羅賓遜全球物流 (CHRW) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2006 Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded Wednesday, October 25th 2006. I would now like to turn 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 will provide some prepared comments on the highlights of our third quarter performance, and we will follow that with a question-and-answer session. I would like to remind you that comments made by John, Chad or others representing C.H. Robinson may contain forward looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.

With that, I'll turn the call over to John.

Thank you, Angie, and good morning everyone. As Angie indicated, last night, we sent out our third quarter earnings release. Our approach in our communication is that we believe all the material information about the quarter is discussed in that release. I have a few prepared comments to emphasize a few of those highlights, and then we'll open it up for questions. Starting with some of the summary financial highlights. For the third quarter, we had gross profit or net revenue growth of 21%. We had operating income growth of 30% and EPS growth of 29%.

Every time we speak with our shareholders, we like to remind them that our definition of success is sustained 15% growth at both the net revenue level and EPS growth. So we're proud of these results. Our 6,500 employees worked hard and made it happen again in the third quarter, and we're happy with the results that we posted.

We've had several quarters in a row now where we've been able to exceed our long-term growth rate. Many of our comments for this quarter will be similar to those that we've discussed the past several quarters, but I think it's important to talk through them again, as some of them have changed slightly. When we talk and plan for the execution in our core growth and our long-term strategy, we spend a lot of time and focus on things like people, process, productivity, service, relationships and technology. Success in these areas are what drives the long-term success at Robinson.

As we discuss the things that impact us more short-term, I think, it's really important that we not lose sight of what our long-term value drivers are and the success that we're having during the current year on those long-term core principles that are going to drive our sustained success. Moving back then to the shorter-term things that impacted the third quarter that we've discussed before. The primary items that have helped us to achieve the results that are in excess of our long-term growth goals are three things that we've highlighted before.

Strong demand and pricing in the North American truckload market. That was a factor again in the third quarter. I'll come back and talk about that more in comments about the specific modes in growth. Second point that we've discussed before that was again an impact is leveraging our network that we do have some fixed costs in our business. While we work hard to make the business as variable as possible, there are some fixed costs.

And we said many times before that when we have high revenue and high net revenue growth in excess of the 15% planning framework that we use, we can leverage our network and hopefully generate operating income and EPS growth in excess of that net revenue growth. That happened again in the third quarter of 2006. The last item that we've highlighted that was again a factor in the quarter is acquisitions. The impact of acquisitions in this quarter is detailed in the press release and was less significant than it's been in some of the previous quarters.

We had about one-half of a quarter of results from the Hirdes acquisition that was completed in August of a year ago, and the full quarter results from the Payne Lynch acquisition that we discussed earlier this year. Those two combined really did not have a very significant impact on the quarter, and the results for the third quarter represent primarily organic growth.

So at an enterprise level, we had a good quarter with solid execution of the base strategies and the things we think will drive our long-term success with some added growth from the North American truck market and the ability to leverage our network and the fixed costs in the network during a period of high growth.

Moving back then to more specific comments by mode. Let's go back to the North American trucking marketplace. In our press release, we commented that our growth in truck net revenues slowed, as the quarter progressed. For the past couple of years, we've been talking about the tight truck market, meaning the tight trucks or short supply relative to the demand of freight in the marketplace.

Over the past couple of years, and especially last year, we talked about how that tight truck market was leading to a lot of different and new dynamics in the marketplace, with some of those things being unprecedented price increases; deterioration of some of the service metrics, especially things like load acceptance ratios and the way freight was being routed and accepted in the marketplace; more fluid price changes in the marketplace; and more unplanned or transactional freight happening.

If you go back to the second half of '05, especially in October of last year, things were pretty tight and chaotic in the truckload marketplace. We were coming off of the hurricane activity. There were many truck stops that were having serious issues with fuels, with fuel supply, fuel prices were at a very high level, and there was a lot of chaos in the market and a very high degree of transactional or unplanned freight. As we stated in our press release, we are not experiencing the same relationship of supply and demand as we were a year ago. A couple of points to consider or think about in listening to that statement.

