羅賓遜全球物流 (CHRW) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson third quarter 2005 conference call. At this time, all participants in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder, this conference is being recorded Wednesday October 26, 2005. I would now like turn the conference over to 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, and Chad Lindbloom, Vice President and CFO. We are presuming that our audience has read the press release that was distributed yesterday, and we will be going directly to prepared comments on the highlights of the quarter. If you do not have a copy of our press release, you can access a copy on our website, www.chrobinson.com, in the Investor Relations section. Our prepared comments will be followed with a question-and-answer session. I would like to remind you that comments made by John, Chad, or others representing C.H. Robinson may contain forward-looking statements, which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I will turn the call over to John.

Thank you, Angie. And thanks to everybody who is taking time to listen to the call this morning.

As I'm sure all of you have seen on the press release, the results of our business for the current year continue to be very strong, with revenues and net revenues exceeding 30 percent growth and earnings exceeding 40 percent growth, both for the quarter and year-to-date. In the prepared comments, we thought what we would do is focus principally on helping understand the growth and helping understand the components that are driving us to such a successful year, and why we're exceeding our long-term growth goals of 15 percent in the revenue and earnings category. So, if you break down our business, we'll start with the top side with the revenue and the net revenue categories on our financial statements.

Beginning first with the largest, which is the truckload category. As all of you are well aware, in the last probably 18 months, the last year and a half or two, there has been a significant change in the supply and demand situation with truckload capacity in the marketplace. The truckload supply and demand is a big part of what we help manage in our customer relationships and a lot of what drives our business. When we look at our results for the third quarter, our north of 30 percent revenue growth was driven by a combination of both pricing and volume increases. We had volume increases in the mid-teens and pricing increases in the low teens as well. So when we look at our history and when we look at what drives our truckload business and compare our history versus the last 18 months, the obvious variation that comes out at you, is the fact that we've been in an environment of significant price increases for the last 18 months. Which really, we hadn't seen in at least a decade prior to that, and perhaps all the way back to the deregulation in 1980. There hasn't been a couple year period of time with these types of price increases. Our numbers would show last year that we had a double-digit price increase over 2003, and again in this year we're running at a low double-digit price increase over 2004. Since a lot of our business is transactional or spot market business, where the rate that we charge our customer or -- and the rate that we pay our carrier are negotiated as an all in service rate on the day of, it's not possible for us to specifically quantify the impact that fuel has had on those pricing arrangements. But our best estimate, based on the business that we do segregate the fuel surcharges that we both collect and pay, as well as estimating from the market data that we have, we believe about half of the price increase is attributable to fuel and half of the price increase is attributable to the market conditions.

If you look at our core truckload model and how we do what we do in the marketplace, we have always, and we continue to recruit new carriers into our network, as well as trying to find better ways to route them and manage their needs more effectively within the network through finding the right freight for them and creating the right types of opportunities to participate with our customer's freight and the freight that we manage. Nothing has really changed. We obviously have a lot of different productivity initiatives, as well as constant improvements to our operating system and our process to try to make that better. In addition, with the supply shortage that has existed for the last couple of years, we obviously have more of our resources and more of our people's time focused on developing that capacity side of it. But for the most part, we' are continuing to sell and try to find solutions and find answers for our customer's needs. And this price-demand supply environment has made a lot more challenges for many of our customers, a lot more challenges for us to try to find new ways to come up with that capacity. But we're executing under the same model that we have for a long time now. And the real difference in the marketplace for the last couple of years has been the significant increase in the prices in the marketplace. So, we continue to experience the same sort of market share penetration and volume growth that we have over a long period of time. We've had a slight increase from mid-teens to high teens in that in the recent periods because of the opportunities that we get on more of a transactional basis, where customers have more freight than they planned. And so they come to us on a short-term basis to look for those short-term needs to fill transactional or spot market capacity. So 30 percent gross revenue and net revenue gains driven by both pricing and volume increases in the truckload marketplace.

When you look at the intermodal piece, we had a nice quarter in terms of net revenue increases with margin improvement. But, as we stated in our press release, we did have a volume decline for the quarter in the intermodal sector. That's the continuation of a trend that's happened throughout this year. Really resulting from price increases and service changes and service eliminations within the real networks that we partner with, in many cases making truckload transportation a more appropriate solution for our customers during this period of time. So we are starting to cycle through, I believe, it was a little more than a year or so ago, when a lot of the pricing and service changes started to impact many of our truck versus rail decisions that we make. And so we're cycling back into a period of time where, while we continue to see some volume declines, we actually have margin improvement for the quarter in our intermodal section.

The next two business lines that I want to comment on, the global forwarding business and the produce business, both include acquisition activity within Robinson that had a positive impact on both our revenues and our earnings. First within the global forwarding piece, we had very meaningful internal growth as well as meaningful supplemental growth from the acquisitions that we completed in Europe, both in Germany and in Italy. We're very positive a month or two into both of those acquisitions that they're going to be very meaningful steps in terms of building out our global network and building our global forwarding presence around the world. We did have revenue growth and earnings growth on our internal and existing global forwarding business that was very positive and exceeded our long-term growth goals just because of some of the momentum that that business unit has in terms of selling its services and expanding our presence in Asia and North America. The acquisitions were completed during the third quarter. And we hope to be able to continue to do smaller acquisitions of this sort, to build out our network in other parts of the world like we've been talking for the past several years, to continue to build out that global forwarding network. So, while global forwarding continues to be less than 10 percent of the total net revenue and component of the revenues and earnings that drive our growth, we feel very positive about our strategy to continue to add these types of locations and to continue to sell internally those services and integrate our international global forwarding business in with the domestic piece.

