羅賓遜全球物流 (CHRW) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson fourth 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, January 9, 2005. I would now like to turn the conference over to Ms. Angie Freeman, C.H. Robinson's 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 2004 fourth quarter and full year 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'll turn the call over to John Wiehoff, CEO, who will begin our prepared remarks.

Thank you, Angie, and thanks to everybody who is taking the time to dial in and listen to our call this morning. For those of you who have listened in the past, we're going to stick with a fairly similar format. We have some fairly brief prepared comments that we will go through and then we are going to move relatively quickly into the Q&A session. I will start out and then Chad will add a few comments before we move into the Q&A. By way of opening, I think we would probably pile onto what many others have talked about throughout 2004 and we did earlier as well too, that it really was a year that was kind of symbolized by a return to growth.

Our growth accelerated as the year wore on. If you look at our growth rates on a quarter-by-quarter basis, we continue to grow throughout the year. And as you can see by the revenue growth and earnings growth of our fourth quarter, we finished the year very strong. The freight demand did continue to be very strong throughout the fourth quarter and we were very happy with our results for the quarter, as well as with our results for the year.

In addition to the strong freight demand, we have talked quite a bit in the past about our model of execution and how we staff and how we hire and how we try to do everything that we can to stay flexible and react to the environment. We were pleased with our efforts, pleased with our result, and happy with the growth activity that we had during the year. By way of more specific comments on the results and kind of the operations and looking at the different modes, by way of introduction I want to talk, again, we commented in the earnings release and through -- as it pertains to a number of modes and services that we provide, there is a pretty meaningful distinction around the terms, transactional and contractual. And I know that it is difficult to follow because a lot of companies in this industry probably have slightly different definitions or meanings when they use those terms.

We use them in the general, in very general or broad terms, meaning that transactional freight to us is on the range of commitments is something that has very little commitment to it, usually nothing in writing. But that tends to be much more on a day-to-day basis in terms of pricing situation and a commitment situation as to what freight will be tendered to us or what order it will be tendered to us and what we will commit. On the other end of the spectrum, we have these contractual relationships which again for us describes a wide range of types of relationships, many of them or most of them in writing. But there is varying degrees of commitments to haul the freight and all of the rest of that.

So hopefully everybody on the call would be familiar with that, but in the explanation of the fourth quarter and the year 2004, I think having some sense of those two terms and what they mean across the different modes is pretty helpful. When you start and look at truckload transportation services, again that is for the year, it was about 75 percent of our net revenue and 75 percent of our activity in profitable. So it is the most important piece. It is the largest piece of the results.

Obviously, in the fourth quarter, we continued to see pretty significant growth in the truckload sector. One of the comments that we made in our earnings release pertains to the fourth quarter as well as the entire 2004 trend, was this shift from contractual freight to transactional freight. As the year wore on in the early quarters, we talked about the fact that we had margin compression on some of the contractual commitments that we had out there. Everybody is well aware that the cost of higher -- for truckload capacity continued to increase quite significantly during the year, and there were capacity shortages in many parts of the country throughout most of the year.

So on that contractual freight that we had predetermined rate commitments and predetermined arrangements with our carriers and with our customers, we did see a certain amount of margin compression throughout the year. We talked in the second and third quarters about our efforts to continue to reprice those commitments and rework them given new rate environments and new market conditions that everybody was much more aware of. We did continue that throughout the year. Part of our margin improvement in the fourth quarter on the truckload piece was the continued repricing and remanaging of those contractual commitments with our customers.

We also talked about the increase in transactional freight. The market activity that accelerated throughout the year results in an environment where a third party like us who has the network and the transactional capabilities that we do. That was clearly a big part of our fourth quarter activity. As we have said before, these categories are more of a continuum and it's hard to be very precise in terms of talking about them. But by our best estimates, we have said historically that coming into this year we probably were somewhere in the 50-50 range of contractual and transactional freight. Our sense is that we clearly finished the year probably closer to something like 75 percent transactional freight, or a much higher component of the freight that was on a day-by-day basis or being repriced or managed on a continual basis.

Throughout that fourth quarter there was just a tremendous amount of freight that we were working with our customers to get it moved or to get their needs met without a lot of preplanning or precommitted activity that was there. This move to transactional was really driven by the marketplace and what our customers needed. It was not something that we anticipated that we would have to do at the beginning of the year. We talked about the possibility of it going into the year 2004. There was a lot of discussion around hours of service and potential capacity shortages that did have us a little bit more prepared for it. But that was clearly a trend that carried on throughout the year 2004 from our perspective.

So we're happy with the truckload growth. We feel like our network did a great job of servicing our customers and reacting to the marketplace and executing under our model that we talked quite a bit about. When you go to some of the other modes, they are smaller but meaningful to us in terms of our strategy and the integrated services that we provide. On the intermodal side, in many ways the year and the fourth quarter were a challenging environment for us. There were some service issues that have been talked about a lot within weather-related and other things, service issues, within the rail industry.

There were rate increases there as well too which drives different decision-making and different trade-offs in terms of the multimodal freight. And coupled that with the fact that our freight base in intermodal, as we have talked about, is unique in that it tends to be more multimodal freight that can go by truck or rail, and generally has been more towards the transactional side of the spectrum as well too, given the fact that it is freight that is being traded off across the modes.

We did see some of the freight that we had historically been moving via intermodal channels gravitate back toward the truckload side of it. Despite that, we did finish the year with single digit growth on our intermodal side and feel pretty good about continuing to build our internal competency and our contractual relationships and growing that business as part of the integrated services that we have been providing. On the freight forwarding side, again we continue to build out our network in parts of the world and parts of the U.S. still too where we do not have as strong a presence.

