羅賓遜全球物流 (CHRW) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson second quarter 2006 conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As reminder this conference is being recorded Wednesday, July 26, 2006. I will now like to the conference over to Angie Freeman, C.H. Robinson Director of Investor Relations. Please go ahead, Ms. Freeman.

Thank you, and good morning, everyone. On our call today will be John Wiehoff, CEO, and Chad Lindbloom, Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our second quarter performance. And we will follow that with the question-and-answer session.

I would like remind you that comments made by John, Chad, or others representing CH Robinson may contain forward-looking statements which are subject to risk and uncertainty. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I'll turn the call over to John.

Thank you, Angie, and thanks to everybody who is taking time to listen to the call and follow our story. By introduction I would say that most of our comments and explanations we believe for the second quarter at CH Robinson are very consistent with the first quarter of 2006.

Some of the financial highlights for the second quarter, our overall net revenue or gross profit growth of 26%, operating income growth of 29%, and EPS growth of 35%. All these growth rates are reasonably similar to the first quarter and all in excess of our long-term targeted growth of 15%.

First point I want to emphasize is just with regards to our business model and how we do work very hard to create a variable cost business model and keep as much of our operating expenses as variable as can be. Two-thirds of the operating expenses are in the personnel category and most of that personnel, or a high percentage of that, personnel are our incentive plans, both cash and equity incentive plans, that we try to keep as variable as possible.

We have commented many times in the past that during periods of high growth when we exceed our long-term target of 15%, we are able to leverage our model and grow our earnings at a rate higher than our net revenue growth and that is again what happened in the second quarter of 2006.

We do have some fixed and some semi variable cost around real estate and other things that when we exceed our long-term growth targets, it provides some leverage to our model. So the net revenue and the growth profit or gross profit number is really our key metric that we look at to initiate the long-term growth target and when we are in excess of that, we typically have pretty positive results.

So let's talk a little bit about that net revenue growth of 26% and what drove it by category. First in the truckload net revenue, which is again by far, our largest net revenue category, similar to previous periods, our growth was driven both by volume and pricing.

About half of our growth in truckload net revenue came from volume increases. We shared before that we continue to take market share and expand our network and expand our volumes very close to our targeted long-term 15% growth.

The change in the last couple of quarters have been that pricing and margin gains have been added to the volume growth, giving us accelerated net revenue growth in the truckload sector in excess of our 15% target.

During the second quarter, we did want to share as well too that our volume growth started out slightly slower in April and did increase growth rate during May and June. It was double-digit growth, approximating our long-term target for the entire quarter, but volume growth did accelerate slightly throughout the quarter.

On the pricing component, as we have mentioned before, it is somewhat difficult to be too precise, given the transactional components of our volumes where a lot of the freight is not comparable from period to period. However, our best estimates are that we had about a 10% pricing increase on comparable freight and about half of that pricing increase would be made up of rate increases and half of it would be variances due to fuel and fuel surcharges.

The other topic to discuss in the truckload revenue category is, as we noted in our press release last evening, we did during the second quarter complete an acquisition located in Sartell, Minnesota. The name of the company is Payne Lynch and Associates. We are excited about it for two reasons, one, because it is a great team of people and ,as we said before, we are committed to using our capital resources to grow market share and add to the team, primarily through internal and organic growth but also through acquisitions when possible.

So we think we have got a great team of people and we're very encouraged about having them be part of the Robinson team. And, second, the business that they do is principally focused on the flatbed arena which is something that we have been putting more emphasis on and believe has a lot of growth opportunity for us.

The acquisition was not financially material to the quarter. It provided less than one-half of 1% of the truckload net revenue for the quarter. When included for a full quarter, it will likely be between one-half of 1% and 1% in terms of net revenue contribution. So it is very consistent with what we have talked about in the past in terms of doing smaller acquisitions to build our team and increase market share.

