羅賓遜全球物流 (CHRW) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the C.H. Robinson fourth quarter 2005 conference call. [Operator Instructions] I would now like to turn the conference over to Angie Freeman, C.H. Robinson's Director of Investor Relations. Please go ahead, Miss Freeman.

Thank you, Eric, and good morning everyone. On our call today will be John Wiehoff, CEO, and Chad Lindbloom, Vice-President & CFO. John and Chad will provide some prepared comments on the highlights of our fourth quarter performance, and we will follow that with a Q&A 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 risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I will turn the call over to John.

Thank you, Angie. We're going to stay with our typical format of trying to keep our prepared comments more on the brief side and try to leave the majority of our time on the call for the Q&A session. I guess to start we sent out our earnings release last night, and there is quite a bit of information in there from a financial reporting standpoint, but I do want to highlight just a few of the data points that are contained in the release. Starting at the top of it, we finished calendar 2005 with over $5.6 billion of gross revenue for C.H. Robinson. That's a 31% increase over 2004.

We talked about a lot of different things at Robinson, but that is one of the measurements that we do focus on, and $5.6 billion is a growth mark that we're proud of, but yet it still represents a fairly small portion of the hundreds of billions of dollars that are spent on transportation and logistics both within North America and even more so worldwide. So while we're proud of the number, we recognize that we still have a lot of opportunity ahead of us and are as excited as we ever been about our future and our growth.

Our overall net revenue grew by 33% to $879 million. When we look at our internal metrics, we use the terms "net revenue" or "gross profit" interchangeably, and the net revenue within our business drives a lot of our internal metrics. It's the common denominator between fee base business and margin base business, and it's a lot of the information that we use on how we manage our network.

Our people worked hard during 2005. The 33% increase in net revenue was converted into a 46% increase in operating income for the year, so we finished with 5,776 employees, and that represents about a 20% increase from the end of the previous year. So with about a 20% increase in head count, we were able to take that increase in volume and increase in net revenue and convert it into a 46% increase in operating income. Most all of our employees are shareholders too, and I guess I wanted to take this moment to thank them for their hard work during 2005.

We are a service company and the effort that the people put in really is what drives the results. Our results in 2005 exceeded the expectations that we had at the beginning of the year, and it exceeded our long-term growth target of 15%. 2005 was Robinson's 100th anniversary. It was our 100 years of doing business, and we were happy with the results, and our business model continues to do well for us. If you look at the fourth quarter of 2005, most everything that happened during the quarter was fairly consistent with our year-to-date results, so most of my comments are really going to be talking about 2005 as a whole.

I'm going to highlight what we saw as some of the key events during 2005 and what really drove our performance. It really shouldn't be a surprise. I think they are all topics that we talked about in previous calls, and really we feel like the fourth quarter pretty much carried on with the momentum and the same factors driving us that we had throughout the year. Before I jump into the topics that were unique and the things that really drove our success for the year, I do just want to remind everybody that when we talk about Robinson on a more basic level, it really is about people, and service and execution and technology, and that when we work internally, that really is the foundation of how we -- how we do what we do. That's what drives our success.

So I don't want to look past any of these core reasons that drive our success for the long-term as really being what created the results for 2005. But at the same time, there were unique things that happened during the year, and that's where I'm going to focus my comments on for 2005. I'd like to talk about three categories of discussion. Again, they're all things we discussed before. But the first one would be the North American truckload demand and pricing. The second one would be some successful acquisitions that supplemented our growth and sourcing and global forwarding. And the third one would be leveraging our people in network to grow earnings faster in our revenues. So I'll talk -- make a few comments about each of these.

First on the North American truckload business, we've talked a lot in the past about our growth goals of sustained 15% growth for net revenues and earnings. That goal, as many of you know, is based largely upon how our historical experience of how we add offices, how we add people, and how we grow volume into the network. When we look back over time, the 15% growth goal really has been driven by annual targets of 15% transactional growth and 15% volume targets or how we plan to grow that network and expand our market share and grow new relationships with customers. As most of you know too, that the truckload business represents about 70% of our net revenue and our profits.

During the fourth quarter of 2005, and for the entire year of 2005, we had approximately 15% growth in the truckload transaction count at Robinson. During the fourth quarter we continued to see the mid-teens price increases, in addition to the volume growth. We've talked about the mid-teens price increases several quarters previous to this, and we saw that continue during the fourth quarter. Our gross margin percentage compressed a few basis points during the fourth quarter. However, when we look at our margin percentage throughout 2005 and through 2004, it continued to fluctuate within what we would define as normal parameters over the past few decades. We continue to buy and sell capacity and manage all different sorts of relationships very similar to how we have the last couple of decades.

Overall rate increases driven by supply shortages on the capacity side, which have been talked about a lot in the industry and by us before, and the fuel prices, which, too, have been discussed a lot, these were the big changes in the past two years that really drove the revenue and net revenue growth of our truckload transportation to the above-normal levels from the past. And our business model, we work really hard to make sure that both our customers and our carriers have market-based relationships with us. In the significant changes of price and supply and demand changes on the truckload piece over the last couple of years, it made what we do more difficult from the standpoint that our people have had to work very hard to adjust to the marketplace and make sure that they are being fair to both the customer and carrier partners that we work with. But we feel good how we have been able to maintain our margin percentage and grow our business through the last couple of years.