We talked quite a bit earlier in the year about our formal entry into China which we continue to feel very positive about. And we're getting integrated into our technology and into our connectivity with the rest of the network. We had double-digit growth, when you combine the air, ocean and customs brokerage freight forwarding services during the year, and feel like we have made some very positive steps in terms of building out that international network.

On the sourcing piece, we have talked in the past about the quarterly fluctuations. You can see in the fourth quarter that we did have some compression in our margins on the sourcing side. These were well within the range of what we have historically experienced in terms of the quarter-by-quarter volatility of the level of product that we are procuring and the types of margins that are attainable within that. But the long-term message and the current view of the sourcing business is consistent with what we have talked about in the past.

It is intertwined with some of our larger customers, some of our more integrated customers, where we are providing both sourcing and transportation services and have a lot of hope for the future in terms of getting more involved with broader integrated supply chain activity around food safety and RFID, and lots of plans that we have to provide broader more integrated services, especially within food channels but within other channels as well too, tying together sourcing, freight management, distribution, transportation-type activities.

Information Services, for those of you who are unaware, again is the fuel card T-Chek services. For us that was what we would describe as hopefully a typical quarter, 15 percent growth, double-digit growth for the year. Continued new business development, but some transactional increases as well too just from the overall increase in activity from the marketplace. So the fourth quarter activity really was the continuation of the trends that we have been talking about throughout the year, as I said earlier, finishing with high levels of freight activity and execution and operating results that we were pretty proud of.

When you move away from the modes of services on the revenue side of it, just a few quick comments on our network, on our people. We added 135 people in the quarter. We have talked a lot about it in the past, but the caliber of the people that we add and the environment and the incentives that we put them in are extremely important to the success of Robinson. We have had a tremendous amount of focus on that in 2004 and we will continue that going into 2005. We opened 6 offices during the quarter. The 6 offices includes a small acquisition in Provo, Utah that we completed. We did not announce it when we completed it because it was immaterial.

But from a bigger picture perspective, building out our network with opening new offices and acquiring businesses that we can put into the network continues to be a really key part of the growth strategy of North American market penetration that we're going to continue to focus on and feel pretty good about what we accomplished in 2004. Those are my comments on 2004.

Before I turn it over to Chad, I want to talk just a little bit about outlook. We have a policy of not giving guidance because it is very difficult to do in our business. I know that many of you are in the business of trying to understand or project out there. So what I want to do is just talk a little bit about what we see today and be as helpful as we think we can in terms of trying to digest the future in little bit.

We have talked in the past about, we determine our outlook by looking back historically at what has happened in Robinson and trying to position ourselves so that we are flexible and ready to react to whatever scenarios evolve in the marketplace. When we went public 7.5 years ago we talked about that growth rate being at 15 percent which is how we have set our targets. We have not moved off those long-term growth targets. When we look back now over the last 8 years as being a public company, our growth rates at both the net revenue, operating income as well as EPS levels, have been right around there, maybe a little bit better in the 16, 17 percent range over that 8 year period of time.

There has always been a fluctuation on a quarter-by-quarter or year-by-year basis as the marketplace kind of swings back and forth between the supply and demand side. We feel very confident about our business and there's a lot of changes going on in the marketplace today with globalization and our focusing on international and our expansion of modes. But from a general perspective, the message is fairly consistent with what we have felt in the past, that we're executing on that long-term strategy.

When you look specifically at '05, we do have obviously a fair amount of momentum with transactional freight in a very busy environment coming into the year. We do want to share that our January activity was comparable to the fourth quarter activity going into the year 2005. But also want to point out that if you look at the history of Robinson and you look at our activity in the third and fourth quarter of '05, that we do believe that our comparisons will become much more difficult as the year wears on. And we compare those third and fourth quarter periods of time where did have more of the contractual activity reworked or repriced, and we do have very high volumes of high margin transactional freight in there for what we did in the third and fourth quarter.

So to us, we do not try to predict precisely what will happen during the year, but the general dynamics are fairly clear and to us fairly consistent with the patterns that we have seen over the last couple of decades and what we hope to see continue on beyond that. Those are my comments. Chad, will make a few and then we will go to Q&A.

Thank you John. John has given you highlights of our revenue growth for the year as well as a little bit of an outlook. I will spend a few moments talking about our operating efficiencies and the cash-flow statement and then we will turn it over for your questions. We're pleased that we were able to expand our operating margins for both the quarter and the year while continuing to invest in the future. We increased by nearly 700 people during the year while improving our gross profit per employee.

We will continue to closely manage personnel expenses as we grow both by keeping the pay systems as variable as possible based on performance, as well as hiring people when we need them. We have also continued to invest in our systems infrastructure. These investments have both been in increased operating expenses including contractors and increasing our IT personnel, as well as in capital expenditures including the new data center as part of our building in Chicago.

We believe these investments will help improve our competitive position in the future. We had a very strong cash-flow quarter driven partly by fluctuations in our working capital. Our Days of Sales Outstanding and accounts receivable decreased during the quarter. It is near the low-end of what we consider normal in the 40 to 45 day range. Also the incremental capital invested in our quick pay program during the quarter was modest, about 500,000 additional investment compared to the $29 million that we told you was invested in it for the first 9 months. This was due partly due to decreased volume at the end of the year due to the holidays.

We're pleased with the cash-flow but expect to see future working capital fluctuations. We also have had a significant portion of the cash spent since year-end to fund our accrued compensation which was about $60 million as of the end of the year. Most of that has already been paid out as bonuses in our profit-sharing program. We also expect to have another approximately $7 million related to finishing the buildout in Chicago. As of year-end, our cash and investment balance had risen to $288 million. We continue to look for ways to redeploy this capital.

There are currently many acquisition opportunities being presented to us. But we have and will maintain our high strategic and financial standards when evaluating these opportunities. We will continue to evaluate our cash balances and consider whether some of it should be returned to the shareholders through a special dividend or increased share repurchases, but currently we feel comfortable with the level given the opportunities we see in the marketplace. That concludes our prepared remarks. We will now take your questions.