On the produce piece, similarly in February of this year, we completed the FoodSource and Epic Roots acquisition, that have had a very positive impact on our growth this year. The FoodSource business that we brought into Robinson has met and sometimes exceeded our expectations throughout the current year, and is contributing very positively to the revenue growth and the earnings growth of our sourcing division. In addition to the FoodSource acquisition, one of the other points I'd like to highlight about our produce business is that with the high percentage of the produce transactions where we are taking title to, and making a margin on the produce that we source on behalf of our customers, there also is produce freight revenue and produce freight margin opportunities that go with those transactions. In our financial statements, those produce freight revenues are included in the transportation, principally in the truckload piece that I referred to earlier. So, within C.H. Robinson, in addition to the sourcing revenues that you see on the financials, there also is this produce freight component, which continues to grow more in line with our transportation and truckload services, rather than the sourcing component, and is a very positive contributor to Robinson. The challenging part has been, and continues to be, the stand alone existing sourcing component that, again, without the acquisitions and without the produce freight activity, was roughly flat for the third quarter compared to the previous quarter. And that is, as we've described before, a continuation of just a change in the produce and perishable marketplace that more and more large retailers are dominating the procurement and the sourcing transactions within the produce world. And while we have positive and growing relationships with some of those retailers, we continue to see margin compression and lost business on some of the other wholesale pieces. So we're having a very positive year in the produce business. But as we've stated earlier, we do not see a lot of opportunities for additional acquisitions of a FoodSource-type nature, because there are not many of those companies that exist. And while we're having good growth there, it is being largely driven by the acquisition, versus a combination of internal and acquisition growth.

The last revenue line item that I would just comment on, is the information services or the T-Chek line item, which continues to just do a very solid job of penetrating market share and growing at that 15 to 16 percent rate, which is our hope for long-term expectations and what they've continued to do in the past. So it's a very positive story. But it is basically the continuation of everything that we've talked about the in the past in terms of their revenue growth. So, when you sit back and look at the revenue side, you have a unique pricing environment in the truckload component. So pricing and volume demands, supply relationship, driving very significant and positive results in the truckload sector. You've got margin rebound on an intermodal piece that continues to see some volume decline, given the current environment. You see global forwarding benefiting from both internal growth and in acquisition and produce growing from an acquisition, as well as information services continuing on their strategy. When you put it all together, like I said in the opening comment, it was a little bit north of 30 percent for the year. Something we feel very positive about, and well in excess of our longer term growth expectations for Robinson.

When you move to the earnings increase of a little more than 40 percent, start talking about operating expenses. I guess a couple of things that I'd like to highlight. First, as we've always emphasized, about two thirds of our operating expenses are on the personnel line. And we work very hard to manage our people from a positive reward standpoint, as well as a productivity and effectiveness standpoint. We did add a lot of people during the quarter and we have added a lot of people during the year. If you look at our head count numbers, we've gone from over 4,600 people a year ago at the end of the third quarter, to over 5,600 people today. That includes a couple hundred employees from acquisitions, as well as significant internal growth, principally in that truckload sector. But all in all, it's about a 20 percent headcount increase for Robinson versus a year ago. And if you look at our total personnel costs, they're up about 28 percent from a year ago as well, too. So, along with these market place opportunities and acquisitions, is coming the incremental costs of adding to our network and building out the infrastructure to handle the business that we're bringing on. As we've talked about many times in the past, while we work very hard to make those personnel costs variable and to work within the model, there always is some timing differences in terms of how and when we add the people, and when the full costs are absorbed, versus the revenue or the business that may be coming with them. During this type of period of time when our revenues are growing as aggressively as they are, we will always benefit from higher revenue growth than the personnel costs. A lot of our internal hires are recent college graduates, or lesser experienced people that start within their career path within Robinson, and so we gain leverage within the model of having newer employees that have to come up the learning curve quickly and gain experience within the Company. So it's not uncommon that during a high growth period of time like this, even though we expect longer-term that the model will stay fairly consistent in terms of revenue growth and operating expenses, that we gain leverage of the network and leverage of the personnel costs during a period of high growth like this.

The other thing that I would point out as Chad has spoken to the in the past, that when we do look at our acquisition growth, while we can benefit very positively in a number of our strategies from acquisition opportunities, we do take a relatively conservative approach towards valuation and the purchase negotiation of those acquisitions. So, while we believe we paid a fair price to the sellers in all of those transactions, we do set them up so that they are accretive to Robinson's earnings. And we have had a positive impact in the current year, based upon the accretion of the FoodSource transaction, and a little bit from the international acquisitions that I talked about for the quarter as well. In addition, when you look at our cash flow from operations and our nonasset model, despite having completed those acquisitions, having comparable levels of cash on hand with interest rates significantly moving up on the cash that we're holding, that all helps in the operating expense and interest income line items that leads to some positive accretion in the quarter as well, too, helping us get our earnings to grow faster than our revenues have for the quarter and for year-to-date.

