羅賓遜全球物流 (CHRW) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the C.H. Robinson fourth quarter 2006 conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call 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 fourth quarter and year end 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.

Last night we sent out our fourth quarter and year-to-date 2006 earnings report. I'm assuming that everybody who is on the call has had access to that, but I want to highlight just a couple of the key metrics that we look at that I'm going to refer to in my comments.At the gross revenue line item during the fourth quarter, we had 3.7% growth to 1.6 billion.

Year-to-date that number was 15% growth to 6.5 billion. At the net revenue line item, fourth quarter growth was plus 18% to 278 million. Year-to-date plus 23% growth in net revenues to 1.082 billion.

Income from operations is the next key line we look at. Fourth quarter growth was 19%, year-to-date growth 28%, we also look at income from operations as a percentage of that net revenue, which was 38.6% for the year. Last metric is earnings per share growth, which was up 32% for the year.

Every time we have one of these calls, we like to remind everybody that our definition of success has been and will remain sustained 15% growth in all of these categories, so that's what we're targeting. And overall for 2006, we think our people did a great job of executing and we reached our goals and our growth goals and most of our metrics and we feel pretty good about our results for 2006.

Specific comments by revenue type starting with truck load and the North American truck load market. For those of you who follow our story and have listened to the calls for the last couple of years, we've talked consistently about both volume growth and margin growth driving net revenue growth for many of those periods in excess of our long-term growth rate of 15%. There's been a lot of discussion about how those volume end margin increases have been driven by unprecedented industry price increases and growth in the demand for North American truck load services.

During the second half of 2006 and especially during the fourth quarter of 2006, I believe that everyone in the industry is relatively aware of the fact that the growth in the demand for those North American truck load services slowed significantly. During our fourth quarter, our slower gross revenue growth was a function of modest price declines and fuel declines leading to what we would estimate overall mid single digit pricing declines.

We had volume increases, which we believe were driven largely by market share and customer expansion in our growth. And then some margin expansion that did allow us to achieve our long-term targeted growth rates in net revenues for the quarter.

In the intermodal mode, as we stated in our press release, the fourth quarter was the continuation of the environment we experienced throughout 2006. We've talked before about how the market condition changes over the last couple of years have resulted in quite a bit of service changes and price changes in the rail networks and how most of the freight that we work with is multimodal freight that can go by truck or rail services. As a result of continually reevaluating what types of freight and what types of services are appropriate on the rail, we continued to move less volume at higher prices for our rail partners and higher margins for ourselves during the fourth quarter of 2006.

In the international forwarding arena, we've talked in the past and we continue to build out our network by expanding into parts of the world and regions where we don't currently have a presence. Last year, our primary acquisition was in Germany. We acquired a company in August of '05 that has been with us for a little more than a year.

During the fourth quarter of 2006, our growth in the global forwarding piece was almost entirely organic. There was an additional acquisition in December 1st of 2006 where we acquired a business in India while the revenues of that acquisition were not material, it was a pretty important strategic move for us to establish our presence in a part of the world where we previously only worked with agents. So we're pretty excited about that company and the growth of our network in that part of the world.

In the sourcing area, we've talked before again about how our sourcing team manages both the buying and the selling of fresh fruits and vegetables. But in addition manages the perishable transportation and produce freight within Robinson. Our sourcing division had a very successful 2006.

You can see the sourcing net revenue growth that's carved out. And that team also has contributed meaningfully the truck load net revenue growth as I mentioned on the produce and perishable freight. We continue to integrate and grow with the FoodSource acquisition that we completed a couple of years ago and feel pretty positive about how our produce division continues to identify and work with new an d different ways to add value to perishable supply chains and distribution in the marketplace.

On the information services line item, our T-Chek subsidiary had a good year. We've discussed how some of their results while they are driven primarily by customer growth and market share penetration and truck load volume, some of their growth is linked to the overall level of truck load activity and some of the transaction fees that they can earn are helped by higher fuel prices. So they had a little bit more of a challenging environment, but we were happy with their growth during the quarter and happy with their year, as well.

Moving to the personnel and SG&A, our year-end head count 6,768 people reflects a 178 person increase from the end of the third quarter. It's interesting to note though that 160 of those 178 people came from the acquisition in India that I referenced earlier, which means that we only added 18 people during the quarter to the remaining portions of Robinson.