Thank you Mr. Lindbloom. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Jim Valentine with Morgan Stanley.

Great quarter guys. I guess the first question is, do you think you're going to see a shift of this contractual truck business? It sounds like it's down near 25 percent and that's great because you're able to exploit the market. But do you think as we go through 2005 and enter 2006 where we see a lot of new capacity coming into the industry that you'll try to move do that number back up?

Yes, I think, again, it will be driven by the customers, but in general from our view what happened during this current year is, given the fact that volumes were higher than what people expected and rates exploded, there was a lot of transactional freight. Shippers don't generally want that transactional freight. So there is a lot of effort going on as we speak and there was near the end of the year, to really try to plan better and prepare better and avoid some of those unanticipated cost increases and put more dedicated capacity into place. So we're already working with our customers to try to do that and we do see over time it will come back to a more dedicated or contractual environment.

Good. The second question was, on driver pay, I know you don't have drivers but you have a good window into what is going on. We've sensed that driver pay, having gone up so much in 2004 and even more being announced here for '05, that would ease some of the more pronounced driver shortages that we saw in 2004. And wondering if you're saying the same thing in terms of carriers coming to you to have additional equipment to be filled?

Yes we do. And I guess the only thing, Jim, I would pile onto that is for us driver pay as set by the larger companies on the announcement that you're seeing is one element of it. The other piece of it is what type of earnings opportunity an owner operator can have by adding new capacity and going into business for themselves. All of us in the industry I think, we're in pretty strong agreement that all of those numbers needed to move up pretty meaningfully in order to attract more drivers or to attract more entrepreneurs into the trucking business. And I think we're seeing it across all (technical difficulty), but it's still an open question as to how fast that can all be added and how that will balance itself out with overall freight demand in '05.

Great. One last question, I'm sorry. If I can just ask about option expensing. As you recall you took a leadership role and took care a lot of that here last year. We're now -- it looks like everyone is going to be following suit later this year. Can you remind us again that I think you have done all the expensing, but I thought you might be changing your compensation structure going forward and how that could impact our forecasting of your earnings?

It is all expensed and it should all be comparable going forth, so there should not be anything different or unique about that. We did do the restated approach where we put the number back into the history. What we did talk quite a bit about is the fact that we moved from an option program to a restricted stock program which would have required expensing under either an accounting scenario which was part of our motivation or incentive to be a leader in this whole thing because we wanted to move to a restricted stock program. So our results have been restated. There are charges in there for the options that continue to vest as well as the new restricted stock awards that have been issued under what we now feel to be our permanent program. Our base of earnings should be set to just grow from there in terms of future compensation activity.

Great, great, thanks guys.

Scott Flower with Smith Barney Citigroup.

Good morning gentlemen. Just a couple of questions. How do you foresee, and obviously it's driven by the marketplace, you're very market-based. How do you foresee your book of business shifting toward contractual? How will that phase in? Obviously if you think about it from a trading standpoint you'll want to tack less when the market is going right. Is there a point at which you think you want to lock in more, obviously as your customers see it versus, at some juncture we've talked a little bit about how capacity, given driver pay increases will come in. I'm just trying to understand better how we should think about it, how it flows through your business over the course of time.

That's a good question, Scott, and I can appreciate that it is a little bit frustrating to really get your arms around it. The best thing I can add to it is that you really -- it's so tempting to put this into two discrete buckets and it is really not. What you're talking about is a continuum of commitment that you make in terms of here are my plan volumes, here are my rate expectations. In the day-to-day world even the contractual business tends to be very fluid because it is all estimated volumes and every day there are loads being tendered that are being honored at a contractual rate that are above or below what the planned rates were.

And it comes down to how well did you plan, how dedicated is the capacity, what volume of activity is honored at the prepriced or contractual rates. Are there any must-haul causes in there where you have to haul it? There were people breaking contracts this year in terms of just not providing the capacity at the rates that were agreed to. On the continuum, what we're doing is just working with our customers to find out where they have had the most severe service failures, where they've had the most extreme cost increases, what types of dedicated programs can we put in place for them, what can we do to bring more capacity at a reasonable price? Can we look at different modes? And trying to work to where maybe if it is freight in the past that we got some days and didn't get other days that they give it all to us and will work on a multimodal program on a much more committed basis.

Okay. One thing on capacity, are you seeing it? Is it coming in a very modulated form? Obviously you mentioned bits and starts. I'm just trying to get a sense of how you see the capacity marketplace right now?

Our overall thing, I guess I didn't talk specifically about it on this call, but what we have talked about it before is the carrier services group that we have that oversees the qualification of new carriers before they get put into the network. Again, like many of these metrics or data points you have to be careful about what they actually tell you. But we do know that throughout this year and including the fourth quarter, we continue to signup an extremely high-level of new service providers. Some of those are new carriers with new carrier qualifications, new to us at least in terms of being qualified to haul freight within our network.

Some of them may be people who went out on their own and started their own company, some of them may be recycled companies that come back, some of them may have been around a long time, they just never did business with us. Carriers dropout as well too. So we know that number is going up by several hundred per quarter and that we are adding capacity to it. And our sense is from our operating people, that there is capacity coming into the marketplace via the form of owner operators and small businesses that have a much more lucrative earnings opportunity today than they did a year or two ago.

Last question. I know Chad may have alluded to this but your other SG&A expense, obviously if you common-size (ph) or look at it on a percentage year-over-year basis (indiscernible), is this the IT expenditures you mentioned? Help me understand. Is that a run rate or is there some additional items you spent to finish out '04 and will come down to a little bit lower rate. I just want to try to better understand it. Obviously it wasn't a bad line item but it was higher than what we have seen previously either year-over-year change, or if you common-size it versus revenues. I'm just trying to better understand that expense category.