So those are my comments on the revenues and operating expenses. And kind of the summary view that we have in terms of why we're having a very positive year. Just a couple of other quick comments before we open it up for question-and-answer, I just want to talk briefly on the weather and hurricane impacts. The hurricanes that occurred during the third quarter ended up impacting Robinson similarly to situations like this in the past and frankly, what we would anticipate in most situations going forward. We do have a New Orleans office that was impacted pretty significantly and negatively by the hurricane in terms of people being displaced and having to work from other locations. Fortunately, our current employees and their families didn't have a lot of significant personal impact, but it was a lot of stress in terms of the displacement of the office and still trying to reassemble what our strategy and direction is going to be down there. Those people did a wonderful job of moving to other locations and preserving as much of the business as we could. But there was also a lot of our customers who just had their business disrupted to the point where they didn't have freight available for anybody to participate in with. Offsetting that, a number of other offices, particularly in the region, had incremental opportunities from storm-related activity, as well as rerouting activity and other things that, when we sit back and look at this situation as with most weather impacts, it usually ends up being something that we think is insignificant to the net effect. Our people have to react, and it's very significant to certain offices in certain parts of our network. That in aggregate at the end of the day, we typically stay involved with about a comparable amount of freight and really don't have a a lot of plants or fixed cost structures that we have to worry about in terms of significant capital costs. So the net story is, that while a lot of things happen, and we had to react a lot of ways from a financial reporting standpoint, we would say that the hurricane did not have a material impact on Robinson's results.

The last point, which we like to continue to emphasize, is just that despite our strong year, we are not changing our definition of good. Sustained growth of 15 percent is what we focused on for a long time at Robinson. And that's what we will continue to focus on, even during periods of high success like this. Obviously, we set up our business and our expectations that when the marketplace allows it, we'll do better than that, as we're doing during the current year. But if you look at the market share penetration, the volume growth, our hiring strategies, and kind of a longer term model that's still in effect today, we still think the principles that have driven us for the last couple of decades are in place, and that we will continue to focus on trying to deliver sustained 15 percent revenue earnings and growth for our shareholders out there. So that concludes my prepared remarks. So at this point, we will turn it over to question-and-answers.

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

Great, thanks. You had a phenomenal quarter. I heard your comments about Katrina not having much of a net impact on the quarter directly in terms of impacting your volumes and your business patterns. But at least when we look at one of our indexes we do internally, looking at supply and demand, that in July and August, things were relatively sluggish, relative to a year ago, when you had such hot demand in the truckload market. And then suddenly, right after Katrina, things -- our index just skyrocketed. And I guess I'm trying understand. Did you see -- you may have in terms of transactions may not have seen much change. Did you see the -- I guess the tightness of the market or your ability to take up pricing? Did you see that any different in the month of September, than you did in July and August? Or was it pretty much the same 40 percent profitability growth each of the three months?

It's a good question, Jim. You know, the answers to that are, if you look at our quarter month by month, the growth rate and the profitability was comparable for all three months. So, we did not see a significant change in September versus the rest of the quarter. But having said that, there clearly were lanes, and especially in the southeast, obviously, where pricing and truck capacity and even things like not having fuel at the truck stops had a significant impact on the freight within certain lanes. So, there is no question that the hurricane and related impacts contributed to the environment of tightness of truck capacity, particularly within certain parts of the country. But overall, that can have a good impact on some margins and a bad impact on other margins for Robinson. And so in aggregate it really didn't impact us.

Okay, good. And so it almost sounds as though what we saw here in the quarter is sustainable, which leads to my second question. That is, for the last five quarters we've seen your EPS growth rate over 40 percent. That's just phenomenal. But it's well above that 15 percent growth rate. I think you touched on this somewhat. But I just wanted to clarify this. Do you think that some of this phenomenal growth we've seen here recently is going to be offset by what would be below your trend rate or below your goal rates here when the market goes back to normal? Or would it be equilibrium? Or do you think that the current run rate of your earnings, when you look at your book of business and the type of relationships you have, how you're resourced and so forth. Do you think that you are now at a whole new level of operating income and you continue to grow this long-term goal of 15 percent on the current plateau level, where you're at right now?

It's a good question, Jim. And obviously we've spent a lot of time thinking about that and talking about that internally as we go into the fourth quarter and prepare for 2006. And part of the reason why we don't give guidance is because it's really hard to tell in our business. And we did not expect nor did we plan for this type of a year at the beginning of the year. We knew that it would start out strong. But, you know, it's difficult. I don't think the consensus was this type of price increase or this type of marketplace activity at the beginning of the year. So with the continued caveat that it's really difficult to tell, the things I would focus on in terms of -- or that we do focus on in terms of trying to understand the pieces about the future that we can is, this is really a pretty unprecedented pricing period of time. And it's really hard to tell if and when that's going to stop, or what might happen when it stops. And we pride ourselves in not trying to position ourselves based upon any one scenario or anticipation of what's going to happen. But when you look back on it, there's no question that these increasing pricing opportunities have both given us margin opportunity, as well as caused a lot of disruption in the transportation community where shippers are more anxious to try to find different approaches to save costs or avoid some of these cost increases. So when we look out at it, it's really difficult to anticipate what that marketplace might be like from a pricing and volume standpoint. But we feel pretty confident about, sustaining our market penetration of opening offices and hiring people and participating each year in kind of mid-teens higher percentage of the freight. What pricing does in the fourth quarter and next year, and what impact that would have on us, I guess that's probably impacted by the economy and fuel and a whole bunch of other things that people like yourselves are probably in a better position to try to anticipate what that might be and what that might do to us.

