羅賓遜全球物流 (CHRW) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the C.H. Robinson third quarter 2004 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, October 20, 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 third 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 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, CEO, who will begin our prepared remarks.

Thanks, Angie, and thanks to everybody out there who is listening to take time to get (indiscernible) on the Robinson story. We're going to follow the same format that we have followed in the previous conference calls with limiting ourselves to about an hour, and we will start with some prepared comments and then go to the Q&A relatively quickly to cover any questions that you may have.

I want to start out by talking about the obvious, talking about the overall environment a little bit. I don't think for those of you who follow the transportation industry or follow Robinson at all, none of this will be a big surprise. But I think it's worth reiterating or refreshing some of these subjects to make sure that they are put into context with our results and our company.

Obviously, there is a lot of freight available in the marketplace. If you look at the balance of supply and demand throughout the year, the demand for freight has continued to outstrip the supply in most areas. So that is the most obvious theme that carries through a lot of our conversations. We get asked frequently -- what is a good operating environment for Robinson? And our most common answer to that is when there's stress in the system and when there is a lot of challenges out there, our basic model of building a service business and building relationships becomes more relevant to the marketplace. And I think that's probably in some respects the overall theme that I want to convey about the results of the third quarter, is that we do see a fair amount of stress and challenge in the environment and we feel proud of the level of opportunity and growth that we were able to participate in helping both the trucking companies, as well as other carriers and customers find better answers to getting things done.

On the top of the list is where our greatest revenues source and greatest activities are in the North American trucking world. And obviously from a capacity standpoint in the industry, we use the terms that trucks are tight -- that it's difficult or more challenging to find capacity. I think that is obviously driven this year by increases in overall shipment levels. We've talked in prior years and previous environments about trucking company bankruptcies and a transition in that carrier supply side several years ago. This year as the equipment environment has become more tight and trucks have been more difficult to work with, I think we believe it is from the escalation of the shipment levels or the demand side increasing.

A lot of publicity, a lot of good articles in the press recently around driver issues and driver shortages, causing a lot of challenges or being a big part of a lot of the challenges. We would certainly second that from our vantage point of things. You see a lot of activity in the marketplace with new drivers coming in, new drivers or drivers returning, drivers moving from one company to another, drivers leaving large trucking companies to go out their own and vice versa. But a lot of increase in turnover, increase in activity. Like I said earlier, some good stuff written about some of the longer-term challenges to address the issues there, in terms of creating more drivers are making sure that it's the right career path and the right compensation levels for a lot of those people. But clearly, in our interface with the marketplace, that will continue to be a challenge.

Fuel -- a lot of discussion about all-time highs on oil prices and the impact that that has on the industry. For us, fuel is a pass-through. We have surcharges in all of our contracts and we work with both shippers and carriers. It does add stress to our environment, because when costs increase like they have, what that means is we are passing through oftentimes unexpected increases from a planning standpoint. The majority of our customers that we work with are probably running over their plans this year, in terms of transportation costs, driven largely by fuel and with rate increases as well too. So it is a very relevant event to us, in terms of planning with our customers and managing the environment. But, it generally it has no net effect on our growth or earnings. But, fuel is another item that is really causing stress in the system and causing everybody to rethink mode options and supply chain options and what impact does fuel have on their transportation and logistics cost.

And then you have production pressure issues. You have steel and oil again being obvious ones where a lot of our manufacturing customers have a lot of pressure that I'm sure they could articulate a lot better than me. But it's causing supply chain issues, in terms of looking at production ports, looking at overall costs, creating lots of desire for productivity gains or other things to try to neutralize other costs increases. So a lot of stress around that environment.

On the international side, you have port congestion issues that, again, have been very well publicized. And I realize a lot of this is not new information to you, but it is very relevant from our point of view that all of these things have an impact on our customers' way of thinking and their desire to look for new or different solutions. On the port side, it obviously touches most of the modes of transportation with connectivity to the rails and truck as well. And then you have rail issues as well, with service and capacity issues and pricing increases that were experienced throughout the year, and particularly during the quarter as well to that had an impact.

So to me, that is our quick laundry list of environmental things that have caused stress, caused transition, caused a lot of challenges for all of us to deal with, but also obviously it creates opportunities for everybody, including Robinson. So what we do is build relationships and customer contracts and carrier contracts and try to help wherever we can and there is not a shortage of things to talk about or opportunities to go to our customers with new ideas during this environment.

So as a result, when we look getting back a little more concretely to our third quarter, then the primary result that we were very pleased with and shines through in our earnings release is a transportation gross revenue increase of around 30 percent and a net revenue increase of around 30 percent.