Moving to the Intermodal net revenue category, as we stated in our press release, like the railroads and most in the industry, we moved slightly less volume during the quarter at significantly improved margins. We continue to focus on multimodal freight. That is the core of our intermodal activity, and we were able to during the quarter focus fairly well on yield improvement, better routing, eliminating some of the lower margin freight, and improving the net revenue growth in the intermodal line.

On the international air ocean customs brokerage, we have talked in the past about the two European acquisitions, both Hirdes and Bussini. Those were completed in August of the previous year so for the second quarter of this year, we continue to have growth, driven by those acquisitions.

For the quarter our ocean growth was around 40% and the airfreight growth more than doubled. Even without those acquisitions, we had very good organic growth and continue to feel very good about building out our network and adding volume to the network.

It is difficult to really talk about trends regarding margin and pricing in the international area because so much of the volume was new, but when we look at our business and building out the network, the primary trend that is happening within in our air ocean customs brokerage business that is worthy of mentioning is some decreases in ocean prices due to incremental volume that is coming to the marketplace.

During the third quarter, obviously, we will have a partial or a component of the third quarter where we will have incremental revenues from the acquisition, but during the third quarter of '06, we will begin to have comparable periods for the last half of the quarter from just organic growth.

On the sourcing line item, we had 14% net revenue growth for the quarter. This is the first quarter that the acquisition of food source, which was completed in February of '05, became fully comparable so that 14% growth rate represents entirely an internal or organic growth rate.

We have commented before that through the evolution of the business and the acquisition of FoodSource that our expectations for that FoodSourcing business, we're moving from the low single digits of 3% to 5% to hopefully higher single digit expectations.

We still believe that that is accurate assessment of where we are at in this business and we were characterized the 14% net revenue growth for the quarter as a good start and a good performance under our new expectations of more retail and more foodservice focus with the business that we are chasing today.

On the information services category, that is our T-Chek subsidiary 17% net revenue growth. We had a good quarter of executing growth. Most of the growth came through volume increases with new, medium, and small carrier capacity, along with some incremental fees driven by fuel price increases, where in a small component of our fees, they are driven as a percentage of fuel prices.

Last comment I would make is on the people area. A couple of key metrics that we look at, our personnel expenses for the quarter were up 24%. We like to look those and evaluate them in relation to the net revenue growth because so many of those expenses are driven by the net revenue growth. So we feel good about the fact that we were able to keep that in check with regards to our net revenue growth.

We also had a 19% head count increase compared to year ago, finishing the quarter with over 6300 employees. As we get bigger and the business diversifies, and we're adding people in Eastern Europe and South America, we added some people through acquisitions in the quarter. In addition with our core businesses where a lot of the hiring occurs, we have different periods of the year, with school graduations and summer hires, where people will add a disproportionate rate, so it gets difficult to make too much judgment for any one period of time a message.

But the message that we wanted to relay to you is that we are continuing to invest in our people and invest in our network. We feel like our people and productivity metrics are good and consistent with how we have approached it in the past. With that, I'll turn it over to Chad for a few more prepared comments.

Thank you, John. I'm just to make a few comments on our SG&A expenses for the quarter compared to last year second quarter. Our tax rate, give a little bit of CapEx guidance for the rest of year, and then talk about our share repurchase activity.

As we have mentioned in our earnings release, during the second quarter of 2005, we settled a lawsuit we had filed against our insurance carriers for their refusal to pay a claim that we filed in 2003, which was related to truck accident that occurred in 1999.

This settlement resulted in a reduction of our SG&A expenses of $2.8 million. Excluding this settlement, our SG&A expenses would have been $31.7 million for the second quarter of 2005 and would have been 14.7% of gross profits.

Excluding this item, we did gain leverage compared to the second quarter of 2005. Our SG&A expenses fell from 14.7% of gross profits to 13.7%.

I will move on to our tax rate. Our tax rate will fluctuate quarter-to-quarter based on various factors, including option exercises, results of operations in foreign locations, audit activity, and the amount of municipal interest we earn.

The tax rate for the second quarter was lower than our normal expected rate. On a go-forward basis, we expect our tax rate to fluctuate between 38% and 38.5%.