The last point, I guess, from an outlook standpoint, if you will is that when we plan internally and we look at the longer term metrics, we don't see growing earnings at 10 percent faster than revenue and net revenue as a sustainable phenomena, that it can happen during some period of time. And we certainly have productivity and longer term leverage goals to try to continue to improve our operating margins as a portion of net revenue. But we do have to eventually add the resources to kind of balance the long-term relationship in freight management. I don't know if those comments are helpful or not. But that's what we know and what we think about and talk about in terms of trying to understand our outlook.

Very, very helpful. Thanks so much, John. Appreciate it. Great quarter.

Edward Wolfe, Bear Stearns.

What are you seeing out there right now during peak season and with the hurricanes and all that? Is it -- are there fewer guys? Are some of the smaller capacity guys that you've seen building in your network starting to go away? Or are you not seeing that yet?

We, through the end of the third quarter, have continued to sign up for us record new amounts of carriers each month. And we continue to try to do a lot of things to attract them with quick pay programs and different types of electronic connectivity and web services and different things to make life within our network more attractive. So, our fundamental view during the year and throughout the quarter was that in the supply and demand cycle, when you have this type of pricing and this type of supply shortage, that you're going to see new capacity coming into the marketplace in forms of smaller carriers, which means incremental drivers and incremental equipment for those medium and small carriers. As well as additional small carriers who are coming to our network to try to take advantage of, if they've been around awhile but maybe haven't done business with us before. We don't have real clear data on how to sort those two apart. But what we did see some data points on more bankruptcies during the quarter. But to us, the level -- those levels of bankruptcies wouldn't immediately follow through in terms of having an impact for the quarter. So our attitude and experience during the third quarter of this year was that record sign-ups, new carriers, new capacity coming in and frying as hard as we can to develop those sources to meet the volume increases that we're dealing with.

Have you seen any step up in bad debt from small guys -- small suppliers going down or anything like that?

We really have not. Obviously on the carrier side, we're paying them. So, it's not really an issue. But if you look at our bad debt expense and our shipper experience as we go through this high growth period, we've actually had some improvement in our aging and feel very good about where we're at in terms of managing the business terms.

Let me ask you a different way. How about service levels? Are you getting pushed back that some of these small guys are being more sporadic or erratic or anything like that? Or are the service levels where they were six months ago?

A big part of what we pride ourselves on, is that every single one of our customers has unique service expectations. And it's all about putting the right piece of equipment on the right customer. And, therefore, it's a little bit hard to generalize about it. But we feel like we've given pretty good service this year. There's no question that on some of the larger, more sophisticated accounts, that I think across the board, things like load acceptance ratios and other service metrics that a lot of the carrier -- customers, shippers would track are probably not as good as they were a year ago. But when you compare the unique needs of each customer and all of their service metrics, a lot of them involve communication and process management things that we can control outside of the market place. And we feel like this is one of the challenges that we have, and one of the points of pride that we have. Is that we would continue to mix and match the capacity in the appropriate way to deliver service that's better in the marketplace.

Just a follow-up to Jim Valentine's question. You said that you saw similar revenue and profitability throughout the months of the quarter. Despite that, did you see any change in the characteristics? Did it go from a quarter -- from a month where you were seeing a better spread in pricing, to a month where you were seeing a less of a spread in pricing? And you just managed it well? And so there was consistency on earnings? Did the climate change throughout the quarter or normal seasonality kind of changes?

It was normal seasonality pretty much, where September was the tightest. But it was, like John mentioned in some lanes. And especially refrigerated equipment was extremely tight in September, added to because of the hurricane.

Has anything changed because of October here, year-over-year as you look at things, seasonal trends, anything?

We haven't and won't comment on the fourth quarter, Ed.

Okay. Was there any hurricane relief business at you all that you did, either directly or indirectly?

We do not have any direct contracts with FEMA or any of the direct agencies. But we do get involved with some relief freight through other agencies who have those contracts and then need help with transportation. So, we certainly shipped more water and ice and things like that. Again, and when we look at the volume that we can try to understand or categorize as being a result of that weather activity, it approximately offsets activities that we would have lost directly out of that region from lost customer activity right in New Orleans and around it.

Okay. And, John, in your remarks you said something about the new sourcing business gives you a growth engine. And it was the transportation business around the sourcing business? Maybe I misunderstood you. Can you just elaborate on that a little bit?

Really, my comment, Ed, was more on the produce freight activity with the existing produce business. n a high percentage of our sourcing or produce activity, we do two things in those relationships. We are sourcing or buying and selling the product, and doing the branding and labeling and quality control on the product itself. But then we're also providing transportation services to provide a delivered product. So in those situations, the transportation revenues and costs and margin roll into our transportation revenues, and the sourcing component rolls into the sourcing line item. So that while the non-FoodSource sourcing line item was flat, so the sourcing revenues, net revenues as we would show it would be flat without the FoodSource activity in there, there's another positive contribution to C.H. Robinson from our sourcing division in the form of incremental produce freight revenues that fall into our transportation category.

And is that an opportunity to cross sell into the new businesses on the sourcing side?