I thought it was a little high, too, and clearly at the top of the list was some of the project spending and stuff that we did. I guess Chad, do have any sense of the run rate sort of question?

IT was a big part of it and some of that should be temporary or at least leveling out as opposed a growing with the business. Many of those expenses are extremely variable and do go up with the level of business, things I communications and things like that. But we do try to gain leverage, but yes there is some incremental, temporary expenses in there that should either level off or go away.

Great, thank you.

Ed Wolfe with Bear Stearns.

Good morning guys. John, I don't want to beat this dead horse. I am just trying to understand it also. When you see your gross revenues below your net revenues in such a tight capacity market, the implication is that on the 75 percent or so of your business that is transactional you're actually making a gross yield on it. Is that a fair assumption and is it a fair assumption that on the 25 percent that is contractual you're getting squeezed a bit as the model normally works at this part of a supply demand cycle?

Yes. I mean I think what you just said is accurate. But even transactional freight has to be put into context. Transactional freight in an environment of extremely tight capacity where you're routing lots of deadhead miles and trying to essentially create new capacity and our people are working very late, they're going to make higher gross margins because of the extra effort and work that is involved in doing that. In this environment, transactional freight has been more lucrative for us because of the workload that is required around it or the creativity that is required to try to initiate it. As I said earlier, in this type of environment the contractual margins compressed over time but they are perpetually renegotiating as well to.

When was the last time you were at 75 percent transactional and only 25 percent contractual?

The history of Robinson is more transactional. We grew from a transactional brokerage business and have expanded modes and moved more into integrated services. So we have had a gradual trend towards more and more contractual customers that we were tying up with integrated services. We were at this point somewhere, I would guess 5, 6, 7, 8 years ago. I don't know when, but in terms of seeing this type of surge in the marketplace, it hasn't happened for quite a while.

The biggest thing you look at, Ed, is just the transactional -- I'm sorry -- the pricing rates. We basically have gotten more than a decade with relatively flat pricing. And so between the rate increases and the fuel surcharges and everything, it was definitely a unique year in terms of the pricing activity and the amount of strain on what people thought they had as contractual relationships coming into the year.

I was amazed. You moved to the year from 50 to then 60 percent to then 75 percent pretty quickly. Do you think you can move back if you wanted to and you make those decisions this year, from 75 back to 50, maybe even 60 percent contractually? Is that doable within a year's period?

I have no doubt that we will. But again, Ed, just make sure you're thinking of this on a continuum with kind of general concepts on each end that the freight will move back towards executing more on a planned basis at planned rates under that umbrella of contractual overtime. I don't want you to have the impression that we have got clean buckets of freight, one with written pieces of paper and the other one that is day-by-day and the freight just hops between the two things.

It gets very blurred in terms of how the freight is committed and how it is priced and how it executes on a day-by-day basis. The real issue or the real message I guess, is that in the third and fourth quarters of this year there was a tremendous amount of freight in the marketplace that was just looking to get moved somehow by somebody at some price and that is what we are good at.

That is the secret sauce.

And that can go away. It comes and goes in terms of that demand in the marketplace, and we'll move with it. Yes, we talked about making sure that we build relationships and have the right type of relationship with our customers and our carriers to move back when the market moves back. If we are gouging people -- and we are not. Our margins, if you look of them on a percentage basis, are very comparable and we have to try to use these environments to help our customers and build a better foundation to move back when the marketplace allows it. That is what our overall strategy would be.

Sure. If you put your cap on for a second as a purchaser of truckload, we have seen now 12 quarters in a row, at least the public truckload guys, where their revenue per mile net of fuel has accelerated in year-over-year growth. And for the group there is some mix issues in there. The growth is about 11 percent year-over-year in fourth quarter, up from 9 percent, 7 percent as you go back. When do you think at least the trend of acceleration levels off? Are we close to that? Do you think where there is clearly more capacity coming in, when do you think just pricing, the rate of price increase, starts to level off as you see it?

The biggest thing that we talked about ties into the earlier question. I think your answer to that is probably driven by your attitude or sympathy or prospective towards the drivers. Because there are arguments that -- I think you can go back and look at those rates increases and transfer a lot of that to driver pay. And then you've got insurance issues as well (indiscernible). I know every other carrier out there is paying a lot, lot more. You have got some combination of better profitability, better yield for the truck lines, but you've driver pay and insurance issues.

I think you would probably get a wide range of answers depending upon your sentiment towards the drivers and whether or not this latest round of increases is an adequate pay increase. It is a clearly attracting more people. It is attracting capacity and it is pretty meaningful. It is just so hard to predict whether or not it's got to go up another 20 percent or whether it is overcorrected and will come back, or whether it is right where it needs to be.

Are you sensing a difference, just in companies that reported and talking anecdotally to smaller carriers, it seems like some carriers are doing a better job of growing their fleets, the drivers. Some just can't do it. Are you getting any kind of sense that the pricing is becoming better for you to purchase with smaller carriers than larger carriers disproportionally than previously?

No, I think for us it has always been different things and different marketplaces for different types of freight. I think it is hard to generalize along that. But I do think it is like every other part of the marketplace that when the environment gets to where it was in the second half of this year, anybody rightly or wrongly who feels that have been treated poorly or have a better opportunity somewhere else, will move. There is not only a shortage but I think the turn accelerates because you get people going out on their own and switching companies. You saw all kinds of signing bonuses and goofy things to attract people, and so there is lots of churn.

Just switching gears, Chad, could you talk a little bit and if you said I apologize, I missed it, for CapEx guidance for '05? I know you had a big year in '04 with a couple of projects. What does that look in '05 relative to you guys, a big year. Can you talk about '05?