Moving to the second topic, the acquisitions and sourcing and global forwarding, we give you the growth percentages in the earnings release, but I want to highlight the fact that we did have good internal growth for the fourth quarter in both our forwarding and sourcing businesses. Our ocean forwarding business which is the largest mode in the global forwarding piece grew organically or internally at 46%, and our sourcing business grew organically or internally at 21%.

During 2005 though, we also did acquisitions in both of these business lines that were very helpful to the growth of them. When you look at the acquisitions that we completed and the revenue that they contributed for the year, on an overall basis I mentioned our 33% net revenue growth, we do an analysis to try to estimate the organic growth versus the overall growth, and it's a little bit of an estimate because we do integrate things fairly quickly, and there is some shared freight, and some of the forwarding business was handled through an agency before. But by our best estimates that 33% overall net revenue growth was about 27% growth driven by internal organic business, and about 6% from the acquisitions.

When you get down to the net income line item, we had a 48% increase in net income for the year, and we would estimate about 40% growth consolidated on net income from organic or internal growth and about 48% overall. So the sourcing and global forwarding acquisitions that we completed were very meaningful to those service lines that we offer within Robinson and also had a pretty positive impact on the overall results of Robinson.

Third point, leveraging our people and our network to grow the earnings faster than our revenue. Every year we set out in our planning cycle. We have different productivity initiatives and different things that we'll look at to try to improve how we operate and how we do things. We also talk a lot about how we have high variable compensation models within Robinson, and that compensation expense is two-thirds of our operating expense. We look at things a lot on the fixed versus variable components of the compensation expense, and how we do things.

We've been generally successful over the last ten years continually driving up those operating margins by looking at productivity, making our network more efficient, and automating how we do things. We've talked about in the past and have emphasized again this year that when we have high transaction growth and high revenue growth, we often times can grow our earnings faster than we are able to grow our net revenues, and we were able to do that in the fourth quarter and throughout 2005.

One of the key metrics that we look at is income from operations as a percentage of net revenue, and that went from 33.7% last year to 37.1% in 2005. That type of improvement is really only possible when we are growing our revenues at a pretty high rate because of the way we set up our variable compensation and the way we run the company. It's really when we get into the high growth rates that we're able to keep the fixed cost component of the compensation to a lower percentage and really improve the earnings growth and the return to the shareholders. Our variable plans automatically share a good portion of the growth, but when we grow very high, it does good things for our employees and for our shareholders as well.

Each year our goals are to hang on to the productivity gains we had from the year before and continue to build. But when we look at our model and look out into the future, it's challenging to create tenth of a percent of improvement from annual gains and annual improvement, because it is a very competitive industry, and we do have very high expectations with both of our customers and carriers. So we'll continue to work on that, but this type of significant improvement was not typical from the past and would be difficult to replicate going forward.

Those are my highlights that I would share with regard to 2005. I would like to emphasize again that while truckload pricing, acquisitions, and leveraging our network were the things we would identify as really contributing to the outstanding growth if 2005, that the foundation of our company around having the right people, getting them to sell, providing good service, and working on systems and technology and process is really what lets us operate at the foundation and really kind of drives our success for the long-term.

Before I turn it over to Chad, I just want to share a few comments on kind of outlook and where we go from here. As all of you know, we don't provide specific earnings guidance, and what we do try to do is share with you our long-term goals and expectations, and let you know how we're thinking, so that we can be as helpful as possible in terms formulating views of the future. One of the things to think about when you think about Robinson is that I do believe that we have a unique attitude towards pricing in the marketplace. We are a very solution-oriented company on both the long-term contractual pricing business and on the shorter-term transactional stuff. We do not make predetermined price adjustments at a corporate basis here for the network. We operate on a very decentralized basis responding to the market, responding to the customer's needs, trying to find solutions to put things together.

One of the primary consequences of that is that when we look out into the future, we do not assume general price increases or price decreases when we are doing our outlook. We plan for flexibility. We plan to react to the market, and then we try to do the best job we can to service our customers. So in our short-term plans and in our long-term plans, we're generally looking at static price assumptions how we're going to operate the network.

We also don't plan on acquisitions. We've talked a lot about how we will continue to look and we are continuing to look at acquisitions, but we view them as an opportunistic way to add value to the network and add value to the shareholders. We do not build acquisitions into any of our core beliefs of how we're going to grow our network and how we're going to achieve the growth goals that we have. So also, when we look forward, we do not count on the fact that we're going to do acquisitions, and we try to be very selective about making sure that they're the right sort of ones to add.