As previously discussed, we expect to have a total of approximately $25 million related to office expansion in Eden Prairie during 2006. Approximately $2 million of these capital expenditures had occurred by June 30. The remaining $23 million will occur during the second half of 2006.

We also expect to have additional $13 million in capital expenditures during 2007 to complete a building that will still be under construction at the end of 2006.

In addition to these Eden Prairie expansion capital expenditures, we will also have capital expenditures to continue to grow our business. Currently those total $6 to $7 million per quarter.

Now onto share repurchases, during the second quarter of 2006, we repurchased approximately 550,000 of our shares at an average price of $46 and some change. This number was slightly offset by some issuances of stock under employee stock purchase program as well as option exercises.

As previously discussed, we will repurchase shares to manage the dilution of our equity programs and also to manage the amount of cash on our balance sheet. We have had faster than expected performance-based vesting on our restricted stock which partly drove our decision for the increased activity. We currently expect to have similar levels of repurchases during the third and fourth quarters. That completes our prepared remarks, and with that, I'll turn it over for questions.

Thank you, Mr. Lindbloom. (OPERATOR INSTRUCTIONS). Edward Wolfe, Bear Stearns.

Generally, what are you seeing in the economy out there? Is there any sign of a slowdown as we are here in July or June, or as you went through the quarter?

You know, as we've said many times before, it is just impossible to predict. There are so many variables and we really don't have any unique insight into that.

Well, forget about predicting. Have you seen a slowdown? Are any of your customers doing less business than you expected, or have you seen pockets of weakness either regionally or by product, anything like that?

As I said earlier, the second quarter trend within the quarter was that we saw slight volume increases or increases in our growth rate throughout the quarter. So June had the highest volume growth of the quarter.

Has had continued year-over-year in July? I know there is seasonality.

We don't disclose anything about third quarter.

Would you disclose if there was a material change to that?

It would probably depend.

Okay. On the acquisition you announced, I am guessing that it is not very large, based on what you said. Is that a peer brokerage and peer flatbed business?

Yes, it is. Peer truck brokerage primarily focused on the flatbed. I believe about 80% to 90% of what they do is flatbed truck brokerage. The rest would be other truck brokerage services, drive and refrigerated.

And in your cash flow there is $26 million for acquisitions. I'm guessing most of that is not related to this. It's earn-outs from other acquisitions?

No, the $26 million was entirely related to this acquisition. In the first quarter we did have earn-out payment of about $8 million.

In your comments, I think you alluded to that you're seeing about 5% price and 5% fuel increases year-over-year, is that right? Did I interpret that right?

Yes.

And yet, your purchase transportation costs yields are expanding, implying that you are getting a better price than -- you are getting a better rate on the cost of the capacity than -- you're getting a higher rate on what you're getting from your customer than what you're purchasing. How do you explain the difference between those two?

Well, first of all, the only gross profit percentage that you can calculate is total transportation and there was a significant mix shift with the acquisitions in the international forwarding arena folding in. So that definitely drove part of the margin increase.

As we have mentioned in the release, there is a slight increase in truck, but even within truck, there are different modes, things like flatbed, refrigerated. When you get down to our North American Van business, our gross profit percentage was almost identical to what it was last years second quarter.

We did have some increases in some refrigerated margins. A lot of those were related to specific customers where we were underpriced last year.

When you scrub for comparability, most of the margin improvement comes from the ability to cleanse the poor freight, which I think most transport providers have been doing. Given the current capacity environment, there is no reason to move freight at a loss.

Are you seeing more or less small guys in the marketplace? You've been talked about more of them recently. Are some of these guys starting to go out of business, or it is more capacity out there?

We continue to sign up record amounts of new small carriers each quarter. It is difficult to tell whether we are just discovering some of them or they are brand new. I am sure it's some combination of both, but we continue to work hard to expand our network of access to capacity, and we are continuing to find more available each quarter.

Your large asset-based competitors on the truck side have generally reported fleets that are down and utilization of truck models that are down, and yet you seem to be finding capacity. How do you put those two things together?