So let's talk a little bit more about that, starting off with the truck mode. The larger we get, the harder it becomes to generalize on something like the truck category because there are a lot of pieces in there. We include our less-than-truckload, our drive-in, our flatbed, our reefer (ph) or short-haul, long-haul -- there is a lot of seasonality and lane issues that get mixed in there. But in general, I think one of the best ways to think about our truck results and those margins when we analyze it all of the different ways that we do, I do come back -- we've talked about this before -- that probably the most relevant way to think about it or try to understand our results is the general segregation into the two categories of committed freight or contractual relationships, versus the spot marker or more transactional opportunities that we operate in. And, again, those two categories would cut across everything else I described, in terms of long-haul, short-haul. It applies to all of the different categories.

In this type of environment where you have (technical difficulty) a lot of stress, obviously our challenge on the contractual freight is to make sure that we're moving with the marketplace and making certain that we are meeting our customers' needs, but also properly anticipating the market because we are making longer-term price commitments and commitments to our customers that we need to honor. And earlier in the year, we talked about some margin from those contractual relationships (technical difficulty) during this quarter to have some margin compression on some components of freight due to larger customers, larger contract commitments. But we have been working throughout the year to continue to try to reprice contracts as they expire pretty much ratably throughout the year on varying dates, depending upon the specifics around that customer activity. But we continue to work hard to (technical difficulty) customers work with our carriers, match commitments and reprice those contractual commitments where appropriate. So while we did have areas that continued margin compression, we had other areas where we returned to more normal activity and obviously, that helped the growth and results in the quarter.

When you go to the other side on the spot market or more transactional opportunities, obviously, this environment creates good opportunities for us in that area where most of our customers or a lot of the shippers have excess freight opportunities, more last-minute, more expedited, more unplanned freight is probably the best general term to think of it in. So in that area, depending upon the supply and demand again and the types of relationships we have and in investments we make in those or the level of effort that we have to go through to fulfill those customer commitments, there can be very good margin opportunities in there on that spot market or transactional freight.

So when you put those two together, again, it was 30 percent roughly gross and roughly 30 percent net revenue growth. So those things balanced into a comparable growth for us in the quarter.

On the intermodal side, I talked briefly before about the fact that there were some service issues. As we have talked in the past, our intermodal business if you remember is -- a significant component of it is multimodal freight where we work proactively and continuously, looking for mode conversion opportunities. And as we said in our press release, there was far less conversion to truck of traditional intermodal type freight during this period because of price increases, making the trade-offs less lucrative, as well as some service issues that we had to deal with, in terms of meeting service parameters or pickup and delivery parameters.

So we actually have a similar situation in intermodal where we have predesignated intermodal freight that is more committed or contractual along with those multimodal conversion opportunities. During the third quarter, we did have net volume growth on our total intermodal activity, but we did see pretty meaningful margin compression offsetting that where we have price increases pretty much across the board and then some more higher-margin freight from previous periods going back to the truck side effect.

On our other revenue categories, on the international forwarding, we continue to build our network there. Most of that growth came from our existing forwarding network. We did at the offices in China officially this quarter, which generated about 20 percent of our growth. So it did start to contribute and we're still very excited about the long-term strategic value of that. It's still -- forwarding still remains a critical part of our strategy that is driven by the integration into the domestic services and providing better integrated services with hopefully better information and management.

I also see good growth on the management fee and services. Line item, again, is not is not terribly material to the consolidated from a financial standpoint, but it is very important in terms of our strategy, direction and growth and we're happy with and proud of some of the progress that we see there, in terms of diversifying our services.

Our produce sourcing business as well as our informational services -- T-check (ph) business -- continue to grow pretty much in line with the expectations that we've talked about before and I don't think there's anything noteworthy to highlight for this quarter in those particular areas.

The last point that I would close with before I turn it over to Chad is to just talk to him briefly on the kind of people and office direction and why in all in environments, but particularly at times like this, we continue to beat the drum of long-term 15 percent growth and really trying to focus on the long-term growth goals that we have as a company. It's very relevant to understand the overall environment like I talked earlier and the impact that a lot of these things has on the freight environment and that they have on our company as well too. But, we talk about this a lot and it remains true today that we are a service company and that adding people, which we added 261 of them in the quarter, 92 of them were in China, which was a big chunk of it. But still, pretty meaningful headcount and people growth in North America and across the rest of the network. That ultimately, while we have to deal with the economics swings and the environmental issues within transportation or logistics or sourcing that we get exposed to, the real challenge for us in the long-term is to hire good people, motivate them, pay them right, give them a career path and give them good productivity tools. And when we talk about the longer-term growth goals of 15 percent and our operating income leverage and our margins and all of the rest of that stuff, our experience in the last several decades has been that these things will even out over time and that, while we can gain some productivity and operating leverage during environments like this, ultimately, we have to add the people to continue that growth and fulfill the future and how good of a job that we do in picking the right people and training them and making the right investments, both in our internal people as well as the longer-term relationships on the customer and the carriers side is what will drive our long-term growth.