Sure. In '04, we had approximately $21 million related to the Eden Prairie headquarters in the new trans services building here in the Chicago building. We expect to have about another 7 million on the Chicago building. If you kind of look at, just like we have always pointed to history, if you kind of look -- subtract the building expenditures which are unusually high because of the two large facilities, subtract those out of the '04 and should kind of give you a baseline, and we expect it to grow as the company grows.

Sure, but it sounds like 14 or 15 million less on that side. Is that fair?

Yes.

Okay. Is there anything unusual in the working capital swing? You said that DSO's are at the low-end? But is there anything else? It seems like for the year, cash flow kind of did what we thought but it was very back-ended? Do you expect that trend to continue? Is there anything different this year?

There is nothing different that we know of. Obviously the big wildcard is what does quick pay do? As far as the fourth quarter it did level off as a percentage of the total payments going out. That combined with the flow last week of the year definitely reduced the amount going out. But as far as predicting what is going to happen next year's working capital we're going to continue to see fluctuations in accounts receivable. We do have incentives for the branches to collect their money as quickly as possible, but we consider it the ending point of the year or well within the realm of what is normal. It is difficult to prove where we will be at the end of any period.

John, you made a comment in passing that January started off very similar to fourth quarter. We have heard from a lot of different modes and freight companies that they saw a bit of a slow down particularly at the beginning of the year, probably some weather-related to that. Are you saying you didn't see it or you're able to manage around it, maybe some of the issues presented opportunities? How do you address that with what we're hearing from some other companies?

Our business again is pretty national. I would say the answer is more that we worked our way around it. There were certainly different things that happened in different parts of the country during the month of January. But in aggregate, the net results were pretty comparable to the fourth quarter. What I should have added to that though, Ed, is that our first quarter and when you look at going into any year during the month of February and March which are both -- our growth historically February and March are bigger quarters than January as January is kind of a lull. Sometime during that period of time you will get the very seasonal tightening of some of the produce capacity and some of the lanes. And so the February and March activity is a much bigger component of the first quarter story than January.

Sure. I understand. Thanks a lot for the time.

Jon Langenfeld with Robert W. Baird.

Good morning all. If you look at the spread between the contractual rate and the spot market rate, even after the repricing that you have gone through, do you feel like that spread is at unprecedented levels relative to where it typically is during the busy season?

When you say spread --.

Just in terms of the price you're going to pay under a contractual rate late in the year versus the price you're going to pay if you need a truck on the spot, no planning?

Contractual margins and prices will always be lower. When you plan out the freight and you dedicate it, that is the reason why people try to dedicate it and put long-term things in place because you can generally get higher utilization and price it better. And we always work on thinner margins on contractual freight because it is easier to do, it requires less labor, all the rest of that. On transactional freight, again, these are big generalizations across a lot of different types of freight.

But in general, transactional freight that gets tendered at 4:30 and has got a pickup tomorrow or maybe even that night or whatever, it is going to cost a lot more. It's going to require a lot more effort, and our margin opportunities are greater. So the bill price or the amount that gets charged in the marketplace, the gap between the two can be real significant.

I guess some of the things we were hearing from some the asset-based providers is that spread had gotten to levels that they had not seen for many, many years between that spot and the contractual rate. Is there any way for you to look at your business and feel the same sort of differential, or is it too different?

I think a carrier would look at that differently. I think what they would say is, look, if they signed up to move certain freight at the beginning of the year at $1 a mile and the market moved the way it did, the opportunity cost for that spot market might be $1.30 by the end of the year. So if they're hauling that contractual freight that they signed up for at the beginning of the year a buck a mile, that margin opportunity to go to the transactional freight probably was as big this year as it's been in a long, long time. We would agree with that.

But we think of it differently in terms of how we manage our business, because ultimately we're trying to earn a margin or earn a fee for what we do, and it is different for us in terms of thinking about pricing and how we approach the customer under those two scenarios.

Okay. That's fair. That's helpful. On the international side, unless I'm missing something, I guess if you take out the acquisition benefit that you still have in the quarter, that was basically flat. Does that just go back to the fact that you have the concentration in the customers and it can be lumpy at times?

It does, and particularly around airfreight. I think we folded in some bigger airfreight programs that started near the end of last year and then have started to overlap each other. So like if you look at airfreight activity on the year, it was pretty healthy growth for the quarter. It wasn't as much. And we do have hopes that -- I don't know exactly what the numbers are, Chad, but our top 10 customers there are still well more than -- a little more than half of our business. So volume fluctuations can move from quarter-to-quarter, and our real challenge there continues to be working hard to add more customers to reach that material size.

All right. Finally, I am probably missing something here, but I guess if I back out the numbers in the fourth quarter, it looks like the acquisition expense was 10 million in the fourth quarter. Is that all related to the acquisition in Utah?

You're talking about the purchase price of the acquisition?

Yes.

On the cash-flow statement?

Yes.

I'm sorry, you said expense. Yes that is.

Is that in line kind of with typical spending on that size of an acquisition or is there something special or unique about that?

It was or is an extremely profitable well-run business.

Okay.

It's typical. We do a discounted cash flow. So business with a higher profit margin is going to have a higher price relative to gross revenues than a lower one.

That is the kind of color I was looking for. Thank you.

John Barnes with Credit Suisse First Boston.

Good morning guys. Could you give us a little bit of color on the competitive landscape? There are a lot of people trying to grow brokerage at a very, very robust pace. HUB announced numbers this morning, their truck brokers business was up pretty solidly. Land storage truck brokerage business is going very robustly. And I'm just curious, are you all fighting for the same type of freight or is it a very different niche and therefore nobody is stepping on each other's toes yet?