First, is that when we talk about a tight and loose truck market, it's a relative statement. While the truck market today is what we believe looser than this time a year ago, there still is a fair amount of demand, and we are moving more freight than we were at this time a year ago. It's just in the relative statement of supply and demand. We feel the market is looser than it was at this time a year ago.

Another thing that we've talked about quite a bit in the past is that markets are much more automated today, and with that comes the ability for everybody to react quicker and create more volatility in the market. So we see as great as swings as ever from a day to day or week to week basis in terms of how things can change from a supply and demand perspective and how pricing can move.

Last comment to consider is that while, obviously, both the supply and the demand in this equation can move, we've said before that we believe the demand side or the freight levels are the shorter-term variable that can move quicker and create a more short-term impact on the supply and demand.

So when we think on the short term, like a couple-month basis, about the market being looser, we believe that freight levels being less than contemplated or less than people expected is what creates that looser environment. There still remains some very serious long-term constraints to supply around driver shortages and different congestion issues that are going to be with us and create different dynamics and future periods. But for the supply and demand during this period of time, that's our assessment of the marketplace.

As most of you know, we do not give short-term earnings guidance, and normally in our communications practices, we really only like to comment on quarters or months that are complete. The primary reason for doing this is that it's very difficult. Given the changes in the North American truckload market, we did decide to share what we know for the first three weeks of October regarding the North American truck market.

We commented in our press release that the market is still relatively soft to a year ago, and that includes the third quarter trend carrying over into the first three weeks of October. I know that for a lot of you, you would appreciate for us to attempt to quantify what that means and what that growth rate looks like. Couple of things around that.

When we look at growth rates, especially at mid-month or mid-quarter, some of the things that are unique to our business that makes that difficult are that there are a lot of factors, there are business day variances from a month to month standpoint that we believe have a disproportionately large impact on our type of businesses. We have day of the week variances with weekends and certain weekdays having different volume activity.

We have very volatile comparisons from a year ago, where there was a lot of unusual activity going on, and we have shippers with a lot of different month-end programs -- some with more emphasis, some with less. So given all those factors, even with one week left in the month, it's very difficult to project what growth rates might look like.

Having said that, if you run all the different variations around our metrics and our forecasting, what we can tell you is that North American growth rates on the truckload market for October could be as high as high teens growth rates or could be as low as a 10% to 12% growth rate, depending upon the assumptions that we would make on all of those variables. Again, it's very hard to predict, but we've chosen to share that to make sure that you understand that some of the trends that we've discussed that carried into October that you get a little better feel for what we mean by that.

Our results in the quarter for the other modes and services, including freight forwarding, sourcing, and T-Chek, are detailed in the press release. The only real prepared comment on those modes and services is that we do continue to feel very positive about the progress that we're making in building out those different sources of revenues and business lines, and I don't really have any further prepared comments about them, as I think they're detailed in the press release.

Just a few comments about our people. Hopefully, one of the things you did see in the press release is that we do continue to invest in building our network. We did have a headcount increase in the third quarter of slightly more than 200 people, and we did open seven new offices during the quarter. I believe five of those offices were in the North American transportation sector, and two of those offices were global forwarding offices.

I mentioned before the concept of kind of our training -- I'm sorry -- our core growth drivers and what drives our long-term success. The hiring, training, and opening of new offices are a very critical part of that kind of core foundation in our long-term growth factors that we continue to focus on in the quarter.

We've mentioned before, and I want to say again, that we are sensitive to adjusting resource levels and managing our people given changes in the marketplace and different growth conditions that we see. But at the same time, the balance is that we do remain focused on creating long-term value. And we do anticipate continuing to expand our network with more people and with opening offices the remainder of this year and into 2007.

The last prepared comment that I have is with regard to litigation. Some of you may have seen there were a couple of court rulings during the third quarter. One approving the class action settlement around pay and promotion matters that we've discussed previously. There was a tentative settlement that was announced, and the court approved that. So it was finalized during the quarter.

