Western Europe now, and we feel especially over the next several years that there's going to be added opportunity for us to try to help manage carrier capacity and really participate in the supply chain unification of Europe.

Just one other question, and this is -- well, more in regard to overall what you're seeing in shipping trends. Are you seeing a change? Are customers more dependent on time-definite type -- or time-sensitive type shipments? And I'm kind of referring to the trends we have seen in ocean and net revenues as opposed to change we've seen in your freight.

I would say that across the board, all industries, all customers, one of the trends is to use information technology and to use more aggressive supply chain management to try to schedule pick up and deliveries more aggressively and keep inventory levels lower and service levels higher. So moving from 10 years ago, maybe just scheduling the date that it would be delivered on to now 15 to 20 minute windows are common. And so keeping factories running, keeping inventory in stock, when you start to run things tighter like that by definition you have more back-fill and expedited type services. We see a general increase across the board in all of those sorts of things as supply chains are managed more aggressively.

This is not just a sudden event that we're seeing; you just think a continuation of a trend we have been seeing?

Yes.

Thanks a lot for your time.

John Larkin, Legg Mason.

Thanks for taking my call. A question for you on sort of the long run view here in terms of where you would like to see truck brokerage as a percent of gross profits, say 5, 10 years from now. Would you see that dropping from, say, 73 percent, where it was in the second quarter, to some lower number as you build out Air erosion in (ph) Intermodal etc.? Or would you always see that as being the dominant percentage of your business?

I would say that it will continue to blend down overtime, like it has for the last 4 or 5 years. Remember, included in the truckload mode is European truck and less than truckload, both of which are growing faster than the North American truckload piece. So I think in the future, hopefully we will gain more clarity around definitions and segregation to help you understand better the mixes of it.

But we continue to believe every single day in interacting with the marketplace that we're still somewhere around 2 percent of the North American truck brokerage market. So there's huge market share opportunities there just to continue to open offices, which we are doing, and to continue to take market share. So we expect it to remain a relatively high percentage. But I would say with all the different initiatives that we have and geographic expansion in other places, it will probably continue to trend down a little bit. If the European truck brokerage and the less than truckload brokerage is successful and that stays into one category, you could see it staying at a higher number, but just a different underlying mix of sources.

Just a follow-up on that. You said that you think you represent 2 percent of the brokerage. Is that 2 percent of the brokerage or 2 percent of the overall trucking market?

2 percent of the overall trucking market.

On the theme of brokerage, it seems like a lot of other people have been getting into the business with a vengeance here over the last couple of years. We've seen the Hub Group (ph) grow their business; the old MNX, now XL logistics. Landstar has been driving most of its growth through brokerage. Werner's brokerage operation I think is now up around 100 million and growing like a weed. Are you basically worried at all about any of those competitors, number one? And number two, have you lost any of your experienced operating people to any of those organizations that must be looking for good operating people?

Obviously we care a lot about competition in general. I would say that the industry itself is so fragmented that really any of the names you mentioned or any of the other good competitors that we have, we really don't run into them in any sort of consistency or focus just because it is such a broad, spread-out market. So the fact that there are a lot of new people, especially during this part of the cycle, is a thing that we would expect. And in terms of who will be around long-term, who will get bigger, and if anybody will sort of arise as more of a common nemesis for us, only time will tell. But for now at least we just -- there are in addition to the names that you mentioned I think more than 20,000 registered transportation intermediaries that are of all different shapes and sizes. It's really thinking about having 20,000 competitors rather than 1 or 2 of the other public companies that you may happened be focused on.

So competition is a huge issue. There's a lot of it out there. And we just have to continue to execute more effectively and do a better job than they do and offer things to the customers that they can't offer. And it is like every other industry; it's just a speed race just to continue to be better and build the relationships and go there first.

Thanks very much again for taking my call. Nice job on the quarter.

Thank you for participating in our second quarter 2004 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 chrobinson.com. It will also be available by dialing 800-405-2236. The conference ID number is 110029 06. The replay will be available at approximately 2 PM Eastern time today.

If you have any additional questions about our second-quarter results please call me, Angie Freeman, at 952-937-7847. Thank you.

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