In terms of the additional carriers you're seeing qualified by your carrier services group, I am curious as to, are you seeing a net increase in capacity in the industry? John, going back to your comment concerning the churn rate, are we just seeing carrier -- some drivers leaving that carrier to go start their own deal or become owner/operators and therefore the pie is staying the same?

I will start with the second one. We definitely know there is some additional capacity coming in. There are drivers that previously were not driving trucks that come from other industries. There are new training schools. There is clearly an element of growth through growth in there. When you match that up with the fact that there is churn, it gets really difficult to decipher exactly what the net add was. But there is definitely an element of real growth in there. From a competitive standpoint, there clearly is -- it is not even really just a handful of other public companies that are doing truck brokerage. There are tens of thousands of registered intermediaries and more of them coming on all the time. Part of the way I guess we look at competition is, people will get in and out of it to differing degrees at different parts of the cycle.

And obviously this is a lucrative part of the cycle where you're going to get a lot of people ramping up and wanting to get bigger in it and there will be some turnaround in that. Our view has always been that from a long-term competitive standpoint, that we feel strongly it is about culture and service and third party. And other non asset-based players are probably the true long-term competitors all the way from the small local niche broker to the larger non-asset based networks that are focusing on the same things that we're focusing on.

So there is very high levels of startups and high levels of competition. But I would say that we have thrown these numbers around before and I really believe them to be true, that we're somewhere less than 2 percent of the market. And everybody, even if it is meaningful growth to them, everybody else is still relatively small to us and we are small to the marketplace. So when we travel our offices and look at competition, the same name rarely comes up twice even though a lot of them are obviously doing really good things or are providing competition to one office or one account here and there. The fragmentation issue is really still out there.

Okay. In terms of headcount, as you look at 2005, I mean if we continue to see the growth at this pace that you saw in 2004, can we expect similar headcount additions? I know at times you have actually had to encourage some of your branch managers to hire to keep up. Are you seeing that now, or is it that business is so good they're kind of making those good decisions on their own?

I think the last couple of quarters at least, they have been very busy and trying to find time to interview and recruit the right types of people to get in there. Part of the way we get the operating leverage in this high growth is you just get a lot out of your people because you have no choice. They're just working very hard. We will definitely be adding people during the year. And the question is, how many? And that is where we come back to, we have to continue to staff up and build the bench and put in the resources to fulfill this growth.

We are prepared to add 7, 8, 900 people this year if the marketplace allows it. We are prepared to add no people if freight demand really levels off for some reason. We will go in either of those directions. But our hope at this point in time is that we continue to grow and that our productivity metrics allow all of the offices to stay in the mode of just adding people when they can.

Okay. In terms of the use of cash, and I know you get this all the time, but given what you said during your prepared comments in terms of looking at a onetime dividend or share repurchase, when do you expect a decision to be made on that? Are the acquisition opportunities being presented to you so attractive that you just hold out hope that something crosses your desk that makes sense?

I guess the way I think about that, John, is that if you look at -- we already upped our regular dividend rate pretty significantly to a 33 percent payout ratio. So our accumulation rate is not all that steep right now. When you look at even the small market share acquisition types like we did in the quarter and that we are pursuing, and then you look at, like Chad mentioned, you look at the year end balance. But we had pretty significant accruals that got paid out in the beginning of the year.

When you sit back and look at the pipeline or the possibility of acquisitions, even though we're pretty picky about what we do, if you look at our size of our market cap relative to the probably couple hundred million dollars that is really sitting there that is not tied up in another country or our day-to-day fluctuations or all the rest of that sort of stuff, it's not a real high percentage or a real big amount relative to our market cap for the types of sizes and opportunities that are out there. So I don't sense anything anytime real soon.

Okay. In terms of all uses of cash, whether it's acquisition or announcing something else, you don't see anything in the near-term?

No, I was talking specifically about your repurchase or special dividend.

All right, that's fine. Okay. Lastly, can you give us an update? A couple of legal issues that were brought up this time I guess almost a year ago now. Where do we stand on those? Has there been any resolution or any progress made on any of that in terms of the two class-action suits and where we stand?

I think they're actually going back close to two years already now that they were filed, and unfortunately we really don't have much of an update. There have been a couple of hearings and a couple of steps forward in the process of determining. It is still in that process of trying to determine whether or not class certification will occur. There have been no rulings on that.

We are no closer today than we were --?

A lot of time and money spent, but unfortunately in terms of answers, no. We are no closer than we have been anywhere really for the last two years.

Okay. On the SG&A side, Chad, can you give us an idea of what 404 cost you in the quarter and what you think the run rate is going forward? How much could come out of SG&A if you had some nonrecurring in there?

404, although it was a lot or work for a couple internal people and our audit fees did go up because of it, there is not much onetime because --.

We'll have to do it every year unfortunately.

We to certify every year. This is the first year you have more work because you had to document everything. But really because our systems are so strong and centralized, it was a lot less work for us than a lot of other people.

Okay. Chad, thanks for your time.

Jordan Alliger with Deutsche Bank.

Jordan Alliger Yes, hi. This is Bill Stegman (ph) for Jordan. Just two quick questions. Can you comment on what your spot exposure was in the third quarter of '04 and also on the trucking piece. And also on the trucking business, what was the margin per load activity in the fourth quarter? Thank you.

You know, in terms of, if I understood the question properly, in terms of third quarter activity, what we have tried to describe throughout the year is that -- I'll give you the very broad estimates, but that if it was an estimated 50/50 at the beginning of the year, that it started a transition. I think the estimate we through out in the third quarter was more like 60/40 transactional to contractual. So it was trending to a much more transactional environment.

And I will throw the caution out one more time. These are very broad concepts that we use to describe the range of types of commitments that they are. So don't put too much definition into exactly what that means. But it was very clear that the environment, by the end of the year, was heavily driven towards reacting to the marketplace and trying to cover freight on a day-by-day basis. We do not disclose the specifics of margin per load and that type of activity in terms of precise volume accounts. So we have never and don't get into the detail for competitive reasons.