The second ruling was the decertification of an FLSA collective action that remained open as over a quarter ago. What these two rulings by the court mean for us is that we do not have any further active litigation on a class basis. We do have exposure to some individual suits that may result from these rulings, but we do not expect any material exposure from the individual suits.

So that concludes our prepared comments for the third quarter. We'll now open up the lines for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Jon Langenfeld with RW Baird. Please go ahead.

Good morning, all.

Good morning.

Question for you, I guess, on the gross profit per employee. I know that's a metric that you guys look at, or I believe it is, and it's something that you've been able to continue to expand. I think there's only been a couple times where it's been down year-over-year. But if you look at that metric, do you still have enough flexibility to manage that, even if the growth rate goes from -- let's say the 25%, 30% like you've been at on truck down to 10%, let's say?

I think that we do. Jon, one of the things that you have to be careful is that, as we grow and expand, we're adding people around the world in different countries with radically different wage scales and different lines of business, where labor relationships are different, particularly in freight forwarding like in Asia and South America.

And then, even within produce and the different modes, the productivity metrics and the labor metrics that we look at are fairly customized to each type of business line. So we do -- that is a very key metric, gross margin per employee is one of the key metrics that we look at in assessing branch productivity and performance, and we do have hopes and goals to continue to improve that regardless of market conditions.

Okay. Good. And then is it a surprise to you at all when you think about the growth -- you made the comment on the gross margin percent not expanding as volumes decelerated. I guess that's a little bit a typical, but then the last several years have been atypical. You know, is that -- how do you look at that relative to history?

Well, the first important point is that gross margins relative to a year ago have expanded. Like, we talked about in the press release. The comment around gross margins staying constant really were throughout the quarter.

September was our biggest month, just like it usually is in the third quarter, Jon. So we move more freight in September. It's just the growth rate slowed.

Okay. And I guess maybe as differently -- it seems like historically, when things have softened, you've had a better buy rate on the transportation, and so you've had -- you've been able to soften things -- soften the gross profit dollars. The growth there has still been maintained. So is that something you'd expect moving forward, or has that relationship fallen away?

I think, from a longer term view, we would expect that to continue. On a month to month basis, it's more difficult to predict that.

Right.

The other thing that is maybe different, though, that perhaps you're touching on as well too is that, as the market has become more fluid from a pricing standpoint, if there is less freight that is being honored on year round or contractual pricing, there probably is going to be a quicker movement or correction of some of these things. But, again, that's very difficult to predict. The long-term forces of supply and demand and pricing and volume and margin expansions, we think, are still in place.

Okay. Good. And then lastly, on the Intermodal side, is that still a pretty fluid buying decision from the customers you're dealing with in terms of moving between truck and Intermodal as capacity and rates change out there?

Yes. For our customers, it is.

Okay. Very good. Thank you.

Our next question comes from Tom Wadewitz with JP Morgan. Please go ahead.

Yes. Good morning. Let's see. I wanted to ask you about some of the operating margin expansion. You did have the slower growth in net revenue in year-over-year in third quarter versus what it was in second quarter. But looking at the operating margin expansion was, I think, about 250 basis points versus 110 in second quarter.

And I'm wondering if you can help us understand what would have driven that stronger margin expansion, and if that driver can continue over the next few quarters.

I don't -- it's very difficult to give the exact reasons why it does, but like we've said, there are leverage points within our business model that, when we grow, we do gain leverage. How much of that leverage is going to happen quarter-to-quarter is very difficult to predict. And like we've said many times, we don't necessarily plan for it but we manage the businesses as efficiently as we can. So we continue to exceed our own expectations from margin expansion. So it's very difficult for us to predict the future.

And I would add one point on that. Since personnel expenses are the largest item that drive that operating leverage or efficiency, as most of you probably know, we have a very high degree of customized compensation programs that adjust for differing levels of growth activity. So depending upon precisely where our growth comes from, it can have varying impacts on compensation levels.