We have metrics that we are proud of that we're pretty disciplined on productivity and activity levels that a certain individual can do for a certain sustained period of time. And so we know that is what will drive our long-term growth and productivity goals. So when we dip below that or go above that, we like to steer people back towards the longer-term understanding of what we are as a company and what we focus on to make things grow.

So those are my thoughts. I'll turn it over to Chad and then we will go to Q&A.

Thank you, John. I'm going to make a few brief comments that expand on a few things in the release the John did not cover. First of all, the insurance proceeds. About a year ago, we had water damage to one of our data centers. Since we have two redundant data centers, this event did not cause a material impact to our business. Last year, we repaired the data centers and bought new equipment to replace the damaged equipment. These expenditures have been being depreciated since we purchased them over there useful lives.

During the quarter, we reached a settlement and collected the insurance proceeds from our carrier. The $1.2 million reduction to us SG&A is the difference between the proceeds check and the remaining book value of the equipment that was destroyed. The net impact to the third quarter was to increase both operating income by $1.2 million, which is equivalent to about 1 cent after tax.

We also, again, commented in the release on our Quick Pay program. As John mentioned, we're continuing to add many new carriers during these volatile times. Many of these carriers are new to the marketplace. Cash flow is extremely important to these carriers, as well as other existing carriers. Our Quick Pay program allows carriers to receive payment within 48 hours, rather than our normal 20-day terms in exchange for granting us a discount. We been told by many of these carriers that this discount is far smaller than what they would pay if they were factoring their receivables. And since we have no credit risk, since we already owe carriers the money, we think it is a great use of our capital.

Our carriers continue to use this program at greater levels than ever. As mentioned in the release, the growth in this program has reduced our cash flow by approximately $29 million for the first nine months of 2004. Only 7.5 million of that growth was for the third quarter. This compares to about 5.5 million for the first nine months of 2003. Given the volatility in the marketplace, we're uncertain whether the usage of Quick Pay will remain at these high levels, increase even more, or begin to fall. As I mentioned, we believe this program is a great use of our capital, it's a good service for our carriers and we earn a great return for investing the money.

Investments in our office space -- in the release, we gave an updated estimate for our estimates in our new buildings, both here in Eden Prairie as well as in Chicago. The building in Eden Prairie is complete and we have moved into it. Just to remind you, that is a leased building, and today, it houses the bulk of the T-Check employees and many of our transportation ranges that are based in Minnesota. We are continuing the build-out of the building we purchased in Chicago. We expect to complete this project and move in during the first quarter of 2005. Since we provided the original estimate in our fourth quarter earnings release, we have changed our plans for this space. These changes were primarily driven by making the space more flexible to accommodate future growth.

We also decided to build a new data center in the building, rather than renting space from an outside provider as we had originally planned. While these changes have increase the initial cost of the project, we're excited about the flexibility the space will have and the even the greater stability the new data center will provide. We believe this project will prove to be a great investment in the years to come.

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

(Operator Instructions). Jon Langenfeld, Robert W. Baird.

Good morning. Question for you, John. In your conversations with customers, you talked about this a little bit at the beginning of your prepared remarks. But, the conversations you're having with shippers, do you get the sense that they feel that these capacity constraints are going to be with them for a short period of time, or are they making decisions like this could be a multiple-year issue in their supply chain?

I would say, the general tone from my personal experience is that it's going to be a longer-term issue, but that it's probably more severe now than it may be in the next year or two. It was kind of the subject during the year that people are acclimating. But some of the things like fuel will hopefully level off or recede a little bit and they will have a better insight into planning for it next year, so they will be able to manage their internal expectations and planning better. But some of the issues like driver shortages, everybody I think understands that to be a longer-term issue.

And is there anything that C.H. Robinson is doing differently or maybe expanding, in terms of the services you're offering to clients because of these issues that could be with us for sometime?

I guess we are rethinking everything and adjusting. I can't really identify anything brand-new or unique. Clearly, soliciting opportunities to help with spot market freight and trying to -- I would say probably spending more time with our larger customers from a planning or analytical perspective to try to get a grip around where they are really experiencing cost increases and where their route guys are failing and probably a more slightly planning oriented. That is not necessarily stuff that we get paid for, but it's just the relationship building effort to make sure that we're being as helpful as we can, getting as much as the freight as we can, selling obviously intertwined with that. But, planning a little bit more.

Okay, that is helpful. That is what I was looking for it. And just on the transaction side within truck -- is it fair to say that the truck transaction growth would have been similar to the gross profit growth?

Slightly less than that; (multiple speakers) margin expansion.