I understand, but in the past you've commented whether the margin per load has increased or decreased in the quarter.

During the fourth quarter of this year, the margin percentage stayed relatively consistent and within the range of our historical activity. Because of the pricing increases that margin per load would increase proportionately. So the profit per load did increase during the quarter.

Okay, thank you for your time.

Ken Hoexter with Merrill Lynch.

Good morning. This is Jeff Fidicaro (ph) for Ken. I was wondering if you, just looking at sourcing understanding it's a little bit lumpy, are you still targeting sort of the 3 to 5 percent long-term growth? And was there any -- give us an idea the effect of some of the larger customer base versus new customer base?

I would say 3 to 5 percent is still a long-term growth initiative. We do have some ideas of how we may be able to get into new services or expand what we are doing. And we're not saying it is 3 to 5 percent forever. We do have some future hopes or growth opportunities that we would more get into. But what we have been saying for the last 6 or 7 years is that we have these larger more integrated customers that we continue to grow with, but when we went public 7 or 8 years ago there was as much as 75 percent of the business that was traditional, wholesale, transactional produce stuff that we actually did continue to lose some of that business activity during 2004 as more and more of the produce just goes directly to retailers.

And that whole perishable supply chain continues to get revamped and managed much more aggressively and the freight is controlled and the product is controlled by the retailers and the sourcing people on an inbound basis. So, yes, the outlook is the same, that we continue to have portions of the business that we know don't have a long-term future to them and there will be some margin compression. And we're working hard to get more of those bigger retail type customers with integrated services that we can grow both the sourcing piece and the transportation related to it.

Great. Just a second question. When you talk about expansion, can you give us an idea, I know you targeted before, 78 offices in '05. Is that still the target and which regions are you focusing on?

7 to 8 offices is the correct number of our target for '05. For those who are not familiar with it, just to refresh you, when we open offices we generally do it with 2 or 3 people. To us those are more like planting seeds for long-term growth in the future. We do not -- it's not like a retail environment where it's a comparable store thing where you make a huge capital investment or put a lot of people into a new office.

We have a list of probably 50 or 60 cities around the country that we continue to target in terms of just building out the network in places where there are half of one million or one million people where we don't have it presence today. In exactly what order they come in has more to do with people preferences and where the manager that is ready to open that office is prepared to live and go to.

So the ones we opened in the current quarter were Portland, Maine; Boise, Idaho; a second office in Toronto; Pasadena, California; and Kalamazoo, Michigan. Those are the types of cities that I think you will see us continuing to target offices for at least the next 5 or 6 years of market share penetration.

Great, thank you.

Brannon Cook with J.P. Morgan.

Good morning guys. I was just curious if you could comment on how the quarter progressed, adjusting for seasonality, if demand or the transactional business accelerated into December or if it was fairly constant throughout?

The growth month by month or business day by business day is probably a better way to look at it. It was relatively consistent throughout the quarter as evidenced also by our fourth quarter growth rate being very similar to the third quarter.

Where there any regions that were particular hot or grew more quickly than other areas?

There was the typical seasonality of the upper Midwest being very busy during the year, but I would say it was -- as far as region-by-region it was normal given the season.

Okay. I guess in 2004 you made several small acquisitions in Ohio, Utah, and into China. Looking toward 2005, should we continue to expect the small opportunistic acquisitions or in this strong demand environment, might you be more aggressive?

That has been one of the more difficult questions that we have had for the last 7 or 8 years and there's even more opportunities out there today probably than there ever has been just because with the strong environment there's a lot of people looking to reposition. And I would say if you're looking at probability or likelihood, there is probably a greater probability that we will stay the course and do smaller market share things and focus more on internal growth. But we did do one pretty material acquisition in our history that we think was really good for the shareholders and really good for operations. And we're not going to shut down the thinking in terms of what bigger things might do for us.

Okay. Finally, just last quarter you opened up several offices in China. If you just give us an update on how that is progressing in terms of contribution and just ramping up?

Okay. What we did is we had agents in the region that we were dealing with that were affiliated with each other, and we hired a number of employees that we had previously been working with that agent and purchased some of their equipment and got our own licenses and set up our own entity. So it was part combination acquisition of the small agent and part opening up of our own offices. And that happened, I believe, July 1st, or was it August 1st? Somewhere like right at the start of the third quarter. The rest of the year, the amount of existing revenue that came with those acquisitions or businesses was very small. I don't even know what it was. I think we disclosed it at the time, but it was real immaterial. Our real focus has been to treat those 7 offices as new Robinson offices that we have spent. We had the managers over here; we have been training. We are working hard at integrating the systems. We're converting a lot of our other existing international freight from agents to our offices and feel very good about the progress we have made in these first six months.

So it's very difficult to quantify exactly what type of revenue we acquired versus what type of growth we've got off of it. We really are thinking of it more as having opened 7 offices, but feel very good about the first six months and the service levels and the capabilities that it's given to our global forwarding network.

Thanks.

John Larkin with Legg Mason.

Good morning, John; good morning, Chad. I noticed that the miscellaneous category grew actually faster than the gross profit per truck brokerage. I guess historically, I had always thought that intermodal and airfreight forwarding and ocean freight forwarding were going to be the new growth drivers. Can you talk a little bit about how miscellaneous fits in and how it overlaps with truck brokerage and how you see that growing over the next couple of years?

Sure, they are two main pieces in there, and the customs brokerage piece which tries -- it's basically fee-based business. So it's custom brokerage fees and it's transportation management fees. Both of those businesses did very well during the quarter and did very well during the year. The customs brokerage piece is obviously going to continue to grow proportionate with the air and ocean piece as part of the bundled forwarding services. You can't sell that separately, but almost all of our customs brokerage business is the integrated services.