I talked briefly already about when we look at productivity and adding the network, that we do try to continue to look for ways to improve the network, but it's very difficult to anticipate very significant annual increases to that productivity. That's why when we talk about Robinson and our outlook, and we talk about our plans, we generally keep gravitating back to that 15% growth goal. knowing that we're going to work on that foundation of people and technology and approach and continue to try to build the network and expand our market share, and we know that there will be fluctuations in the marketplace and supply and demand and in pricing. We hope that we'll continue to find good acquisition opportunities to add to the network, and we're going to continue to be smarter and add productivity.

But when we put that all together, it really is about executing that core base, and that's why we continue to emphasize the 15% growth goal. We always say that we will share whatever it is that we know with certainty and beyond our year-end cycle here, we do have January mostly closed. And we do want to share that our truckload transaction volume in January grew at approximately 15%. In January, we also had the double-digit price increases compared to previous January that we had in the fourth quarter resulting in truckload net revenue growth similar to the fourth quarter of 2005.

Couple other comments about January, is we have not yet finished closing the books for January, so I'm not certain what our operating income or how our earnings will compare on that revenue growth. Also, January is typically the lowest revenue month for the quarter. February and March in most parts of the country are times when seasonal capacity and seasonal tightness and shortage can and will kick in and there can be meaningful price changes, price increases, or decreases, depending on what happens on the supply and demand side. So even though we are off to a good start with our truckload business in the month of January, a lot of the first quarter remains to be seen in terms of what will happen.

We do expect that we will see some continued incremental revenue growth from the 2005 acquisitions for part of 2006. The food source acquisition was completed on February 15th of last year. So there will be about a month and a half of incremental sourcing revenue in 2006. The forwarding acquisitions were both completed around August in the fall so we expect to see some continued incremental revenue as those acquisitions come in. We also know that we're building our team for the future, and we do plan to hire a lot of new employees in 2006. We do not target a specific number of hires.

We've talked in the past quite a bit about our productivity metrics and how we will adjust as the year goes on to make sure that we have the right resources in place to serve the customers. But we do anticipate growth of head count approximating what we had in 2005, maybe in the range of 1000 employees. We don't know for sure. But we do expect meaningful additions to the network to continue to grow. So, that's how we think. That's what we see when we look out into the future. And those are the comments that I can share with you. I'm going to l turn over to Chad now for a few more prepared comments on the financials, and then we'll open it up for questions.

Okay. As John mentioned, we do not give earnings guidance, but I am going to spend a couple minutes just giving you some CapEx and some other color on uses of cash going forward. As you saw, we ended the year at slightly over $350 million of cash and short-term investments. One important thing to remember is each year, year end tends to be our peak, as the $94 million roughly that was on the balance sheet for accrued compensation will be paid out during the first quarter so we generally see a little bit of dip in our cash but then start to build those accruals again and build the earnings.

As far as our working capital goes, we think that there will continue to be fluctuations like there has been in the past but don't know of anything that would materially that will materially change other than the growth volume of business we're doing, the working capital invested in the business. We did mention in the press release that we currently expect our CapEx to be about $50 million in the year. And about half of that is related to expansion here in Eden Prairie at our corporate headquarters and the surrounding branches.

We were approached by a tenant in one of our office parks who offered to buy us out of our lease, which is the reason why we are putting up a new big building that we leased, which we expect to spend $4 million or $5 million in the first and second quarter furnishing that building. We also bought all of the surrounding land of that new building we leased so that we can expand as we need to and expect that land could provide up to 250,000 additional square feet as we need it. That land will close towards the end of '06, and the purchase price is about $11 million. We also expect to start a second building on our purchased land, which makes up the balance of the $25 million we expect to spend on real estate expansion for Eden Prairie.

Another thing to note is our dividend in the increase that's already been announced. We raised our regular dividend to $0.13 a share, which should be $0.52 a year assuming we do not change it during the year. That would make our annual dividend approximately $88 million compared to last year's $51 million. As John mentioned, we will continue to look for acquisitions, so we do like to keep some cash available for the tuck-in acquisitions, so that we don't have to worry about financing as we find opportunities. And we'll also likely increase our share repurchases like we have done in the past, as a way to help manage the cash and the balance sheet. That concludes our prepared remarks. We will now take questions from our investor audience.

Thank you, Mr. Lindbloom. [Operator Instructions] Ed Wolfe with Bear Stearns, please go ahead with your question.

Good morning, guys.

Good morning.

On the core truck side, you talk a little bit about what you saw in terms of the impact of the hurricanes maybe taking some of the smaller capacity down to the Gulf, and as we sit here in February if any of that is starting to subside in the marketplace, you know, if nothing else, seasonally?

You know, the hurricane obviously had an impact on capacity, especially in the Southeast. And when we look at kind of results by branch, results by lane, there certainly was some meaningful price variance resulting from the hurricane, in particular, our transportation leadership talked about the significant fuel increases that were also triggered by it that, as we've talked many times before, ends up being largely a pass-through for us that probably contributed some degree to our margin compression during the quarter. What we've experienced, Ed, through January is that after Christmas in our perspective into the business, we see a very typical seasonal slow-down where capacity in January is much looser than it is during the fourth quarter period of time. And we've experienced that this January as well. So we -- we do not really see any lingering effects of the hurricane specifically in the capacity arena through January. It was really more contained end of the fourth quarter. Obviously there could be ongoing fuel price impacts or different more indirect things like that, but for us, January compared to last January felt seasonally fairly normal.