So that's one compounding reason why the point that Chad made is very difficult to estimate or analyze because we try to keep it variable, but there are some fixed pieces. And the interrelationship between the two is sometimes difficult to predict. But we know, when growth rates are higher, it generally leverages more.

So there wasn't anything in either personnel expense or in SGA within the quarter that was unusual or that you wouldn't be able to duplicate in fourth quarter, in terms of cost control?

Nothing material, no. Every quarter there's things both positive and negative, but there's nothing significant to comment on.

Okay. And then as you look to -- you commented on some slowness in the truckload market and who knows how long that persists. But in terms of how you plan out your headcount addition and being a driver of growth, is that something, if you see this slow growth in the truckload market for a slow quarters, you mean you would scale back the headcount addition or is that the type of thing where you just kind of look longer term and maybe bear a little cost pressure and you continue to add headcount at the same pace?

Headcount decisions are generally made locally with some guidance from us around productivity parameters, so that -- the precise staffing decisions will be a collective decision based upon the business model and the network and the parameters. And those parameters would limit hiring if growth starts to taper off.

At the same time, there is some flexibility. And we do exercise some discretion to continue to invest or staff up in different modes or different regions or locations if we have a pretty positive view of what's there. So we don't make one master decision that we can share with you around how that dynamic is going to work, but it's very much a part of what we talk about and how we manage the business.

I mean would you -- is that fair to think that that might slow a bit, given the slowness you saw in the truckload market or is that extrapolating too much?

We really don't make decisions off one or two months. So at this point, it would be too premature. But if the market got really soft and business really slowed and we went into a recession in 2007, we would absolutely taper off our hiring.

Right. Okay. Thank you for the time.

Yes.

Our next question comes from Ed Wolfe with Bear Stearns. Please go ahead.

Good morning, guys. John, I don't think I've ever heard you put this kind of language. Maybe I'm just over reading it. But you wrote in -- and if you said this before I jumped on, I apologize. But you gave language that said our growth in truck net revenue slowed as the quarter progressed. Gross profit margins are consistent throughout the quarter. Volume growth slowed. Is the implication that in September and October basically, gross and net are growing at similar levels on the truck side? Am I reading that right?

No. We're talking sequentially during the quarter versus comparing to last year. We also said in the press release our gross profit for our truck business -- gross profit margins were up.

No. I can read that they're up year-over-year. But the fact that you said it went into October, and I haven't seen you do that before. Am I over-reading to say that you're to some degree giving us a bit of caution when looking at those numbers or not?

Yes, Ed. And we did -- I think you probably did miss some of the conversation in the call, because we did talk during the prepared comments about the fact that since the trend did carry over into October, while we normally don't like to give guidance or talk about months that are incomplete, we did feel it was important to share that the trend line did continue into October given the changes in the market.

Okay. And historically, less volume means more margin. So if you're seeing a little bit less volume and not more margin, what's different in the marketplace?

We've talked about that already too. And it's really about the same gross profit margins are sequentially quarterly. But there is more gross margin percentage compared to last year, which is what we're comparing the volume growth to.

So it's the tough hurricane comp, basically, you think?

That's a big part of it, yes. Last October, the hurricane was one factor.

When does that comp become easier? Is it November, December?

Again, we talked about the challenge of looking all the different metrics and depending upon how you measure it. But by most of our metrics, we believe October was our highest growth percentage last year. So that comparisons would start to taper off in November. But again, as we've mentioned several times, it's a very volatile market with things moving pretty quickly.

And how should we think about fuel with fuel quickly coming down at the pump and surcharges lagging in your different models? How should we think about the impact of fuel when fuel is coming down or conversely if fuel is coming up?