Well, I think we've talked a lot in the past that our model is a service model. We don't focus on the asset utilization component of it, so we are using primarily medium and small carriers and growing market share by building relationships and trying to find a more effective way to route it. So our growth in market share and our growth in volume is not necessarily correlating with network utilization factors that the truck line, especially a large one, would have.

Thanks for the time. I appreciate it.

Jon Langenfeld, Robert W. Baird.

On the flatbed side, can you just talk about why, you know, historically you have more or less outsourced kind of fulfilling the flatbed side, and what makes that more unique that maybe it's more of a focus today versus five years ago?

Sure. The reason why flatbed truck brokerage is unique is because of the types of freight that is hauled by flatbed, where much of it is high, wide, and heavy or is a unique type of freight that requires the base or durability or loading ability of the flatbed.

And because of that, it generally requires more specialized drivers and strapping or tarping and different things that you need to do to it. So the people working with flatbed freight need to have more specialized expertise about the commodities and about the types of available capacity.

Historically, we have wanted to and have participated some in that area, but we just don't have a lot of expertise in it. So adding a group of people who are all knowledgeable in that arena will hopefully help us just penetrate carrier availability and customers that can handle, or customers that have those specific types of needs.

How widespread is the customer base of Payne?

Like John mentioned, it is based in Sartell, Minnesota, but their customer base is much nationwide.

And then on the international side, looking at the organic growth trends, I know we've talked about that being lumpy and being a function of a more consolidated customer base, but does it feel to you like things have become a little bit more stable in terms of that customer base and expanding the customer base with the acquisition so therefore your organic growth has been better?

Our customer base is expanding. We used to talk about the top 10 customers being 50%. Now, I think you've got to get down to 20 or 25 customers to be 50%. So we are growing the customer base and hopefully it will become less lumpy. And we do believe that these small --relatively small acquisitions we have done to expand our network have really helped us build the business and sell ourselves as an international freight forwarder.

Are there still opportunities out there at a reasonable valuation to find some of these smaller acquisitions on the international side?

Yes, there are. We talked about many times how we focus on finding good agents to move our freight which tend to be small international forwarders and then hopefully have them join our team later on once we get to know each other.

And then finally on the intermodal side, I think you addressed this a little bit, John, on the truck side, but how much of that freight, lack of freight volume, how much repricing is there being done in the numbers as well?

I'm sorry, for intermodal?

Within intermodal, yes.

Within intermodal, there is quite a bit of repricing that is going on. I think we have talked in the previous quarter that I think many other railroads eliminated certain service lanes, which caused a big mix shift of certain freight to go away. And there is quite a bit of price changing going on within each other railroads. So, yes, you see truckload prices escalating. You see rail prices escalating and certain service is going away or coming into the marketplace and so there is a high degree of turn, in terms of a routing decision of truck versus rail and pricing.

And is it the lack of volume growth, are you taking on new customers in that area and so the volume growth or the volume contraction is less than what it would've been, had you not grown with new customers?

Yes. We had quite a bit of new customer activity and quite a bit of freight that we moved intermodal previously that we didn't move.

Okay. That's what I was getting at. Thanks very much.

Scott Flower, Banc of America Securities.

Just a couple of quick questions. I was wondering, and I know it's a small category, but organically the category of miscellaneous which I know has customs brokerage and some other items, has obviously grown fairly rapidly. I was just wondering, are you doing other things beyond just dragging along customs brokerage from the past international acquisitions, or are -- because I know there are some other things in that category. I am just curious what things are going on there.

In additions to customs brokerage, the primary other item in that line item is a transportation management fees where we are earning fees for transportation management, including technology and people outsource where it is more of a process management, rather than making a spread on buying and selling transportation services. So we have a -- I don't know what the best term to describe it is, but a transportation management product that is a fee-based business that is very small to the total, but it is growing pretty nicely.