And then overall, I am assuming the spot market business and the fee-based business is helping, or part of the reason why your gross profit and your revenue within transportation are growing at similar rates?

Yes.

Great quarter.

James Valentine, Morgan Stanley.

Great, thanks, great quarter. I had a few questions. First, I was wondering if you could maybe give us some color on the let's say 25 percent growth you had in truck, in terms of transactions or somewhere thereabout. How much of that would have been from existing customers that just said -- I cannot find capacity myself, I'm going to use C.H. Robinson for surge purposes -- versus new customers saying that I want to give this a try?

We have tried our best in the past to quantify that, and obviously, we look at like brand-new customer IDs. And we had several hundred of those during the quarter and we know that there is some activity. It gets very difficult to quantify it though, Jim, because a lot of times, what's happening is we have customer relationships where we've had a freight relationship for 20 years or more. And what will happen is we will start to get involved in lanes or plants that we've previously weren't involved in or if they're introducing a new product line at this point, it's a really difficult time to do it because there are no new capacity sources. There's no doubt that across the board, a lot of the freight for this quarter, a lot of the growth was new freight, new things that we had not been previously involved in. But it is impossible for us to quantify it by brand-new customers versus existing customers.

Okay. The second question pertains to -- it sounded like you mentioned a few times that this current growth rate is probably unsustainable, or you feel more comfortable with a 15 percent growth. And so I'm trying to think through and I'm modeling forward what was unique maybe in the third quarter beyond just incredible demand we've had relative to capacity. Was any kind of peak surcharge or anything in the quarter that would probably fall off after let's say November or December that we should not be modeling in into the slower times of the year, like December through, let's say, March?

Here's the things we think about or talked about. one is, the spot market -- part of the reason why we don't give guidance or predictions is because the spot market thing is extremely difficult to anticipate. And particularly like when you're going into a fourth quarter like this, there's a lot of variables around shipment levels for the Christmas season, the fall rush, what came early, what's coming late. Some of the spot market things can carry on longer than expected or they can go away in a hurry.

And I think that's where people like yourselves have to sort of do the best you can to extrapolate with the overall economy and what you're seeing elsewhere because it is really difficult for us to know what type of activity, whether or not freight levels are going to continue to exceed the previously planned levels or whether they will certainly suddenly spike or we'll get some backlash. Some of those third quarter freight could be fourth quarter freight that got moved up. our shippers wouldn't necessarily disclose that to us or they may not even know exactly themselves. It depends upon what their consumers are doing.

So fuel prices, obviously, those surcharges adjust pretty quickly. So those correlate right along with fuel prices and oil prices, maybe a few day lag or a week lag or whatever. So you have that thing hitting all-time highs and then you have the seasonality issues. But above that, it is why we position ourselves to be flexible and ready to react because it is tough to gauge.

If I could ask one last question about Intermodal. What do you think it's going to take to see net revenue growth for Intermodal? Is this going to be quite a while, a few more quarters because the railroads are going to keep taking up rates? Or, can you adjust your contracts fast enough? What is the thought process here?

I think for us on the Intermodal side, the real difference between that and truck is just our lack of maturity. We're just not as large. We don't have the same types of commitments to capacity. Containers, it is a more complex product in terms of the drage (ph) interfaces and stuff. So when times get stressful, it is more difficult for us to execute and it is easier or simpler to go back to truck.

So we're still building the long-term piece of that in a pretty positive way in that we're getting involved with more longer-term contractual business, we're building our relationships, our volumes are increasing. It's just that our margin impact and the swings in the margins are going to be of much greater impact. So I feel pretty good about longer-term prospects for net revenue growth in the Intermodal area, it's just going to be lumpier.

Great. Once again, great quarter.

Edward Wolfe, Bear Stearns.

Can you talk a little bit to demand versus supply? If I look at your gross transportation, it grew 30 percent in third quarter. In the second quarter, it grew 20 percent. Most of the economic data would indicate third quarter maybe grew a little slower than second quarter. How much of it is you were able to find more capacity? You could've grown more in second quarter, but you couldn't find as much capacity? Or did demand just get better as you saw it in third quarter versus second quarter?

I think in both the second and the third quarter, from everything I could see there, most parts of the country, had we had more capacity, we would have moved more freight during both periods. So the revenue growth has a lot -- I mean the fuel prices are embedded in there, so that has an impact on it. And then, as I mentioned earlier, we were repricing throughout the year to try to make sure that we weren't losing freight opportunities by being uncompetitive in the marketplace on what we're paying the carriers. So lots of factors like that. But I would say in general, stress level, the demand level is pretty high, pretty consistent, again on both -- particularly in the spot market for the last couple of quarters.

That indicates that you were able to find more capacity in the third quarter and still couldn't find enough to fit potential demand that was out there. Is that a fair statement?