We have always believed and continue to believe that fuel should be a pass-through and not really have an impact on our results. It's one of -- it's a great example of why we focus on net revenue rather than gross revenues. It obviously will have an impact on gross revenue, growth rates, because that's a big component of the billing that we put through. But it's a good example of why we focus on net revenue growth and profitability. So we manage it. It's a factor. But we don't believe it impacts our results.

I mean, I certainly understand that and know the model well enough that that's the case over a period of time. But you would think, when it's coming down and you're billing at one level and then your costs are coming down at another level, that doesn't benefit you at all in the quarter in that scenario?

No. I mean -- since the market -- especially since we've moved to a fairly transactional model with a lot of fluid pricing. And I think because of the magnitude of the increases and changes over the last couple of years, everybody is pretty sensitive to it, and it's adjusting pretty fast on both sides.

Okay. What should we think about in terms of the tax rate, Chad?

Where it was for the quarter is relatively where we expect it to be. Like we commented last quarter, our go-forward rate should be between 38 and 35, but there's going to be fluctuations.

Okay. And similar for next year, no major reason for change there?

Not that we know of now.

Can you update on the capital expenditures? And I think there was some buildings or land. There is something you were looking at.

Yes, it's consistent with the comments we made last quarter. We spent somewhere between $11 million and $12 million this year building out here in the Eden Prairie, and plan to do another 11 or 12 in the fourth quarter. And then there will be about 13 to finish out the project next year. And that's above and beyond the normal CapEx, which is currently running in the $6 million to $7 million range.

Okay. And how should we think strategically? Over the last couple of years, you started to make more tuck-in acquisitions and more out of the core tuck-in acquisitions, if you will? Should we think, in terms of cash flow that that's probably the continued use? More share buybacks? How should we think about that?

Yes. The message there hasn't changed. We continue to and expect to continue to look for the right deals, but we're very selective. And if we don't find ways to redeploy our cash, one of the things we will do is continually look at our dividend levels and our share repurchase levels.

Okay. Thanks, guys.

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

Thank you, guys. Good morning. First question here. You didn't specifically talk about peak season in your commentary, I assume. Like everybody else, you've seen -- later start to peak versus last year. In your experience, if that assumption is correct, what does that typically mean for you guys? Do you then see more of a pickup in the November, early December time period?

No. I think that's difficult to gauge. Like one of the things that Chad mentioned earlier is that -- when you think about peak season, there is more freight moving in September and October than in other months of the year. And we continue to experience that. It's just looking at relative growth rates and comparisons from a year ago. It's difficult because of some of the high growth rates of a year ago and some loosening in the truck market.

So we do feel that -- the peak has not been quite as intense as it was a year ago. Whether that's a high degree of shippers who are -- most shippers or a lot of shippers try to move freight out of peak season to avoid some of the difficulties. So if it -- it could be indicative of some shippers moving freight around and having more freight late in the season. It could be that some had more earlier. It's really difficult to understand what it's going to mean for next week or next month.

Okay. Fair enough. Second question would be, can you talk a little bit more about Payne Lynch, now that you've had that for a full quarter. What you've seen since you've gotten in there? And then you said the contribution was minimal for Q3. What about the outlook for the contribution going forward?

The Payne Lynch acquisition, which we do have for the entire third quarter, I believe, represents about 1% of the growth in the truck net revenue. And just to be clear, we're very happy with the acquisition. That is on plan for what we anticipated when we bought it. It's just not a large enough business that the results of it are material to the consolidation.

But what Payne Lynch became was our Sartell branch. It's one of our branch offices that's within the network. And what we've seen in our first four to five months of ownership is that we feel very positive about how that team of people have been able to convert onto our operating system and continue to service the customers that they had prior to acquisition and continue to move the freight and work with the carriers that they had in place.

But also begin to work with the rest of the network in terms of sharing freight and sharing capacity and do what we would call cross booking on sharing those services across the network. And because of that, we feel very positive about the acquisition and how it's progressing.

Okay. Thanks. Final question here. On carrier recruitment. Does the easing of truck capacity overall or the slightly decelerating freight environment either make it easier for you to add new carriers to your network or, for the existing carriers, are they coming to you more frequently looking for loads? Have you seen that yet?