And then I know you have talked a little bit about it to the prior question about small and medium carriers, but I'm just wondering when you look at your capacity base and I think I've had this conversation with you in the past, but I'm just curious where we stand today. Even though you're signing up a large number of carriers and there is churn, are you really just taking perhaps from more of your capacity, just more share of your existing carriers, even though you may be adding lots of new numbers? I'm just trying to get a sense of where you're able really to pocket new capacity. Is more marketshare with sort of existing bellwether carriers and the churn of new carriers helps you a little bit, but not that much, or actually are the new carriers actually providing substantive capacity when you look at your overall capacity requirements?

The way we think about that is we have a couple of thousand carriers that probably average around 50 to a couple of hundred pieces of equipment that really make up more than half of the supply-side for us. And so those, we would call a medium-sized carrier that really moves a pretty high percentage of our freight.

And the challenge for us is to continue to find and recruit the new carriers or the smaller carriers and hopefully over time, as they grow, we grow with them. So a lot of our capacity growth comes from greater penetration of again what we would call medium-sized carriers. There is always a meaningful component of it that is hauled by the large carriers as well. And then we do get some incremental capacity from the brand-new carriers that we are signing up, but if you looked at it on quarter by quarter basis, you know the carriers that we sign up this quarter and the freight that they move for us this quarter would not be a huge percentage of the total.

I mean, does it take a period of maturation in terms of whether the carrier is durable to where you have actually develop and grow relationship to where they really add? I mean, is that a year? I mean it may be highly variable, but I was just wondering what's the period where you have shakeout versus a new carrier that may be actually meaningful over time as a relationship.

Highly variable is the right statement. We may discover a new medium-sized carrier that we haven't done business with before and be able to grow that relationship fairly quickly. And a fair number of these carriers that we sign up, we do a couple of shipments with them and never see them again. So it really can vary in terms of what that learning or growth cycle is, in terms of turning into a more significant source of capacity for us.

And last quick question. I know that obviously as you grow, you have leverage, but obviously you have done terrifically well in the SG&A front. I am just wondering, are you feeling yourself in some of the facilities or resources in that pocket a little more stretched? Might there be some lumpiness in catching up with some of your growth as we look perhaps into '07 or perhaps second half? I am just wondering how you feel about how good the leverage is versus maybe there is some resources you're feeling a little bit stretched on?

I think, you know, we have talked about our expansion here in Eden Prairie so there will be a slight increase in our occupancy expense here, but I don't think it will be all that noticeable. And, yes, there are things. You are definitely right. There are things that are lumpy, but they tend to occur at different times, so pretty much it smoothes out when you look at total SG&A as a percentage of net revenue.

Thanks very much.

Jordan Alliger, Deutsche Bank.

Good morning. Sal Vitale for Jordan Alliger. Sorry if you already answered this question. I'm getting on this call a little late. But can you comment on the tightness of capacity, maybe give a little color on that and how -- what it looks like relative to, say, a few months ago relative to the first quarter?

I guess comments that we shared earlier is that during our second quarter, from April, May and June, we did see a slight increase throughout the quarter in terms of our volume activity. Our volume growth and typically what that means is when we're seeing a greater volume increase it's because capacity is becoming a little bit tighter. So in general I think we would assess that throughout the second quarter truckload capacity became slightly tighter from April through June.

Thank you. And looking at the SG&A line, just looking at the operating leverage you're getting on that line, you know, I guess other SG&A increased at about 15% year-over-year versus, say, a 25% net revenue growth. Do you expect that relationship from our modeling, should we expect that relationship to be pretty much consistently going forward? In other words, do you think that you can continue to grow your net revenue say at double the rate of SG&A?

No, the growing net revenue at double the rate of the SG&A is more of a function that we talked about earlier on the call of when we have growth above our long-term expectation of 15%, we tend to gain more leverage, just because there are things that are fixed, but there is also things are variable.

So if we were growing closer to our expected growth rate of 15% for gross profits, we would expect the SG&A category to grow hopefully less than that. We always try to gain more leverage, but definitely closer to the rate. You wouldn't see the same sort of spread in a slower growth area.

Helane Becker, Benchmark.