Yes. That's -- we've talked before the reason why this produce business is a very good fit within Robinson, is because these perishable supply chain needs are very volatile and very fast moving and very transportation dependent. And so it's a very natural extension for our customers to just have us source the product and take responsibility for a delivered product at a aggregated price. And we see longer term within Robinson's model as we get more into integrated supply chain services, that's a great living example of the types of things that we can do to bundle together information and people services with transportation.

Okay. One last question for Chad. The cash flow was very strong. The cash flow from operations with a nice swing in working capital. Is there anything unusual or one-time in there?

No. A lot of our expenses as you know, are bonuses that are paid out at the beginning of next year. And since we were so profitable, there was a big increase in accrued compensation. Besides that, there's really nothing unusual.

John Barnes, BB&T Capital Markets

You're always talking about that you're pushing the branches to higher -- to kind of stay to stay ahead of the game just a little bit. Are you having to take a look at that at the corporate level? You talked about that a little bit. That you get some leverage off the head count as you're in this fast growth mode. But do you feel like at the corporate level you're sufficiently staffed, or do you need to beef it up there as well?

No. And just to be clear, John, when we talk about staffing levels, we have pretty well established productivity benchmarks in terms of shipments per person, and different things that we think are sustainable in terms of what the branch network can deliver. And when they have a surge in growth activity, people work harder, they work more hours, they find a faster way to get things done. But ultimately, they'll layer the people in to kind of rebalance to those longer term expectations of productivity metrics and stuff. So we manage that process. But, we don't really have to push them one way or another. There's just a little bit of a lag as to how the sales and operational people flow into the network during a high period of growth. About 11 percent of our employees, I believe, are shared services or corporate-type employees. And, that whole phenomenon does not apply. We are staffed regularly and don't have any real variances there. Other than the fact that as technology continues to become more and more important part of our business, that we are constantly adding significant amounts of IT people and continuing to -- if you look at our shared services today, our corporate employees in aggregate, would be somewhere around 600, and about half of them are IT people. And that headcount is growing faster than the rest of the shared services piece. So there's that phenomenon that's going on. But you don't have the kind of timing issues in terms of how and when you staff up during high growth.

Okay. All right. And you said you're doing a pretty good job at signing up -- I think you used the word record numbers of carriers into your network for, at least as you measure in internally. Is there anything you're doing to incent people other than just, hey, if you come and haul freight for Robinson, this is the benefit. You'll survive this tough environment. I mean, is there anything else you're doing to incent carriers to come into the Robinson network, or is it more of the same?

We have a menu of services that we can offer to them in terms of electronic relationships and quick-pay programs and fuel management if they want to take advantage of T-Chek. And so it would vary, carrier by carrier in terms of the types of things that we do. But maybe one point that's worth emphasizing, John, is that the reason why we don't focus as much on the new carriers -- I mean, it's almost like opening our new offices. The new carriers that we sign up in a quarter don't end up moving a significant amount of freight for that quarter at all. It's usually just the beginning of a relationship where, if we signed up 1,000 new carriers this quarter, many of them might have only moved one or two loads. But we're hopefully building the foundation for a longer-term relationship with them. So, we view it -- we like to share the data point. Because I know the marketplace cares about it as it being one data point to understand what's happening with the overall capacity side. But we really have to serve our customers by leveraging additional capacity on existing relationships. But then constantly continue to recruit new ones into the network, and try to explain to them what the relationship might be some day with dedicated freight, nondedicated freight, and lots of services that we can provide for them over a longer period of time.

Okay. All right. Very good. As you look into -- as you look into '06, your CapEx needs, for a lot of the -- not just you, but a lot of other companies in your space -- the logistics space. The CapEx needs as we go into '06 are not near as great as they were the last couple of years. I know you're rolling out new technology and that type of thing. But, are you all revisiting aggressively the idea of where to put your cash to use? And I know you've talked about acquisitions, and I know you've done some other things. But can you kind of map out for us what your thoughts are right now in terms of your use of cash?

Right. John, as far as CapEx goes, our second and third quarters are pretty normal quarters for us, at about the $4 million range. As you know, our business is a lot less asset-based than many transportation companies. So, that should not be, going forward, a big use of our cash. We still have the same four uses of cash, which are continuing to invest in the growth of the business, obviously. The acquisitions that John mentioned, we do have our conservative valuation and strategic criteria to pass, and we will maintain those. And then we talked about over the past few years, potentially further increasing our regular dividend payout ratio, and stepping up our share repurchase plans, if we can't find a way to redeploy the cash.

Okay.

We are comfortable with roughly the amount of cash we have on hand right now. That it does give us a lot of flexibility when we are pursuing acquisitions.

Okay. John, last question. Last quarter we talked a little bit about this, and I'm just curious as to -- you've had another quarter to digest it a little bit. Burlington Northern, on their conference call earlier this week, made the statement that they're continuing with their program of divesting their intermodal containers and force more and more of that asset ownership cost out onto the IMCs and other private -- customers. Have you given that any more thought in terms of the things like a rail industrywide issue and all of them are talking about doing something similar. Does that change your view of the intermodal business and what have you thought about growing that going forward?