We've continued to add carriers fairly similar to what we have in previous quarters, and I don't know that that dynamic has really changed from the short term looseness in the market. On a day-by-day basis we solicit available equipment. And in a loose market, you generally hear about and [feel] more availability of equipment from existing carrier relationships. So yes, that would definitely be occurring.

Okay. Thanks for the time.

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

Hi. This is George Pickral for Alex Brand. In this slowdown you've seen, has it come from any one segment? i.e., I know you don't do much industrial but for hi-tech or retail have you seen it anywhere specifically?

No. We really haven't based on type of our customer. But another important thing to remember is we are continuing to grow, it's just the growth rate has slowed.

Okay. Well, based on that growth then, has the spot contract mix changed at all? Or is it still about 75/25?

We've talked in the past about the difficulties of making those estimates. So we really wouldn't estimate it at 75/25 today, but the trend over the last couple of years is clearly that pricing has moved to be more fluid, and there are less longer term contracts and longer term pricing commitments in place.

And that is still the case today. I think that's one of the interesting dynamics to watch over the next year or two is does pricing stabilize? And if so, what does that do to what carriers and customers will commit to and how the length of pricing in the marketplace.

Okay. I guess back to the growth question. Are you seeing it in any specific geographic region? i.e. is it a little slower coming out of the west coast where intermodal has been strong?

No. We really, as Chad mentioned earlier, while growth rates have slowing, we really haven't seen any regional or lane or industry variances that stick out.

Great. And last question. Have your -- are you getting better rates in the market because of the larger truckers having excess capacity, or have they remained relatively stable for you?

There are certain lanes or certain days especially where rates are falling compared to a few months ago or in some cases a year ago. So yes, when we see a loose market like that, that's indicating the supply and demand of capacity is changing, and there will always be instances where rates will either be staying the same or transactionally dropping.

But overall, rates are still up compared to a year ago.

Great. Thank you for your time.

Our next question comes from Helene Becker with Benchmark. Please go ahead.

Thank you very much, operator. Thank you, gentlemen, for taking my questions. Just any IT CapEx that we should be thinking about in the '07 timeframe to kind of bring all the acquisitions on one platform?

No. There hasn't, in the last year or so, there haven't been any real significant IT expenditures because of acquisitions. Most of them have been folding on to our existing systems or continuing to run on their own in the case of Hirdes in Germany.

Okay. And then just so I understand this and you don't get a mark. I mean, from the past year, you don't get a margin on the fuel. Is that right?

Correct. It's impossible to measure, but we believe it's somewhere -- it's pretty much a pass through as John mentioned earlier.

Got it. Right. That's how I've always thought about it, but I've heard some talk in the marketplace recently that you do get a margin on fuel, and that was confusing to me. So I just thought I'd get it clarified. Thank you.

The reason why it can be confusing is because there are surcharges that adjust for fuel with both shippers and carriers, and sometimes -- you may have one shipper that's tendering you thousands of loads, and you have one fuel surcharge index.

And then you may be using hundreds of different carriers, some of who have preset fuel surcharges, others who negotiate daily rates that include fuel. So in the mechanics of it, oftentimes there can be misperceptions or misunderstandings of whether fuel's included or not. And sometimes people believe you're making money on fuel or when you're not or vice versa. So in day-to-day practice, it can be confusing.

And historically, what we've said is fuel is somewhere between a straight pass through and we make our normal 15% margin on it, and it depends on the particular transaction.

Okay. All right. That's very--.

Go ahead.

I was just going to say that's very helpful. Thank you.

Okay.

Those are all my questions. Thank you.

Our next question comes from [David Mack] with J Goldman & Company. Please go ahead.

Hi, guys. I had a question for you on the break down of net revenue. You've been trying to grow intermodal, air, ocean, and other as a percent of the total. And I guess, when you have truck growing so fast, it's tough for the other groups to keep up.