And can you talk a little bit more details about the personnel expenses. You talked about getting some leverage with above historical volume growth. But if I look at. as a percentage of net revenue, your net revenue growth hasn't changed much in its growth the last several quarters, yet your margins improved 300 basis points in this line item personnel expenses, and it hadn't been expanding by that amount. Is there something that was specific to the quarter or that ongoing we should look at a little differently in this line, in terms of mix or anything like that?

No, I really don't think so. There is - there is probably a couple of small factors that add together. But with a lot of the variable compensation plans, when you get into the higher growth arenas of incentives and rewards, some of the percentage pools would taper off a little bit, so that when we have calendar-based incentives, there is not as much compensation with the high levels of growth as there is early on. In addition, we have a lot of salaries that would be adjusted annually, and so as the business grows throughout the year, your fixed costs are just getting to be a smaller component. And it really does kind of just come down into compensation and equity incentives and how they get aligned with the revenue growth and the profits that we have.

Sure. And in terms of that, if you grew your operating income 46% in '05 over '04, does it change what your bogeys are for growth in '06 over '05 to share that? Or is it similar, but it's a growth metric? Does that make sense?

It -- it would change, but it changes on a branch-by-branch basis, of which we have almost a couple hundred, and there is a lot of nuances within each business line, in terms of how we reset the incentives, and how we do it. So, yes, it would change, but it's difficult to quantify that.

And then on the sourcing side, you talked about the internal growth ramping up to 21%, 22% in addition to the acquisition growth. Should we look at that as there is been a change in the marketplace or that the acquisitions have helped you to cross-sell and stimulate the core business? How do you think about that going forward?

Here is what we would say in terms of outlook from a sourcing standpoint is that when we went public eight years ago, we talked about the sourcing component of our business being choppy and growing more in the low single digits. I believe we've used 3% to 5% a number of times. And within that sourcing business, there is a mixture of customers from retail, food service, and wholesale business and that a lot of the lumps in growth in earnings would come from the transitioning of the customer base to more retail and food service type customers and away from wholesale. But, in addition, there's lumps because of the seasonality of the crops and the different products that we work with. The acquisition we completed has almost entirely a retail and food service business so that this transition to a slightly more stable, hopefully long-term customer base that pushed us forward in that. So after the acquisition overlaps itself, we do have hopes that our sourcing growth will move to mid to high single digits.

But we also want to re-iterate the notion that that business line of revenues will continue to be lumpier than the rest of Robinson just because of seasonal variances and crop variances and things that we can't really control. When we look at our sourcing business, the people internally who manage that sourcing business also manage a high percentage of the produce freight business. And so they're doing transportation and distribution and perishable management programs in addition to the sourcing. So there's a more integrated story that's important to understand in terms of how we look at and manage that division. But when you're trying to understand what to expect on the sourcing net revenue line item, we do have slightly higher growth expectations but continue to expect variances in the growth rate.

Thank you. That's very helpful. I will get back in line. Thank you.

Our next question comes from James Valentine with Morgan Stanley.

Great quarter, guys. John, I'm wondering when I hear your comments, if I'm assessing this correctly. Now that it sounds you being more tempered or maybe just a little more cautious than we normally hear during your quarterly calls. Am I misinterpreting or misreading you?

I would say, yes, because I think what we always try to convey is an explanation of what's happened and sort of, kind of the what-ifs of what might happen in the future. And I think when we look at a 50% earnings growth for the quarter and what contributed to that, I don't really have a lot of vision into what those things are going to do during '06 or not. So I'm trying to continue to reemphasize that, Jim. So, I don't think it's really more about being optimistic or pessimistic as much as kind of reminding you what we are all about and hopefully, helping you understand what 2005 was about and what the variables are for '06.

Okay, great, great. Second question, I was wondering if you might be able to address the current differential between long-haul truckload, and intermodal pricing, and how that differential may have changed here, based on what you see going on in a fairly tight truckload market and, yet, with railroad service and intermodal where it is, can you give us some color on what's going on between those markets?

Sure. Yes. Here is how we would look at kind of intermodal versus long-haul truck. I guess probably the first phenomena that's important to understand is within the rail industry there is some alignment of their long- haul resources towards the ports and the international shipments where they are servicing a higher percentage of that business that's coming into the country. And many of the railroads have cut out service schedules on some of the other lines. So from the standpoint of truck and rail competitiveness or comparable within what we would look at, you've got kind of a big shift towards just a market that they are going after and the freight. So some our intermodal business has declined because they've -- not offering the service any more, which leaves that more available to trucks.