Thank you very much for taking my question. I just have a question about the employees. Is there any -- I heard what you said about part-timers and people in temporary situations and stuff, but is there a way to determine how many of the additional people come through the acquisitions and how many are to support the organic growth?

Well, Sartell had approximately 50 people, the acquisition we did this quarter. If you're trying to compare back to last year's June, if I remember correctly Hirdes had about 100 and Bussini had about 30.

Okay. So the rest would then be -- or considered organic?

Yes, although there are only three acquisitions we have done in the last 12 months.

And then the branch count, going from 170 to 103, is that agents, increasing agents, or is that new branches of your own? How do we think about that?

We don't count agents as branches, so those -- the branch account of just north of 200 is made up completely of 100% owned CH Robinson branches.

Okay. Great. Thank you for your help.

Alex Brand, Stephens Inc.

Hi, this is George Pickral for Alex Brand. I kind of had a broader question for you. You have made a lot of small tuck-in acquisitions over the years in freight forwarding and intermodal. And I just wanted to know does Robinson kind of have a broader product offering goal, or are these more kind of nice side businesses that aren't supposed to get the way of the main truck brokerage?

I would say the broad goal is both, that we clearly are looking first at just high-quality marketshare. There are a lot of smaller transportation service and brokerage businesses out there. And when we look at acquisition candidates, even if they are performing service is identical to what we are doing, we think by including them in the network and sharing freight and routing opportunities that we can be better together and leverage our overhead and do all kinds of good things even if we are providing similar services.

We get more excited about acquisition opportunity when the services that they are providing are different or incremental into what we are doing, much like I discussed earlier on the flatbed capabilities of Sartell acquisition during the quarter. So the primary focus is to just redeploy our capital and to grow through marketshare, but we also are looking to expand the service offerings within the umbrella of third party logistics and the types of services that we offer.

And how are you -- what is your main selling point? By that, I mean are the national sales team still going out and selling truck brokerage or are they going out and saying we have everything to offer, and how they relating kind of at a local level with the local salesmen?

That is very customer specific thing. We have over 20,000 active customer IDs and, for a high percentage of them, we're offering truckload services or less than truckload services or some specific product that they may have a need for, based upon however they define what their needs are.

On the other end of the spectrum, if we have very complicated customers who are looking for assistance with process management or technology help, we have management fee type programs that we'll talk about in very select instances as well. Somewhere in the middle of that continuum, you've got multimodal and all sorts of different transportation or logistics approaches that our salespeople would take depending upon what that customer is asking for.

Great. Thank you for your time and have a good ay.

David Campbell, Thompson Davis, & Company.

You paid, if I heard that correct, $26 million for Payne in the second quarter, which supposedly has roughly or had roughly $8 million of annual net revenues. That seems like a very high price. You must be -- I mean I am not saying, obviously, I am not questioning what you did. I am just wondering, there must be something a lot more to it than just, you know, the $8 million of net revenues. You mentioned expertise and stuff like that, but I mean can you give us any more clues as to what you expect from this?

Well, it is a very profitable operation as well. Net revenue is one factor. You asked our very general guidance as to what their net revenue is. Your estimate may be a little low, but it is very profitable. It is a fast-growing company. And it is in a mode that we're trying to expand. We did play a slight strategic premium to it, compared to our normal valuations.

Is that a business that you have identified any kind of market size for? I mean what sort of potential market do you see coming from that business in terms of the whole market. I mean is it $100 million annual business or a $1 billion business or don't you know?

It is tough to estimate, David, because there is quite a variety of flatbed type services. We have seen estimates that the flatbed component within the truckload sector is a pretty large number, like in the tens of billions, like a very big number. But a lot of that flatbed capacity might be dedicated to the steel industry or the timber industry or something like that.

So we are actually focusing in on a smaller subset of that flatbed industry where the capacity is more universal and there might be backhaul opportunities and different things. So we're pretty confident that in terms of where we are at versus the market that we want to pursue, that it is much larger than we're at today that we can mostly go after it by just trying to hire people and grow the expertise.