But when I think about the company in the next year or two, what kind of percentages of contribution should we think about for the non-trucking segments as a percent of total net revenue?

We don't have any precise plans or projections around that. One of the things that we have shared is that -- from an investment standpoint, near the top of our priorities is looking for freight forwarding offices and relationships in parts of the world where we don't have a presence today.

And given the North American market share landscape around trucking and intermodal and other services, given the fact that acquisitions in global forwarding are slightly more probable than the rest, when we think about the future, there's probably a little bit greater likelihood that you'll see a higher percentage of those types of modes and services.

But, again, as we've discussed many times around our acquisition criteria and our selectiveness, that even those aren't for sure unless we find the right types of opportunities.

And within trucking, how much I don't know if you'll answer this, but how much of the trucking net revenue is domestic versus Europe or other continents?

About 97% North America, about 3% Europe. We do have a meaningful presence in Canada and Mexico. I'm not sure exactly what percentages they would be because a lot of the freight crosses the border, and we just look at it that way. But we do have -- not more than 10%, but a meaningful presence in both of those and we do look at it as North America.

Okay. On sourcing, Wal-Mart has been talking about well, increasing -- their produce business, but also regions where the produce will come from. Does that have any impact on your relationship with them?

Yes. I mean, Wal-Mart is our largest produce customer and has been for a number of years. They have many suppliers and we have to, compete and bid for everything that we do. But the fact that they are very growth oriented, particularly in the food category, has continued to create growth opportunities for us in our produce business.

And so any shift in regional sourcing is not necessarily a negative for you. It could be I mean, are you tied to any particular region for where you're sourcing?

No.

Okay. Great. All right, that's it. Thanks a lot.

Our next question comes from Donald Broughton with A.G. Edwards. Please go ahead.

Gentlemen, I'm looking at your model and I mean correct me if I've got this wrong. But really given the visibility you have of loads available on any given day, and this is true in truck and I'm sure it's true in any other modes.

And given the visibility of equipment you have available on any given day, your model really works best when you either have a large imbalance, that being way more loads than there are trucks available, or way more trucks available than there are loads, thinking about that right?

I guess that's depends upon your definition of working best. If you want all the shippers and carriers to go home happy at the end of the day, it works best when it's imbalance. When it's out of balance either way, our network is scrambling to try to either find additional capacity or reroute or share or find additional freight to move that empty capacity. And, it really depends upon the environment that we're in.

Well. Let me put it another way then. It's when things are out of balance that you have the greatest opportunity to add value to the equation?

In the transactional marketplace, that's probably true. That we can help the most when there's an extreme imbalance one way or the other. Oftentimes, though, with a customer relationship, we add a lot of value by helping to plan out the year and execute contracted freight on a more reliable basis. And it's tougher to do that when things are way out of balance. It's a pretty relationship specific question.

So, well, bear with me then. So if I -- the conversation that's being held in the marketplace right now is this extended peak. Peak's been delayed. If retailers get closer and closer to the holiday season and begin to get caught short on inventory, doesn't that portray the potential in which there's an imbalance that you guys can help people out with?

That could be true, yes.

Don't care to elaborate any further?

You know, I think it's -- I'm trying to think what else might be helpful or insightful. If the assumption is that the peak season is going to come later and that there will be more freight compared to a-year-ago in the November-December timeframe, it will really depend upon how that incremental freight compares to the supply that's available during the November-December timeframe. But whenever there is a surplus of freight and a lot of unplanned or transactional freight, yes, that's a very good opportunity for us to try to help our customers.

Very good. I'll let someone else ask a question.

Our final question comes as a follow-up from Ed Wolfe. Please go ahead.

Just directionally, some thoughts on the truckload market generally. You guys have been very early and very right on, and in very real time in your perceptions that there were a lot of smaller guys getting in the markets over the last couple of years. Are you starting to see more capacity available with the larger guys at this point, and/or are you seeing smaller guys starting to exit at all?