When you get into the long-haul stuff that is coming off of the ports and in the international lanes, obviously with the rail focus on capacity, and train performance within those, there is probably market share that's going to the railroads within there. Both the rails and the trucks have obviously raised prices fairly significantly over the last couple of years. And what we are talking to our customers about, and what we're seeing in our business is that when you look at kind of the truck rail tradeoff between the two that everybody has to kind of relook where one is more competitive and where it's less competitive. Because overall, there's been pretty significant rate increases in both, but it's not consistent across North America or all of the networks. So that there have been a lot of changes, and we're kind of revisiting mode selection by customer and by lane in all areas to see kind of where those price matrixes have made things better or worse for each customer.

So basically you're saying in situations where a railroad has some decent service and hasn't take an pricing too much that still works, but either have poor service or they've taken up prices too much, you're going -- you're going to the customer and saying maybe we're just better off staying truckload?

Yes.

Okay. Great. And if I can ask one last question on the -- maybe of Chad, you mentioned about potentially being bought out, lease being bought out. Is that something that runs through the P&L? And if so, where would we see it and would it be material?

It will not run through the P&L in one chunk. It is buying out leaseholds that we had invested into the previous building.

Okay, great. Thanks, guys.

Thank you.

Our next question comes from Brannon Cook with JP Morgan. Please go ahead.

Good morning. I have a question on your mix of business. Obviously throughout this year you seen a higher level of business come in the spot market, and I guess you probably have a limited visibility in terms of what you are expecting looking forward. But, as you look on to the marketplace, is there anything that's kind of affecting your view one way or another in terms of your expectation of the higher level spot market activity continuing?

You know, the drivers of a lot of that spot market activity are the fact that demand -- the shipment levels have moved up pretty meaningfully over the last couple of years, and there is a long list of supply constraints, starting with the large truckers who don't plan to add a lot of equipment down to kind of hours of service, driver shortages and all the other sorts of constraints that are out there. Most of the constraints and most of the trucking industry would tell you that those supply constraints are going to stay there for some period of time. So, wen we look at the truck load piece, again, we try to stay neutral in terms of forecasting any of this. But if -- if in fact that holds true, then the real variable would be the demand side. Depending upon what will happen on the freight side.

If freight levels continue to trend upwards, we believe there will be a lot of spot market or transactional freight during 2006 like there has been the last couple of years. If those freight levels start to soften in any sort of meaningful way, you would see less spot market activity and potentially price decreases in some lanes compared to a year ago. So that's -- when we think about what do we expect out of that level activity, the supply side is generally going to adjust slower, and there are built in constraints that have been made visible the last few years, and the demand side is really probably the driver of what's going to happen.

Okay. And just as a follow-on that question, you mentioned a lot of the large truckers aren't adding capacity. Are you seeing smaller truckers come into the market more so? And if so, do you feel like serving as a broker between the large shippers and them, you know, really has enabled you to be a conduit between the large shippers and the small truckload carriers?

We do see new capacity coming into the marketplace on medium and small carriers. And, yes, we do believe that a big value-add that we provide to the marketplace is the quality control, the aggregation, and the automation of a lot of that capacity with all different shapes and sizes of shippers. But that is a core value that we think we bring to the marketplace on the truckload piece.

Thank you.

Our next question comes from Jon Langenfeld with Robert W. Baird and Company. Please go ahead.

Good morning. John, could you give us your perspective maybe following up on that? What is the perspective of the shipper? Because most of the ones we talked to are convinced that the constraints are going to be in place as long as the economy is good, but I'd be interested in your perspective in terms of what you're hearing.

When you talk about the shipper perspective, I think, first and foremost, they are tired of rate increases. That's not something that had been going on for a long period of time. It's really new to the last couple of years. And the customer reviews and interaction that I've had personally and that we've had here at Robinson very early on in all of the discussions is a strong desire to try to stop the escalating costs on transportation and on fuel, because it's putting a lot of strain on a lot of business models, and most of those customers are having a difficult time passing it through to their consumers or end customers -- with a of lack of willingness to tolerate inflation at the retail level, especially with a lot of the larger retailers today. The general attitude of the shippers, I think, is not expecting these supply constraints to go away any time soon. Tired of the rate increases. Looking for newer, creative different approaches. Probably a general or pretty high desire to try to lock in rates, if they could. Most customers that we interact with would accept flat pricing if they thought they could get a year-long commitment that somebody would live up to it, because they just really don't want to experience any more increases.

Okay. That's helpful. And then have you seen the shippers either have a willingness or the ability to change their distribution strategy, maybe the timing of their shipments throughout the year? Is that even an option that you see for some of the customers you talked with?

Yes, it is. We talk with many of our customers about that, particularly with the freight that becomes spot market or transactional for whatever variety of reasons. It might be incremental freight that they didn't plan for. It might be freight that other people committed to but didn't perform for them on. When they end up having freight like that, the parameters around how they try to tender that, or how they get that moved by us or anybody in the marketplace, flexibility around equipment size, around literally days of the week, around all sorts of other things, really become helpful in terms of managing the rates and cost increases in a spot market.

Okay. And then lastly on a qualitative basis, the last two fourth quarters here have been very ideal freight conditions. I guess I was wondering if you look at how difficult it was to service your 15% transaction growth this year, did it feel like it was similar, better or worse than your ability to service it in Q4 of 2004?