The transportation management fees, we have a couple of different initiatives around the Company where we are doing more aggressive management services, fee-based services, route guide management, different retainer type services that are relatively small to the consolidation right now, but pretty meaningful to a number of customer relationships. And we are seeking to continue to grow those aggressively. We do see continued and hopefully above average growth rate in that category of miscellaneous.

Just one final question related to your comments about the feel for the business in the month of January. You had indicated that you're seeing not only more carriers come into the system -- I guess your recruiting guys are doing a great job -- but also I guess those carriers are adding incremental power units. And given that January is normally one of your weakest months, probably followed by February, is there any scenario you can envision where '05 would develop in a way that's substantially different from, let's say, the way '04 developed, where supply and demand would continue to be very tight throughout the year, even though there is some incremental capacity coming in?

I think the biggest wild-card, John, that we haven't talked a lot about is just the raw freight demand. Everybody's expectations or most people's expectation is that capacity will stay tight and that rate increases will occur again, and that in the February and March time frame when a lot of the seasonal freight kicks in, that things will get very difficult. But it has happened before where if the economy softens and some of this expected freight demand -- and we're talking about freight demands, in order to have a repeat type of year, we're talking about freight demand growing to the same degree above last year from a comparison standpoint. It may not happen.

It may be that the supply and demand of freight and capacity has already corrected itself more than everybody would give it credit for, and that the rates won't spike up as much and it will be a little bit softer. Then for us particularly, if you get later on in that year and there's just not that high intensity of transactional freight, it could be a pretty different environment by the end of the year.

Do you think the inbound volume of containerized rate for the Pacific Rim has a way of sort of mitigating any kind of a downturn in volume that may be economically related?

In certain lanes, it sure can. I mean in those long haul coastal lanes, it can have a huge impact. So, yes. I don't know that I would think that that applies kind of universally to the whole U.S. freight spend or activity, but that would certainly apply in some parts of it.

That's great. Thank you very much.

David Campbell with Thompson, Davis & Co.

Hey, John and Chad. Your airfreight business in '04 grew a lot faster than your sea freight business net revenues. Is that likely to continue in '05, excluding any acquisitions you may make?

A lot of the growth in '04 was driven by, as we announced I think a year ago on the conference call, that our Hong Kong office started doing airfreight forwarding. So some of the margin shares that we were giving we kept internally, as well as landing some new customers during the fourth quarter coming out of Asia in airfreight. So now we have kind of anniversaried that. So it kind of gets back to the fact that we have -- there are some customers that make up such a significant portion of the business that we're going to see some lumps in the growth rate. But we more look at it as a business unit and expect the two to grow together, along with the caveat that it is going to be lumpy because we are relatively small still.

The sea freight, if you take out the acquisition, hardly grew at all. I mean, there was some revenue gain from the Chinese offices.

Yes, we did have -- I didn't get into much detail around that. We did have some fairly meaningful volume growth on the ocean side with some compression in the margin side of it that we think we can do a better job on next year. So you are correct that from a net revenue standpoint, the ocean freight activity did not have real high growth during the current year. But despite that, we felt like we made pretty good progress of expanding our presence and volume with the capacity community out there and really changing the relationships to a more dedicated owned office element, in Asia at least.

Okay. You didn't say anything about your European offices. Are there more of them? Were there more of them in '04? I think we had two more last year. And what about net revenues per branch in Europe, are they beginning to -- are they just continuing to increase?

I do not believe we actually opened any offices in Europe during '04. I think we might have had a few near the end of '03, but we have right around 13 offices in Europe, 10 that focus principally on European truckload activity, and 3 of them that do international, air, ocean and forwarding activity. We made the decision at the beginning of the year in Europe that we needed to let our people mature and grow in and improve the profitability of the 13 offices that we had. I think we've got a little over 200 or 230 employees in Europe, somewhere around there, and we really need to continue to strengthen the bench and build the team. And we thought that if we opened too many offices too quickly, we would continue to dilute the talent and spread it out too quickly.

So we did focus on and felt good about the profitability improvement and the productivity improvement in virtually all of the European offices this year. The European business in aggregate makes up about 3 percent of the consolidation. It is more truck than freight forwarding at this point. Freight forwarding offices in Europe are a huge growth opportunity for us from a market share standpoint. So we're a little over a decade into Europe on both the truck and forwarding piece, and feel very excited about the long-term prospects for it and the strategy of it and the improving productivity metrics and profitability around it, but it is still, like I said, 3 percent of the total.

Right. But if it is 3 percent of the total, it is still -- therefore, it's growing.

Gone from zero to 3 in the last 10 year, which doesn't sound like a lot, but the North America piece wasn't sitting still during that period of time.

In terms of acquisition activity in '05, I guess it's still going to be largely focused in the U.S., although you have opportunities outside the U.S.; is that correct?

Yes. I would say that freight forwarding acquisitions of our agents or of smaller businesses in other parts of the world are pretty high up on our focal point, just because of the standpoint that when you're going into countries or regions that we have historically not done business, acquisitions are sometimes a much easier opportunity to get started when you don't know anybody to begin with. So I would say -- we commented earlier that from a probability standpoint, smaller acquisitions are more likely than larger acquisitions. I would also say that from a general probability standpoint, we are interested equally in both in non-U.S. and U.S. smaller acquisitions.

Okay. Thanks for the help.

Thank you for participating in our fourth-quarter and year-end 2004 conference call. We apologize that we ran out of time and could not get to all of you this morning. 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 passcode 11022327#. The replay will be available at approximately 2 PM Eastern Time today. If you have additional questions about our fourth-quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you. Ladies and gentlemen, this concludes the C.H. Robinson fourth-quarter 2004 conference call. Thank you for participating in today's conference. At this time, you may now disconnect.