Yes, and particularly in certain lanes and certain regions. Yes.

In October so far in the quarter has there been any major change in what you're seeing out there, either in the spot or the transactional market or demand or supply?

We don't comment on the fourth quarter Ed.

Not even directionally now in a public forum you won't?

No.

In terms of the cost side, it felt like for the first time in awhile personnel expenses as a percentage of revenue came down a bit. For 5 years there's been a direction that personnel expenses have been going up and others and SG&A has been coming down. Is there something that feels like maybe this is an inflection going forward? Is that a fair way to look at it? Or is there something that's more one time here?

What I like to think Ed, I tried to describe it near the end of my comments, is to us it's a longer-term formula that stays very consistent. We have programs in-place to share the success or rewards of the profitability with our sales and operations people across the network. And what happens is when we grow a lot or we don't grow as much you get some lumps. And plus we make decisions about when to add people.

So it's a pretty -- over the long-term we try to keep it as a pretty variable cost. But in the short-term there are some fixed pieces to it, and we do make some decisions about when to add people and try to anticipate things a little bit for the short-term. So I think what you see over the 7 years that we have been public or whatever, hopefully some longer-term productivity improvements and scale leverage and all the rest of that. But even to gain a couple of percentage points of net revenue versus operating income growth is a pretty big deal over that period of time. But on a quarter-by-quarter basis you're going to see things jump around a little bit depending upon freight levels and staffing levels.

To that end -- and if you said this already forgive me -- but the employee count was up 15.5 percent year-over-year; the branch up 12.5 percent. It looks like you picked up about 8 branches this quarter over last quarter. Directionally as you go forward this year and next year, if you have done your planning, what should we look at for headcount and branch count?

7 of the 8 branches that we added this quarter were in China and 1 in Canada. We do expect a couple of new US offices between now and year-end to fulfill kind of the 7 to 8 range that we had planned for this year, and would plan similarly for next year to open 7 or 8 new offices. And again, just to remind everybody, in our world there's 2, 3 people maybe in a new office like that. And the openings themselves do not create in any way comparable stores or big requirements. It's just planting seeds to try to get access to new markets, to new carriers, to new customers in those areas. So we clearly are anticipating the continuation of that program that we have had in place for several years now.

On the headcount side, we do create growth plans in terms of how many people we intend to add. But our day-to-day practices are to only to hire them when freight levels and productivity levels warrant it. And we will go ahead or behind that a little bit. And what we have said this year and would say again now is that we're hiring people. We're looking for things to continue to be busy and we're going to put people into the network. And if the environment stays like it was in the third quarter, that could prove to be a really good thing. If the transactional or spot market drops down and we're continuing to invest in people, you could see some of these ratios go the other way. But we think we're pretty disciplined about it and we feel pretty good about making a long-term investment if we're getting the right people and starting to train them.

And the hiring market, are you finding success or is that becoming more difficult to find people?

We're having success. That's kind of one of the things where even in the last 5, 6 years, despite -- forget about the IT people for a moment; I think that market has a life within itself. But from a sales and operations standpoint, what we are selling is kind of a different type of a job and a unique opportunity. And we feel pretty fortunate about the caliber of people that we have been able to attract pretty consistently over the last 5, 6 years.

Changing gears for a second. On the sourcing side, it felt like a bigger drop than we've seen for awhile on the gross revenue side. And the gross yields were a bit better than we've seen. Is there something structurally different here?

Some of that is just driven by the fluctuation in the gross price of the commodities that we're selling. So if you go from strawberries to potatoes, our margin per case is the same, but the gross revenues drop a lot. And there were some of that. But nonetheless, there was parts of the sourcing business that were fairly weak in terms of volumes.

And so really the message isn't a lot different other than previous quarters. We continue to do more value-added work, and our margin per case stays fairly constant. And we continue to integrate that business into the transportational logistics piece. And it really is continuing on with the same trend. But the gross revenues did decline pretty meaningfully from some of the fluctuations in commodity prices.

What would be the long-term equivalent of your 15 percent overall growth for sourcing net revenues?

We've said 3 to 5 for the last 5 years, and I think that would still be our best estimate.

And then one last question and I know you get asked this a lot. But the cash balance continues to grow. Have you gotten any closer to coming up with some thoughts of maybe distributing some of that cash back to the shareholders?

If you look at during the current year, we have done some share repurchases. We did increase our dividend pretty meaningfully, and our Board looks at that at the end of every year. We continue to be pretty active but pretty selective in the M&A world. And Chad talked about kind of the long-term network investments and infrastructure of buildings, data centers, capital requirements on the carrier side. So we're constantly challenging ourselves with all of the options that are open there, but I don't really feel any more sense of urgency now than I did a year ago that we've got to do something radically different.