You know, it gets difficult to generalize about that because certainly like in the Southeast, some of the hurricane things, I mean, there were truck stops without fuel and some things that were probably more unusual or more painful than ever. I guess we talked a couple of times, though that if you really step back and look at 2005 including the fourth quarter, it was kind of generally in the level of transaction growth and activity that we'd experienced over a long period of time. So I would say overall fourth quarter in general was probably pretty comparable to the fourth quarter a year ago. But acknowledging that October, November as some of the peak shipping months, capacity is always seasonally tight, and our people work very hard during that portion of the year. I wouldn't want anybody to think we didn't work very hard in the fourth quarter, but I wouldn't characterize it as significantly harder or easier than a year ago.

Okay. Thank you for the color.

Our next question comes from Jordan Alliger with Deutsche Bank. Please go ahead.

Yeah, hi. Morning. Just a question. You talked about the personnel expenses and the leverage in the fourth quarter. On the SG&A side, especially if you sort of strip out the depreciation from both years, the growth in the SG&A was, I think, high single digits which was a very strong performance, very strong leverage. And I guess my question was, you had strong growth in the prior quarters and that line had grown a little bit -- quite a bit more. So I'm just wondering was there any additional sort of leverage opportunities that you actually had in the fourth quarter, and how you may think about that going forward.

If what you are looking at is growth over last year, I think if you look back at Q4 of 2004 with SG&A being $26.4 million excluding D&A, that was an extremely -- or that was much higher than any other previous quarter. So if you look at SG&A expense on a sequential basis, it looks -- it goes $26 million, $24 million, $28 million, $28 million this year. So there really was no incremental leverage or any big savings that were generated in the fourth quarter.

Okay.

Compared to last year's fourth quarter. So it's relatively consistent with the year, I guess.

Okay. So and sort of you'd expect that type of consistency --I guess you talked about it in your opening comments sort of productivity to sort of -- I don't know how you describe it on a looking forward basis.

SG&A excluding personnel and depreciation and amortization is less variable than personnel expense. There are many things that are variable like communication costs, occupancy actually becomes relatively variable because we have so many different leases and we are growing. But there is a lot of leverage especially of centralized services in times of growth.

And then just a follow-up question. You mentioned I think shippers, tired of rate increases and the fuel pass-through, so I'm just wondering how are you guys managing the interplay with the fuel surcharges passed on to customers as well as sort of how much you're sharing on the owner/operator side. How did fuel affect you in the quarter, I guess is another way to ask you, too.

When we look at the business, the theory of what we do, fuel is a pure pass-through. That we have surcharge agreements with all of the carriers -- and most of the carriers and surcharge agreements with the customers. What happens, though, on a practical basis is that surcharges eventually roll into rates or get reset, and we may have a single shipper that we're interacting with, with one fuel surcharge schedule, and we'll be using a couple hundred different carriers with all variable different fuel surcharges. So, in the mechanics of how the fuel charges get calculated and paid and passed through and rates get renegotiated, a lot of the capacity that we purchase on a daily basis is kind of an all-in rate as of that date inclusive of fuel, so we don't know exactly how much of that higher rate was fuel, whereas with the shipper it might be broken out on the surcharge. So we describe fuel as a pass-through, but on the mechanics of how we operate that pass-through, it's difficult to -- it's impossible to prove if we made a little money or lost a little money on it. We don't know.

Okay So you really couldn't just aggregate that mid-teens price increase into fuel and sort of underlying price is what you are saying.

Yeah. And our best estimate, based on analyzing where we do have surcharges, and looking at relative fuel prices and stuff, that it's about half and half. That about half of that price increase would be fuel and half of that price increase would be rates.

Great. Thank you.

Our next question comes from Scott Flower with Citigroup. Please go ahead.

Good morning, all. I wondered, I know this question was asked but I want to look at it, perhaps, a slightly different way as -- I know that, John, you talked about that you're seeing new small and medium capacity, and that tends to happen, you see churn. But, are you seeing it at a similar rate to what you seen in '05? A faster rate? A slower rate. What's the rate of change as you look at capacity, understanding there is also some churn in there?

I guess the comments that I would add is we continue to sign up more carriers almost each quarter than we did the quarter before. So we are seeing a high number of new additions or new carriers coming in. There is no question that today versus five years ago, the average size of that carrier would be smaller, because we've got most of the larger ones signed up, and that, on that average, we're getting medium and small carriers that are coming into the network. What makes it hard for us, and when we talk about churn, there's two issues. There is like a bankruptcy or somebody who we may have had a good relationship with, who goes away or goes out of business. And then there is all the carriers that we sign up, and do one or two loads with, but then we don't do business with them again for a year or two. Maybe they took one load from us but haven't come back or whatever. So that's what makes it challenging for us when we look at the churn, is how many are we signing up, and how many are really converting into a more permanent carrier for us. To our best understanding, there have been fewer bankruptcies as a percentage and different components of the churn in 2005 versus going back a couple of years, because the freight environment is pretty healthy. But all our sort of internal churn of signing them up and using them only for a couple of loads and then not getting them back, that's probably higher now because we're pretty aggressive out looking for capacity.