And you have, I mean, obviously Payne sold in part because of the opportunities you provide them, but can you add any other comments to that? Why they sold?

You know, I think there were two owners who owned the business and there's probably always a combination of reasons why it is right for them to do some sort of ownership transaction. But when we have gone through any of these acquisition processes, it is generally about showing our network and our technology.

I think there is pretty strong consensus across the industry that you are going to be much better off if you have a broader menu of services and those customers that you are providing flatbed services to, you can also provide dry van or refrigerated or less than truckload services. And we have had some small but early successes in doing that with some of the customers and, conversely, we know that across our customer base where we may be having greater penetration of the freight that there is periodically flatbed opportunities in there that we want to be capable at. So much the conversation around motivation and structure becomes an assessment of, are you really both better off together and going to grow at a faster more profitable rate.

Right. And then the last question is, you haven't said anything about your trends with regard to transaction pricing versus contract pricing in the second quarter, whether there was any significant change in trend there from earlier in the year.

There really wasn't. We talked a lot last year about the fact that the annual or more contractual price agreements in most cases kind of fell apart because of the unexpected escalation in prices.

During the current year there is a little bit more stability to annual or long-term rates that are in place and there is a much higher compliance rate in terms of how transportation or truckload services are being executed versus how they were priced at the beginning of the year. But they are still -- the interesting part of a year is coming in terms of the fall, the traditionally steepest months of September and October with the highest level of activity, where there is the greatest chance for there to be lots of incremental freight and for the truckload environment or the truckload industry to start chasing more transactional freight rather than honoring those contractual commitments. So probably a little bit more stable through the first half of this year than the first half of last year, but the interesting part of a year is yet to come.

Thanks very much for your answers. I appreciate it.

Chris Wetherbee, Merrill Lynch.

Good morning. It's Ken Hoexter. I just want to follow-up on the sourcing business. Just to clarify first, this quarter there were no comps that you had to fight against to get those two acquisitions you made last year, is that correct?

Correct.

Now that you're posting almost the midteens on double-digit net revenue growth, is that -- you had targeted that kind of level growth if you were successful in the business, was ongoing. Is that kind of a level you are comfortable of going forward?

What we had said earlier, Ken, is that based upon this acquisition and our evolution of the business and the customer base that our longer-term target was moving from low single digits to high single digits, and that while we are happy with this quarter and we certainly hope there is more like that in the future, this was probably a little beyond what our long-term or a little above what our long-term targeted growth would be for the sourcing component.

That's helpful. And then on the truckside, you talked about, I guess, increased volumes and the rest driven by increased rates and improved profit margins. Are those profit margins increased because increasing -- well I guess you said that was an increasing capacity or is that mostly just because of the internal cost controls?

Chad talked earlier about how much of the margin increase has come from repricing business that was unprofitable in previous periods and different modes and different lanes where we have just been able to be more selective about the freight that we move.

When we try to analyze our business from truly comparable freight last quarter -- last year second quarter to this year second quarter, for the largest category of dry van activity, the gross margin percentages are very comparable to a year ago. But there is a lot of mixed shift from the different modes that are being brought in with international and intermodal at higher margin percentages. And then there is some customer specific stories on yields and repricing previously unprofitable freight.

And then lastly just a couple of the trucking companies noted that they were seeing some loosening of capacity as we entered July and as, I guess, parts of the economy weaken a little bit. But it sounded like you were saying that each month that it kind of continued to tighten. Can you kind of give a reason why you're seeing a little bit different than what some other facility-base guys are seeing?

What we said a couple times is that are capacity volumes and related tightness increased very slightly from April through June, and we have not made any comments about July.

Okay.

Adam Thalhimer with BB&T Capital Markets.

Just a couple of quick questions here. Most of mine have been answered already. Can you give a quick reminder of where you stand on the truckside, the breakdown of your current mix between retail and manufacturing?

Food and beverage is still our biggest, right around 40%. Retail and manufacturing I think they are both between 15% and 18%. I don't have the numbers here in front of me.