Thanks a lot for all the time guys.

Jordan Alliger, Deutsche Bank.

Just a couple of things. One, you mentioned I think that you added additional carriers to your network over the quarter. Realizing that capacity is still very tight, does that also mean you're starting to see some more owner-operators or smaller truckers come into the market?

Yes. We have said, and would say again this quarter, that we've added several hundred carriers per month through our carrier management group here in Minneapolis where we're qualifying people to do business with us. And we try to collect the data on each of those carriers in terms of how many pieces of equipment do they have. And obviously most of them are on the smaller side if they're new or we're just finding out about them. So at the same time it gets a little bit difficult to be real precise on kind of the activity level, because oftentimes some of these new carriers are people that we were working previously are working with who change entities or start over again or leave one company and start up on their own. So there's clearly new activity in there, but it's challenging for us to be precise about it.

I think you had mentioned that you saw some increase in gross margin on the truck side despite the increase in purchase transportation costs. I assume that means that margin load might have picked up a little bit. Is that more a function of the opportunities, as you indicated, in the spot market? Are you starting to get into the heart of repricing the 40 to 50 percent of your business that is under contract?

It did tick up and it is almost entirely driven by the spot market.

And on the contracts that do come up, though, you still feel you're getting the underlying increase in the carrier prices?

On the longer-term contracts, that's really the foundation that we talked about with our bigger, more committed customers, where we work very hard to keep our margins fair and consistent in all periods. And when the contracts renew, we will recalibrate to the market. But those margins per load and activity and stuff with our bigger dedicated customers will stay very consistent over a long period of time.

Thank you very much.

John Larkin, Legg Mason.

I just wanted to bore into a little bit, if it's all right, the Quick Pay program, which I find fascinating. I think it's a great use of your corporate resources as well. Could you give us a flavor for what percentage of your truck capacity takes advantage of this program?

It is close 30 percent of our total truck payables are going through the Quick Pay program today.

What percentage of the new people that are signing up that John was just talking about tend to sign up for the Quick Pay program?

Most of the very small carriers -- more than half, but not nearly all -- are signing up for the new Quick Pay program. But there's also existing carriers who are understanding, like I mentioned, it is in most cases cheaper than factoring for them. So a lot of those carriers are carving out the Robinson receivables are not factoring those any more and taking advantage of our Quick Pay program. So it's both from new carriers and existing carriers.

As you been able to find enough capacity to satisfy all your customer needs, have you seen any of the larger or medium-sized carriers be more willing to make capacity available to you as you've gone forward? Or are they being more stingy?

I think when the environment is like it is now, the larger carriers in particular have greater choices as well in terms of their freight selection. So it really depends upon the type of relationship that we have. We have some larger carriers that we work with on a very dedicated et al type basis that we are expanding our relationships with. Those that see us as a broker and only provide us incremental transactional capacity when available, some of those are clearly providing us less than they would in other environments. And so it's a little bit across the board, depending upon how they see us and how they use us; very similar to our customer base. And our goal is to continue to build relationships on both sides and try to expand how they see us and the ways that we may interact with them.

Do you think that Quick Pay has given you a huge advantage over many of the small mom-and-pop brokers out there that may have had a following of trucks? Do you think the flow of some of the new carriers that you're seeing is coming from that general concept or that direction?

I think the whole Robinson model attracts carriers more than the small, and Quick Pay is definitely one of them. Even if they're not taking advantage of Quick Pay, the solid balance sheet is definitely one and access to more loads than anyplace else. The network is probably a strength, that there's freight everywhere and that we see the bigger picture, that sort of thing.

Thanks very much. Keep up the great work.

Alex Brand, BB&T Capital Markets.

Just a follow up on the contract versus spot. You just answered a question about the gross profit per load was driven mostly by spot prices. Does that mean that for now your mix has shifted more to spot as well? I am really just trying to feel out why any of that dynamic would change in the near term.

Yes it has switched more. And we talked in previous quarters that kind of coming into the year with hours of service changes and some slightly -- not to the level that they've occurred, but some anticipation of capacity shortages and stuff, we probably had our guard up a little bit in terms of contractual volume commitments to begin with. And then when you combine some of that with freight levels exceeding most plan levels, our mix of spot has increased.

So it's definitely more than half the business now?

The challenge becomes --

In the contracts.

Well, I mean conceptually it's pretty easy to talk about each and of the pendulum, what these things are. In the real world there's all shades of gray because there's never absolute volume definitions of what's under the contract.

And a specific example -- I don't want to beat it to death, but if you're traditionally doing 10 loads a day in a lane for a customer, and then it ticks up to 11 and you still do it at the contractual rate, and then it ticks up to 12 and you do it at the contractual rate, at some point if they give you 20 loads, you probably don't have the capacity condition to work with that, so you have to start talking about alternative pricing. So when did the contract become transactional and what's spot market and what did you modify the contract for, that all gets blurry.