Okay. And then I know you talked about the overall environment in terms of the trucking side. How would you differentiate -- I know that it's a smaller part -- but how would you differentiate what you're seeing in the LTL versus the TL markets from a pricing capacity and demand standpoint as you look at the market in your book of business.

The LTL business is fundamentally different in that, in theory, each network has sort of unlimited capacity or at least it's not really debated on a day-by-day basis in terms of how much freight they can handle. Clearly there's been price increases just like there has been on every other component of transportation. However, within LTL where you have all the different classes and all the different categories of commodities, it becomes -- plus all of the tariff pricing and discounts -- it gets a lot more difficult to really understand what the net price increases were to each customer or to each type of thing. So a lot of the phenomena that we talked about carries over into the LTL arena with a fair amount of added complexity and change for just the underlying way that industry prices itself.

Okay. And then the last question for me, and I will let someone else have at it. I know that you stay flexible and you do what the market wants to do and try to address and provide solutions. But you also mention that customers are tired of the continued pressures and are willing to lock in. Is it, then, fair to assume that if the customers are trying to go in that direction, that if we look at your book of business, understanding it moves around that you may have more of a fixed component this year versus transactional, because that's the direction the market wants to go?

Probably compared to a year ago, where we talked about things being very fluid and that nobody was really certain, there is maybe a little bit more stability today in terms of annual rates and annual commitments. But we've talked a lot, Scott, the last couple of years about if capacity tightens really beyond expectations, those things fall apart pretty quick. I think there is pretty strong sentiment to try to stabilize things and lock them in, and we're working hard with our customers to try to put those types of programs together. But as I said, we talked about it before. I don't think that means that the way the transportation landscape works, I don't think you can read into that that '06 is locked and loaded, because that's what everybody wants to happen.

Great. Thank you.

Our next question comes from Alex Brand from Stephens, Incorporated. Please go ahead.

Thanks. Good morning, guys. You got a couple other businesses now that are showing great organic growth. I'm just curious how you are going about cross-selling those products with your core product, if that's even sort of the leverage mechanism. And have we moved beyond in the freight forwarding business, now beyond sort of those core big customers that you talked about in the past, and you're starting to move downstream in your customer base a little bit?

I guess the first point, cross-selling is a really important part of what we do. And it is a driving component as to why we are expanding our network, expanding the modes, focusing a lot on account management, and really trying to work with the customers. The early parts of that, 15 or 20 years ago was the breaking down of truckload versus LTL. The truck versus intermodal options, and now, for the last ten years probably, it's been the domestic and international blend of whether freight crosses a border or not, that that's being less and less of a differentiator in terms of how the freight is handled. That's clearly a big theme within Robinson, and we continue to work at it, and we've had some success, and we feel pretty good about our forwarding network and how we were building the services. But I think it would be wrong to convey too much stability in terms of that global forwarding customer base. We still have -- I think we talked eight or ten in the past -- it might be, now, that we have 12 or 15 customers that make up a high percentage of the business. So while -- while the long-term vision feels pretty good, and we continue to build on it, I do believe that there will be more lumpier results in the organic component of the forwarding business based upon the success or failure that we have winning or losing a big customer.

And, Chad, with respect to working capital management, have you seen the quick pay program sort of get to a point of stability now so we can sort of think about your working capital needs as being perhaps more stable than they have been the last couple of years?

Throughout 2005, it was relatively stable as a percentage of total payments going out. So we think it has stabilized, but we have been surprised about it before where it's grown. Like during all of 2004, we kind of went from one plateau and then stepped up to another one. So right now we don't expect it to go up as a percentage of total payables, but things change.

Okay. Great, thanks a lot, guys.

Our next question comes from Ken Hoexter with Merrill Lynch. Please go ahead.

Good morning. When you -- Chad, you were talking before about pricing, you anticipate pricing in a steady state. So are you looking for volumes, then, to stay in this mid-teen growth for the next few years? Is that kind of what you've built into the model?

Yes, that's how we talk internally is that we want to get incremental freight activity from new customers and existing customers and new modes and expand our participation in the universe of transportation and logistics by 15% greater participation. And that can come in a lot of different ways, but in general that's how we think and that's how we plan.

Important to remember, though, that pricing conditioned to rise quarter by quarter sequentially during last year. So, that doesn't mean we expect first quarter pricing to be flat with first quarter of last year.

Okay. Helpful. And then, on acquisitions, during the opening comments you kind of said you don't plan on acquisitions but they're an opportunistic way to add value, and during your cash flow discussion you also want to keep the cash available for acquisitions. I presume you've got as a -- a team that's constantly and actively looking at some of these carriers. Do you spend more time on the international -- on domestic kind of targets? Is there a certain area where you 'd like to round out the business to gain some more scale to make it continuously get more cost effective?

Yes. As far as as being reactive, the deals that come in, we look at them all equally. Where we are out being proactive, we are more active in the international freight forwarding market. So we're -- we have active conversations with many of our different agents that are handling our freight in locations where we don't have offices today. And like the China acquisition and the Italy acquisitions and some others that we've done in the past, we expect to do some more of those. But there are also many domestic deals that we look at.