It's a good question, John. We've spent a lot of time talking about it, as has the entire IMC industry. I think any IMC that you would talk to today is still trying to figure out exactly how they're going to respond. And the reason why nobody is crystal clear on it, is because I think the universe of what's going to be available in terms of pooled equipment and exactly how much equipment of what type each of the railroads is going to make available. My understanding is Burlington Northern has been the most aggressive about being clear with their lack ever commitment to it. But others aren't so clear, and they do plan to provide some levels of equipment. Simultaneously, you've got price increases, you've got service lane eliminations and a whole bunch of moving parts. Where at the same time, by our view of the world, the primary competitor is a truck to that product. And so you've got significant changes going on there, too. So this turmoil in the marketplace over the last 18 months, has caused everybody, including us, to kind of rethink what types of freight are going to be right for intermodal going forward. Where is the equipment going to coming from to service that? And will there be enough free pool or generally available equipment to service that? So we in the past at times have had leased and owned intermodal equipment dedicated to customer programs that wanted to put those in place, and we could certainly reestablish something like that if we thought it was the right long-term approach. But today at least, we are continuing to try to understand what's universally available in the marketplace, make that available, explore new sources of more dedicated equipment and see -- hopefully we can gain a better understanding of really where intermodal fits into our customers needs and bring the best answer to them.

Okay. Very good. Guys, nice quarter. Thanks for your time.

Jon Langenfeld, Robert W. Baird & Co.

In the past, you've talked about sourcing and the dollar volume that it's contributed to the transportation side. Where would that stand on a run rate type basis?

I believe it's about -- just trying to find the number here. One of the challenges that we have in our produce freight world, as Chad looks for the precise number, is that we have what we classify as direct to produce freight, where it ties into the sourcing activity. But then we have a number of other customers where we're not involved with the sourcing, and we'll either be using refrigerated or vented or other types of equipment to move that. So our produce and produce freight competency -- there's one precise element of it - the produce freight - that rolls into the transportation number. But then there's a whole bunch of other -- what we would classify as transportation freight, that moves in refrigerated and vented van type with more perishable commodities that is managed within our transportation division within C.H. Robinson.

The produce that we moved, both the produce we buy and sell, as well as the produce that we just move for customers where we don't own it is between 4 and 5 percent of our total truck business.

Okay.

Then I think there's probably at least that again, another 4 or 5 percent of other refrigerated freight or vented type stuff that -- I think we may have said in the past before that maybe somewhere around 10 percent of our truckload freight is perishable or produce or something like that.

Or is refrigerated.

Or is refrigerated, but a decent chunk of that is directly tied and managed by our individuals internally that work in our sourcing division.

Okay. Good. And then on the -- more of the general truck trends. In the past couple of quarters you've talked about customers unwilling to go out with extended term contracts, year-type contracts, and more shorter-term in length. Is that still the case or have you seen some easing on that?

I think when we've talked about it in the past, Jon, it's really more the carrier community, that coming into the current year really was more reluctant to -- at least a large portion of the carriers that we work with were more expecting continued rate increases and were looking less and less to commit to full-year contracts. There has been a little bit of stabilizing and returning back to where people are, I believe, planning for a little bit more stable environment and expecting that contractual bids and contractual rates should hold a little more as expected or as planned during '06. Like I said, I think the general environment in the truckload marketplace today is that everybody is coming off of 18 months to two years of unprecedented price increases and unprecedented stress in the marketplace in terms of trying to find available capacity. And you find a wide range of attitudes out there from people who think it's going to continue like this with double-digit price increases and more chaos for a couple more years to other people who think that things will start to level off, and that pricing will stabilize or decline, and that this supply and demand cycle will swing back fairly quickly. And it's really tough to predict. And the biggest wild card in there is probably the freight levels that are driven by the economic activity rather than any real capacity or driver or fuel issues.

Okay. Good color. Thank you.

Jordan Alliger, Deutsche Bank.

Realizing, I know you don't give guidance per se. But maybe said another way, is there anything in sort of the big picture or trend line, whether it be this unprecedented pricing or capacity, that would sort of change the near-term broader trend line that you're seeing in the truck transportation area?

No. And I think it's really important to remember that, as John said in his prepared remarks, our underlying load volume was in the high teens, which is definitely within the realm of what's normal in a sustained 15 percent growth rate. So a lot of the growth that we've had in the last 18 months has come from these price increases. But as far as the general market and things that could change other than pricing, have a major impact to our business, we're not aware of anything.

The biggest thing, Jordan, that I can think of is that there is a faction of people out there that think we are going to be in a sustained period of time of capacity shortage, driven by a whole -- I don't -- we don't necessarily believe that. I think we've probably been -- if anything, towards the other side of the argument, feeling like the market place will correct itself in terms of new capacity coming in. And our history is more that there are sort of general swings in supply and demand like most every other part of the capital markets. But we were admittedly surprised by continued price increases and tightness this year that is really driving it. So the only thing that I can say that I think you're sort of asking about is, I think most everybody in the transportation industry is sitting around scratching their head a little bit at the last 18 months, wondering what's going to happen next.

Yeah. It's also kind of interesting if you listen to sort of the regular asset-based truckload guys. They seem to be having a difficult time, according to them, getting owner operators. And you don't seem to be having as as much of an issue with that. Is that just your model is more attractive to those folks in an environment like we're in now?