That's fair enough. And I guess there was some significant weather in the quarter. Would the quarter have been different? Was it impacted? Could it have been better without the bad weather?

There was clearly some impact in the Southeast in terms of offices closing down for awhile and lost opportunities. There were also clearly some added opportunities of sending flatbeds to the Southeast and different things that I think our general position would be that it was a net non-impact. But again, pretty hard to be too precise on that.

Fair enough. Any patterns in the quarter that would have been different from sort of normal historical patterns sort of by month?

No, it was pretty much normal seasonal pick up, September being the strongest.

Great. Thanks guys.

Gregory Burns, J.P. Morgan.

Very impressive quarter, particularly on the revenue line. Just wanted to clarify some things. And John I got on the call late, so maybe I missed it. But the Quick Pay, did you say either what the margin cut is or the return on your capital, or essentially what kind of returns you get from deploying that capital a little longer?

Our discount is 1.5 percent.

And on the air, which grew a lot, albeit off a small base, would you attribute that growth to the jam-ups that are happening in the supply chain? Or was it just sort of you're starting to grow business?

We've made a pretty concerted effort to get more into the air business and control ourselves some of it that we had previously worked with agents. And I think our added efforts, along with the fact that the marketplace probably provided some more opportunity, is due to congestion.

So did you pick up a new lane maybe or add a couple of new charters? Or was it just taking business that you had -- it sounds like you just took business in-house from your agents?

Some of that, but we did add some new customers as well too. I'm not certain on the lanes, but I presume there was new lanes in there as well.

It is obviously a strong growth on a small base. And then just turning over to truck, your growth rate, gross profit, net revenue looks like it was well above trend; sounds like it's continuing there. And this is probably hard to answer, but I'm curious how much of this or what percentage is sort of new customers saying, "we've got to use C.H. Robinson now because we can't find capacity," and how much is sort of taking market share within the accounts. I know a fair number of accounts I think still use you guys as an overflow carrier. I am just curious, is the tightness of the market sort of shaking awareness for people that haven't used you before? Or is this really just a tsunami business coming from people that are getting turned down by their carriers?

We did talk about a little did before in that it's hard to really segregate those two things. If you think of the shipper community in terms of you have got the S&P or Fortune 500 or all the big guys that everybody would know about, clearly we've already got all those people in our database either doing some transactional or hopefully more meaningful work with them. And we see lots of new opportunities; could be in plants or divisions that we've never touched before or it could be incremental freight from locations that we had worked with before. It could be going from transactional to contractual and participating in a bid and having them see us different. We're clearly adding new customer IDs and finding brand new customers. Those obviously tend to be the medium and small ones that are up to more than 16,000 in North America here. But there's probably 100,000 plus that we could pursue in that area. So there's definitely some of both. And the lines get blurry in terms of quantifying exactly where it comes from.

That's helpful. Thanks a lot guys.

Marshall Penniks (ph), private investor.

In your July conference call you mentioned that the wild-card -- that was the term you used -- was acquisitions. And I see that you acquired -- that you paid 9.1 million for acquisitions during the 9 months. Could you just tell us a little bit about who they were, and what type of business they were in, and also what the outlook is as far as future acquisitions?

The 2 acquisitions closed so far this year, 1 was of the 7 Chinese offices that we have talked about on this call a couple of times already and the second was a domestic third-party truck and intermodal provider in Toledo, Ohio. That was closed during the first quarter of the year.

So what is the outlook? I believe at some point I have heard you say that your concept is more for opportunistic acquisitions rather than anything that you have programmed along the lines. Is that correct?

That remains true. To expand on that a little bit, we've talked very publicly about our growth strategy being in several different directions; being North American market share penetration and new services, as well as international expansion and building the forwarding network. And that while we continue to be active in all of those areas, and are going to be opportunistically open to whatever comes along, that the more meaningful opportunities probably lie in the international forwarding area where we have so much geography that we're not touching today. And it's a more mature industry that has freight forwarding companies all around the world that are providing those services today.

Along that line, you said in your annual report for 2003 that the overseas outside of the United States business was about 3 percent of your gross profit. That was Europe, I'm sorry. Not everybody, but Europe. Can you just give us an idea of what percentage now this year you expect and next year 2005 that operations outside of the United States will be as a portion either of your gross revenues or, if you could say, your net income?

The definition you are referring to, the 3 percent, is our domestic -- or not domestic, but pan-European trucking division. If you look at our freight based on things that cross borders as the definition of international (indiscernible) either originate or terminate outside of the United States or both, it's closer to 12 to 15 percent of total net revenues.