Could we see anything larger? Each of the acquisitions I think, we've seen over the past two or three years, have tended to be things that you highlighted -- it's not landscape changing and it will stay small, and you will see the amount that we pay kind of when the cues come out because it's that small, but you need to get specific. Is there a desire, do you think, or need to do anything on -- or are there companies out there that could be of larger scale that could continue to build scale in these companies like China or India?

Yes, there are some regional forwarders that would be larger that would be attractive acquisitions for us, but you know the further we get along building our own network, the less desirable the larger ones will become. But I think we're in a state right now where especially in international forwarding, a more medium or bigger deal could help us.

Those last two questions can kind of tie together were international acquisitions are probably more strategically desirable now where we have no presence, because we can make a greater impact because we have -- don't have any owned offices there now. Once you establish a premise -- in our business -- in our industry, the biggest risk in acquisitions is the integration and loss of people and the -- putting two existing businesses together and so then, Chad's second comment is once you have a presence there, however you got it by organic growth or regional acquisition then the likelihood you're going to buy something bigger that also has the presence there would go down.

Great. Thanks, Chad. Thanks, Jon.

Our next question comes from Adam Thalhimer with BB&T Capital Markets. Please go ahead.

Thanks, guys. Most of my questions have been answered here. I just wanted to take it back on Ken's last question on international acquisitions. You mentioned on the Q4 call that the valuations had started to run away from you a little bit. I don't know if you mentioned that specifically or we inferred that. But how do the valuations look on some of international freight forwarding opportunities?

There is really a mixed bag out there. The larger ones that are running through more of a formal option process, the valuations have got relatively high and a lot of venture capital money right now interested in logistics. But, on the smaller ones or our agents, the dynamics are slightly different, because when we do approach to buy them, many times we are significant portion of the business that they have. So there the valuations are more reasonable.

Okay. That's helpful. That's all I had. Thanks, guys.

Our next question comes from David Ross with Stifel Nicolaus. Please go ahead.

Good morning. I had a question with 40,000 broker carriers you have. You said some of them come on one or two loads for you in a year, and then you don't see them for awhile. Do you have any contracts in place for certain brokerage carriers where they haul exclusively for C.H. Robinson?

There are some carriers that we know haul exclusively for C.H. Robinson, but they're not contractually committed to.

And is that something you are looking at in the future, because it seems the competitor landscape out there [inaudible] in the brokerage space where everyone seems to be competing for the broker carriers with light and other truckload carriers regionally starting up operations?

It's -- today, we have not contemplated that. Today the market even though there is more and more brokers, larger third-party truck companies out there, the competition really because of the fragmentation hasn't been an issue yet.

Okay. Thank you very much.

The thing I would add to that is if you would look at the driver churn and the carrier turnover and all of the rest of that, that it really is more about having the right freight and paying the right amount of money versus the type of agreement or commitment that you enter into.

Our last our last question comes from David Campbell with Thompson, Davis Company, please go ahead.

Yeah, thanks. Hi, John and Chad. Can you give us what the net revenues in Europe there were in the fourth quarter and how many branches there were there?

Europe truck business is about 3%. Slightly over 3% in total net revenues and there is about 16 branches I believe, in Europe.

Great, thank you. And last question is, you mentioned earlier about the fact that shippers are tired of rate increases and cost increases and so forth and looking for new solutions. Does that help drive your business -- does that help get business to you away from the traditional sources of customers trucking as they look for cost savings?

Yes, it helps and it hurts. You know, if a customer associates you with some of the cost increases or thinks you haven't worked hard to service them or do all you can to mitigate the cost increases, they may be upset with you, but there's no question we've had growth opportunities from other relationships where we previously were uninvolved, and those customers were unhappy with the level of effort and magnitude of price increases from other providers.

And you would say those providers are largely not -- nonasset-base providers but asset-based trucking companies.

All of the above. really, David. I mean, it depends upon -- when you have a significant price change like this, it changes a lot of things. I mean some of those truck lines or other nonasset-based carriers that have more aligned or dedicated capacity, they may be making good business decisions, because they've now found more lucrative alternatives for the equipment that they control, and so they are going to go in with very aggressive price increases, not concerned if they lose the business. Just like the drivers, the trucks itself,, everything kind of realigns to the new economic paradigm that gets set up when you have these big price increases. Occasionally, it's service or effort and sometimes it's economics that causes everything to realign.

All right. Okay, thank you very much.

Thank you.

Unfortunately we're out of time, so that will have to be our last question. We apologize that we could not get all -- to all of your questions this morning. Thank you for participating in our fourth quarter 2005 conference call. Before we conclude, I want to remind you that this call will be available for replay in the Investor Relations section of the C.H. Robinson website at www.chrobinson.com. It will also be available by dialing 800-405-2236, and entering the pass code 11051188-pound. The replay will be available at approximately 2:00 P.M. Eastern time today. If you have additional questions about our fourth quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.