Again, it's hard to generalize about these things. But one thing I would share that we constantly try to emphasize, is that if you aggregate the trucking capacity in the public entities that you're probably interacting with, it represents the larger portion of the truckload community with the larger networks. And it probably also represents somewhere around 12 to 15 percent of the trucks that are running on the road or the capacity that's out there. So when you talk about owner/operators, one of things that can happen during a period of time like this, when you have rapidly rising rates and rate opportunities, some of those drivers may be leaving those larger carriers to go on their own and try to run as more of an owner/operator and capture some of the revenue opportunity because the marketplace is out there. . If you also want to go out on your own, if you will, or take more risk as a truck driver or carrier in this type of rate environment with the freight availability and density, it's a lot easier time to go out and take that risk. So, we look at the industry we think maybe in a little more aggregate way of all of the medium, small and large carriers. And we don't really see as much deficiency of the owner/operator types as the larger carriers might.

And just a final question. You sort of indicated in this realm of growth you know you need to add people or infrastructure, et cetera. And I know there's leads and lags. But I guess my question is, when you say sort of building out the infrastructure. Presumably when you build it out, even though it's an unprecedented level of growth, you're building it out with the assumption that once things normalize, it will be the right amount of infrastructure for 15 percent long-term growth. If you know what I mean?

Yes. I mean, another way to state it is that when we look back over the past couple of decades, we have pretty time-tested principles in terms of the rate of hire and how we acclimate in. And a big part of the infrastructure in a service company is building relationships and making sure that you're doing business reviews and account management in a format that you think is sustainable, and that you're giving all of the right level of service and interaction with both the customers and the carriers. And that over a longer period of time, like the last several decades, when we look at our metrics around how many relationships and how much freight and how much activity can a person handle, and how long does it take us to train them and get them productive or whatever, those ratios keep coming back to that longer term trend line, why we keep emphasizing it. But, yes, the core business model that we subscribe to is sustained 15 percent growth. And, you know, when I say that, I always want to fight that. Because I know that we do try to take advantage of better opportunities and we do drive for productivity and we do try to find way, to make the experience better and offer new services. But, that's really not the core attitude of sustained 15 percent growth.

Brannon Cook, JP Morgan.

I had a question on -- you're talking about the shift from spot capacity to contract. Have you seen -- you've been benefiting from the shift towards spot capacity. Has that stabilized over time in that, -- is your mix between spot and contract the same at the end of the third quarter as it was at the second quarter?

You know, just to re-emphasize, I think what I described last quarter is that we've sort of tried to deemphasized those categories a little bit, because they mean so many different things to different people. But, the primary thing that we focused on going back to the pricing relationship is that in a contractual setting, there is generally 12 month or calendar cycle-type pricing in place. And in a spot market, we think that the lead characteristic being sort of daily pricing or renegotiated fluid pricing. In a true distinction between contractual and spot market, there might be 100 different service requirements and a whole bunch of different things. But as we talked a year ago in the third quarter of 2004, what was happening in the marketplace is that with the beginning of this significant escalation in pricing, was being driven by incremental volumes of freight. So a couple things started to happen. One is there was a lot more unplanned freight or transactional spot market freight that was never bid out in the first place, and was a more the traditional brokerage-type opportunity where you just have one load at a time, or ten loads at a time in terms of customers needing help that wasn't planned for at the beginning of the year.

As the year wore on, we also talked about within pre-priced or longer-term contractual commitments, you saw many service metrics start to break down with load acceptance ratios and different service parameters really starting to deteriorate in the marketplace for many carriers and many customers, because the market was changing so dramatically that other opportunities were far more lucrative, people were paying their drivers a lot more, and needed incremental revenues sooner rather than later to try to hang onto those drivers. So, in that whole turmoil, we use terms like the entire market had become more transactional. Meaning that the entire market pricing was becoming more fluid and that things were changing rather rapidly. So that environment during the tail end of last year helped us get more freight opportunities, it help the us reengage in those customer opportunities. Throughout this year you would certainly see some trend back towards customers and carriers expecting that the contracted or longer-term pricing that gets put in place, that a much higher percentage of the freight would move under those contemplated prices and those contemplated arrangements. During this current year, we have continued to see a fair amount of transactional opportunity with prices continuing to rise and freight levels being fairly strong, so that we continue to get some of those transactional opportunities. But there is some stabilizing in terms of people of adjusting to this environment and more freight moving under prices that were planned out or bid out at the beginning of a cycle.

Okay. That's helpful. Is there a difference in that there's two businesses with the receivable terms you have with your customers? Do you get paid more quickly on the spot versus the more contractual business?

No, we don't.

Okay.

The general terms are similar for everybody there. They vary a little bit from customer to customer. But they would vary within any type of formal or contractual relationship, and any kind of spot market relationship that we just have to monitor them.

Ken Hoexter, Merrill Lynch.

Very nice results. Just a quick question on international. Are you looking to kind of organically grow international at all with adding new offices and staff? Or are you solely focused on the acquisitions?

That's a good question. Our longer term growth is obviously to transition into more pure organic growth. And we are trying that within North America today, where we have a little bit of a nucleus of a network that we can -- periodically we have in the last few years opened some North American international forwarding offices. So offices that are located within the U.S., but doing international air and ocean with the rest of the globe. Our primary challenge has been that we have not had a lot of success and don't believe that we can open offices in Asia or parts of Europe without having locals. And so the reason why we're pursuing the strategy that we are, of agent or local company acquisitions and then kind of developing integration and internal growth from there, is to establish a local presence of relationships that we can try to grow organically from. So, yes within North America. Long-term hopefully everywhere we would have organic growth. But for the next several years at least, we continue to see the acquisition piece as a key part of the strategy to build out the network.