We continue to sign up a pretty high number of small carriers during the quarter. Again, one of the comments that I made earlier is the supply side tends to correct on a much slower, more gradual basis. It's our view in the marketplace that the short-term dynamics are driven more by the freight levels.

So what we've seen in the last few months is clearly more available equipment on a spot market basis from large carriers and all carriers just due to the loosening of the market. But we don't believe that on a couple month basis -- the short-term trends on the supply side really have that much of an impact.

Have you seen, though, some of these larger guys? I know -- typically your suppliers look like the market and the big guys are a small piece of that, but they've been even a smaller piece of that recently. Is that changing at all, or do you expect that to change?

Not materially. You know, it can change in certain lanes. If they start to -- if larger carriers start to see a real high degree of imbalance and make equipment available very cost effectively in certain lanes, we can plug them in more, but, nothing measurable that I can think of to this point.

Are you seeing existing carriers now with more capacity available for you because demand is weaker?

Yes. That would be the characterization of a loose market, yes.

Compared to last year.

Compared to a-year-ago, yes.

Okay. Does that give you some sense and concern in your planning that maybe some of these guys, after peak or supposed peak, come January or February, might hang it up and be ready to head out of the market?

You know, Ed, from a longer-term perspective, every January, February, people park or take some time off or leave the market, and I guess part of the message that maybe we haven't emphasized enough is that to us, from a longer-term basis, you don't know when the market is going to soften, and we couldn't have and didn't try to predict this.

On the other hand, it all feels very natural and very typical of long-term swings and supply and demand of the market. So I don't think there's anything about what might happen in the remainder of this year going into next year that we would see as troubling or anything that's threatening to what our long-term principles are of how we're building the business.

Thanks. That's a beautiful model you have. Thank you very much.

We do have a question from Ken Hoexter. Please, go ahead.

Hi. Good morning. I just wanted to check. Chad, I don't know if you mentioned this when you were going through your original presentation on T Chek, should we see that decrease significantly on a growth rate if you're seeing decelerating volume trend?

Well, one thing that happened with T Chek over the past year or so is they did change some of the rates they were charging small independent truck stops. If you remember, we get fees both from the carriers and the truck stops. And we had a cap in place on some of our percentage based relationships. So over the last year, we've seen some pricing benefits.

We have pretty much grandfathered all of those, so now it's going to be down to volume growth. And, again, the volume growth in T Chek is subject to the volume growth in the total transportation market, but it's not necessarily tied to Robinson's volume growth. So T Chek could continue to do better or worse regardless of what Robinson's volumes were doing.

So based on whatever customers you're using?

Yes. It's whatever carriers are using us.

And then just another follow-up question on kind of the net and gross. I mean, obviously, net significantly outpaced growth. I just want to understand what John was saying, that this is net was -- or gross, you don't focus on as much because your fuel intake is, obviously, when fuel comes down, you might not see that also in a decelerating market, but you can still accelerate on the profit side. Can you maintain a pace for an extended period of time where your net is outpacing growth, or do eventually they -- will they fall back in line with each other?

Well, there is also the -- we don't give gross revenues by mode, so you're looking at transportation as a whole. So there's also the factor of other modes becoming bigger or smaller parts of the mix, when you look at total gross profit percentage.

So profits are greater at certain at other modes.

Yes, like our miscellaneous transportation is close to 100% gross profit margin, and that is growing as an example of why our overall gross profit percentage could continue to grow, even if our truck margins are staying consistent.

Very helpful. Thank you very much for the time.

Okay.

At this time, we have no further questions. I'd like to turn the call back over to Ms Angie Freeman. Please, go ahead.

Thank you for participating in our third 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 of the CH Robinson website at chrobinson.com. It will be also be available by dialing 1-800-405-2236 and entering the password 1107-3232 pound. The replay will be available at approximately 2:00 pm. Eastern Time today. If you have any additional questions about our third quarter results, please call me, Angie Freeman, at 952-937-7847. Thank you.