That's how it is now. What might it look like, say, next year?

We don't target specific mixes in the future. But we have shared, and it's true this year as well, that both the European trucking business, as well as the global forwarding business, are growing at a slightly faster rate than the consolidated rate. So absent the acquisition variable, we would expect both of those percentages to tick up a percent or 2 if the current trends continue each year.

Can you continue this kind of growth just by adding offices, adding branches in these various countries? Or is an acquisitions such as you made in China, is that likely to -- is that going to be required to continue the growth that you want to see outside the United States?

We talk about that on a fairly continuous basis around here. And I think we feel very confident that we can continue to grow without acquisitions, and that's what our long-term plans are based on. But clearly we could grow faster with acquisitions, and that's what we continue to evaluate.

David Campbell, Thompson Davis & Co.

Most of my questions have been answered. But with regard to the third quarter, and your market share gains, and your business coming from new customers, do you have any idea how much of that new business was from companies who are outsourcing for the first time? Or how much of it is from other logistics companies, the companies who are switching logistics providers?

That's a difficult question. We don't typically know where the freight previously was when we get it, so my sense is that a lot of the other logistics companies, at least the ones that I'm aware of, are more focused on larger accounts that probably aren't switching a lot; that it's more all of us trying to attack the portion of the supply chain that is currently done internally or something that we think can be done better. But that would be focused around those larger accounts.

I think for us in the spot market business it's just transactional services to medium and small accounts who -- maybe an example would be somebody who has worked with 1 or 2 truck lines in the past who always met their needs, and suddenly they don't meet their needs anymore because they had a few more shipments and/or they diverted those trucks to something else more lucrative, and now they had a new need that arose.

Thank you very much.

Helene Becker (ph), Bench Market (ph).

2 really quick questions. 1, did you did you say earlier what your driver turnover was so far this year, if any? And 2, did you think about higher economic cycles that we have had and where oil prices were moving up, that then we saw recession maybe 6 or 9 months down the line, how that affected your business or when that affected your business?

We don't employ any drivers, so our driver turnover is not a statistic that would mean anything.

In terms of the economic cycles, again that fuel price is a pass-through for us. So it doesn't really impact our business other than that when fuel prices start to recede it takes some of the pressure off that element of the relationship that we interact with our customers on.

I guess I was thinking about if their business started to -- if your customers' business started to slow down, because through the chain you're going to pass the increase on and so will they. So at some point things slow, and I just wondered when the lag time was with your business.

You really various customer by customer. With some of the import customers that we work with, obviously they've got a very long supply chain of importing product, and maybe ramping up on inventories 6 to 12 months in advance. Other parts in our business, our perishable food and beverage stuff that is being manufactured and consumed within a several week period of time and will adjust the real quickly. So the spot market piece, as I discussed earlier, is the part that reacts very quickly. When those activity levels, production levels and freight demands of the shippers start to change, whether it's from a recession or their performance turns down, or whatever, that spot market, because its seasonal to begin with, and then it's also very sensitive above and beyond that, that will be the piece that will change quickly.

Okay great. Thank you very much.

Louis Cappellino (ph), Cappellino & Associates.

With the emphasis being placed on capacity issues and issues of capacity currently, is there anything that you're currently doing from a capacity development standpoint that you either weren't doing or are doing now or plan to do in the future regarding securement of additional capacity?

There is a longer-term change that we've been making for the past several years that we do plan to continue, which is to try to strengthen our carrier relationships and expand our carrier relationships by incorporating more business review and planning type techniques like we have been doing with our larger customers for a decade or more. Which means meeting with them face-to-face far more frequently than we have in the past to talk with them about things like what their equipment purchase plans are, what lanes they run in, where we see that they could probably get good returns on adding incremental capacity, what types of freight we see demand far exceeding capacity, that sort of thing. So nothing brand-new, but continued emphasis and escalation of those types of things and face-to-face meetings to discuss them and help develop a capacity side going forward.

Okay. Would that also be the same from an internal perspective too regarding the issue of finding necessary capacity the same way? Is there any plans for any kind of internal change, if you will, when it comes to securing needed and additional capacity from an internal and/or an external perspective?

Each of our offices is continually challenging themselves to find new ways to identify or secure capacity into our network. So it is a pretty evolving thing where we're constantly looking for new sources or looking for new connectivity. I would really say probably the only other thing I can think of that we hadn't discussed is just increased automation of electronically connecting with carriers to make certain that they can provide us available capacity or do things on a very efficient basis so that they see us being an equally or more desirable customer to interface with than any other choice they may have.

Thank you very much.

Thank you for participating in our third-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 www.chrobinson.com. It will also be available by dialing 800-405-2236 and entering the pass code 11010976#. The replay will be available at approximately 2 PM Eastern time today.

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