Great. And just a follow-up on kind of a lot of the pricing discussion. When you talk pricing as very strong, are you talking pricing excluding fuel surcharge, or do you view it as all market pricing all wrapped in on one? I'm just trying to think ahead when we start to get I guess easier comps where oil's come down. Does that kind of shift the whole pricing discussion?

It will contribute to it because, again, a high percentage of our activity is spot market, transactional, day of, all in pricing, if you will. So as I said earlier, we had low double-digit total price increase. The way we understand and can analyze our business,all we can really look at is the total amount charged to the customer, now versus a year ago, because much of that was just priced in. Some of it is fuel surcharged, and some of it just a daily quote-type thing. So in that double-digit price increase, our best estimate is half fuel and half pricing. So, yes to your first part of your question, that it's both pricing and fuel. And when we look at the strength of the pricing market, it's that all in, total transactional cost that can drive a lot of the marginal freight one way or another.

So you're talking about on the bid side, and then the ask that the drivers are charging also includes a fixed rate with fuel. Their estimated fuel cost built in?

Again, it's all of the above.

Okay.

We have many carriers that we work with on a more committed basis, where there's a fuel surcharge index. We have lots of other carriers that we're just getting a daily price them, that would include fuel.

Due to the time constraints for today's conference call, our final question comes from Alex Brand with Stephens, Incorporated.

Fantastic. Got in. [ Laughter ] I apologize if I missed this. You guys talked a lot about increased carrier count. What was the carrier count at the end of the quarter? And how many were added in the quarter?

Yes, we don't have a net new number, Alex. We only really do that count once a year. But we did add approximately 3,000 new carriers. We're not sure how many dropped off during the quarter.

The problem is, when you look at the churn and the aging of the carrier sign-ups that we have, a lot of them -- it's difficult to confirm whether they're still around or not, or if they just haven't done business with us. And so when you go in and, -- when we go in and clean that up, it's tough to systematize and make sure that they're dropping off at the same rates. All we can really measure is the the amount of new ones coming in, which has averaged about 1,000 a month.

Right. And then at the end of every year, we look and say how many time carriers hauled loads for us this year. And that's what we use for an ending count. And why we only update it once a year.

Okay. And as you look at the fact that you continue to add carriers, is there a way to know how much of your -- the capacity you're using is coming from sort of these smaller carriers that you -- that seem to be coming into the market, versus some of the larger carriers that you may have traditionally used ?

We do know that with the brand new ones of the small carriers that we had, a high percentage of them would have one or a couple of pieces of equipment, and would not have moved very many load for us during the that period. But a big part of what do, Alex, is try to grow with the carriers and help assure them of revenue and let them add equipment over time. When we've done these more, like Chad described, the annual analysis of kind of where -- what our carrier profiles are and who we're doing business with, our real sweet spot for capacity is the medium-sized carrier. It's somebody who has more than 25 trucks, but less than 500 trucks. Because that's the size carrier that doesn't really have the overhead and infrastructure to have a national sales force. But yet they have a lot of capacity that we can take advantage of. And we generally find a real natural partnership with what we would classify as a medium-sized carrier. Now, we do a lot of business with large carriers and have very positive relationships with many of them. But it tends to be more of a traditional back haul, seasonal capacity-type relationship for a lot of the freight. Or a more formal dedicated contracted basis if it's head haul and comprehensive freight. So that when we look at where does the bulk of the capacity come, especially to react in an environment like this, it would be one off back haul extra capacity from larger carriers, a huge component with those medium-sized carriers, and then some incremental availability from the small ones. But more importantly, qualifying those new carriers is really like planting the seeds to continue to grow the program.

Okay. And as you look at owner/operators, is it as simple as they can often make more money driving for Robinson than they can doing other things? I mean, it seems to me like simple economics would drive the decision about whether or not they would want to be a Robinson carrier versus another one.

Yes, I think -- I'm not the expert on this. But, I mean if you look at a driver's choices, they range from highly unionized private fleet, to larger over-the-road carriers. And all the way down on the other end of the spectrum to truly on their own with one truck as a truly independent owner/operator. And I think if you look through that range of choices, on the one hand,you have a very dedicated predictable, stable-type environment. On the other hand, it's feast or famine. You can make a lot more money out on your own just because you're not paying for a lot of overhead or other type things. But, you can suffer too. That's why you see the bankruptcies. So I think the way we think about, is you look at a driver with their spectrum of choices of risk and reward, in terms of where they can fit it. And it seems pretty intuitive to me that during this type of time with rapidly rising prices and high freight availability in most parts of the country, that you're going to see a gravitation towards the higher risk reward part of it.

All right. And just a housekeeping item, Chad. The lower tax rate in the quarter. What's the right tax rate to use going forward?

It's going to bounce a little bit based on option exercises and other things. As you know, we've started expensing options and the timing of those can impact a tax rate. But overall, the 38.5 to 39 percent range is what to expect.

Okay. Great. Thanks a lot, guys.

Thank you for participating in our third quarter 2005 conference call. We apologize that we could not get to all of the questions this morning. 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 11040861 pound. The replay will be available at approximately 2 p.m. Eastern time today. If you have additional questions about our third quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you, and ladies and gentlemen, at this time you may now disconnect.