We do have a pie chart that we have used in the past that the percentages would stay really close to that. We haven't updated that for the second quarter of this year yet, but I think Chad gave good general ranges.

Okay. I mean I was just trying to get a sense of whether you have seen some of the weakness that others have seen develop throughout the second quarter in terms of retail volume versus manufacturing, and I assume food and beverage would probably be the same way, where it has been more throughout the second quarter.

We can't really tell on a month-to-month basis which of those industry groupings is driving the volume or not. We can sort of sum it up at the end of a period and look at what made it, but it is not -- we are not able to conclude which if any of those sectors drove the tightness or our increase.

And when we categorize our customers, we are talking about what business the customer is in, not what commodity is being moved. So much of our retail activity is actually food and beverage as well.

Okay. And then longer-term, can you just give a bit of where you want to be say in a year or two on the intermodal side? Is there a chance you'll try to grow that business more aggressively than you are now?

We have been completely committed to growing our intermodal business as fast as we can, and we also have been and still are open to acquisition or whatever might be appropriate to try to penetrate that market and grow it as fast as we can. We don't have a predetermined target or size of how big we want to be or how big we think we need to be, but we're just going to continue to market aggressively and build relationships with the railroads and hopefully penetrate the marketplace.

So it is hard to say exactly what our goal would be for a year out very similar to the overall business. We have a long-term 15% market penetration goal. We have had times in the last five years with intermodal where we have had 20% to 30% volume or transaction increases, and we were taking a lot of market share and gaining some larger commitments. And most recently we have had flat to declining volumes with a lot of margin improvement as the rails have really redirected more of a focus on yield improvement and some of that freight went back to truck, or either that or we walked away from it.

So there will be different growth spurts and different phases of evolution, but our general attitude would be long-term 15% growth riding through the various cycles of that mode and staying open-minded to what type of additional investment might really be able to allow us to grow at a lot faster rate.

Thanks, guys. Congratulations on the good quarter.

Follow-up from Ed Wolfe.

Yes, I just wanted to follow up if you have seen any activity from the government on the FEMA contract, the hurricane release stuff, if there is any activity or you're hearing the timing of that?

We have not. I do know that there is a lot of different government related bids that are out or in process in one way or another, and we are evaluating and potentially participating in some of those, but no activity through the end of the second quarter in terms of freight volumes or anything that we know of that we will be participating in.

I am asking about the large bid, the one that Landstar currently contracts. Is there any sense that the '07 bid is out or timing of when that might happen? I know you've talked in the past about being interested in it.

I haven't seen it. We haven't seen it. I am not aware that it has been put out.

Is the acquisition of a flatbed carrier in any way related to government business; are there hopes to get more?

No.

Okay, thanks a lot then.

(OPERATOR INSTRUCTIONS). Jon Langenfeld.

You know, John, when you look at the seasonality of your earnings prior to the last couple of years with the disruptions in the second half of the year, you had very similar trend, I think, from the second quarter to the fourth quarter. My question is, is there anything inherent in your business profile today that is different than it was throughout the previous decade that would prevent kind of a reversion to that type of seasonality?

Like you mentioned, John, the last couple of years there has been great turmoil in the market in the second half of the year, and I would say that the change compared to our historic levels of the second, third, and fourth quarters, being very similar from an earnings perspective, was related to that turmoil, not related to the structure of the Company. So I don't think that there is anything structurally changed about Robinson that would cause us to react differently.

Okay. That was my question. Thank you.

Thank you. Management, at this time I'll turn it back to you for any closing comments.

Thank you for participating in our second quarter 2006 conference call. Before we conclude, I want to remind you that this call will be available for replay in the Investor Relations section the CH Robinson website at CHRobinson.com. It will also be available by telling 800-405-2236 and entering the passcode 11065323 pound. The replay will be available approximately 2 PM Eastern time today. If you have additional questions about our second quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you, ladies and gentlemen, that concludes today's teleconference. We thank you again for your participation and at this time you may disconnect.