I guess the message there is that in our variable cost management and reflecting the changes in the North American marketplace and volume activity that we discussed, it's relevant to note that already during the fourth quarter of 2006, our network has been managing themselves more aggressively by slowing the rate of head count growth to match the rate of growth and the volume activity in the truck load network.

In terms of looking forward and talking about 2007 before I, before I turn it over to Chad for a few more comments. As most of you know, we do not give specific guidance.

When we look at our business and we look at the marketplace, one of the things we are all in agreement at Robinson is that the markets are moving quicker and prices on both the shipper side and the carrier side are moving and reacting faster than they have in the past, largely due to automation and better information that's available in the marketplace. So we do believe that our model is becoming more and more relevant.

And yet at the same time it's becoming more and more challenging to really try to predict or anticipate what the markets are going to do and how things are going to react.

But in terms of what's on our mind. We do know that going into 2007 and through January of 2007 that volume growth will be more of a challenge for us because of overall industry trends of slowing growth in the demand for truck load transportation services.

As I mentioned, that can change relatively quickly. The spring peaks around March and April are very relevant to the first quarter and second quarter results and it remains to be seen what type of activity those will provide. So again, it's too early to really be predicting what sort of environment is going to be for the remainder of the first quarter.

But with a slowing growth rate in the demand for truck load services, we know that we need to focus on selling and market share and relationships and do all that we can to focus on volume growth for this part of the cycle during 2007. We know that our long-term success formula requires volume growth as well as good margins on the freight that we move.

So while margin improvement that helped us achieve our growth goals during the fourth quarter of 2006 can continue to help us for some period of time. That's not the recipe for long-term success. We need to grow our volume and achieve our growth targets in different ways for periods going forward.

The last point that I think is relevant is that we have added a lot of people and a lot of resources to our network during this growth spurt over the last two or three years. And one of the things we have a history on and will be focusing on again to is to really focus on leveraging that people investment to greater productivity and managing through different parts of the cycle to continue to achieve our long-term growth. So we will see what 2007 brings to us. But we remain very confident in our model and our ability to execute.

With that, I'll turn it over to Chad for a few more prepared comments and then we'll open it for questions.

Thanks, John.

I'm just going to focus on a few things that should help you update your models going forward. I'm going talk about our cash flow, including CapEx, our dividend share repurchase plans, and then I'm going to touch on the tax rate.

As you saw our cash and investments increased during the quarter up to $473 million, we have and will continue to see large fluctuations in our daily working capital requirements. We happen to finish the year with our receivables in really good shape and our payables actually extended a little bit, so we had about 12 net days of working capital or the difference between receivables and payables invested which is on the low-end of what we historically see.

In addition to that, the fact that our fourth quarter gross revenues were relatively low, that shows you that due partially to the lower rates like John mentioned, that also contributed to the lower working capital because the gross amount of money flowing through was lower. It's also important to note that the $98 million of accrued compensation on our balance sheet will all be paid during January and February. Like all years, that is a large cash outflow at the beginning of the year.

On the CapEx side, in 2007 we expect our CapEx to be somewhere between 45 and $50 million. About half of that is related to the new corporate headquarters that is currently under construction. And the other half is kind of our normal ongoing investments in technologies, desks and phones.

Our -- I just want to remind everybody that we did announce the significant increase in our dividend the first of which has already been paid in January. We went to $0.18 from $0.13 or 38.5% increase.

During 2006, we also had significant increases in our share repurchases, up to about $68 million net of reissuances through the stock option and employee stock purchase program. We will continue to evaluate our cash position and use share repurchase as a variable way to redeploy capital or return some excess capital to shareholders.

On a go-forward basis, we continue to expect our tax rate to be between 38 and 38.5%. During the quarter, we had a one-time foreign tax credit that we got related to our operations in Mexico. So there was that had about a 1% decrease to our effective tax rate in the quarter.

And again, that was an unusual item. There may be items like that in the future where we have opportunities to do some tax planning to lower our rate but our kind of base rate going forward that we use internally is 38 to 38.5%.

With that, we'll turn it over to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Tom Wadewitz with JP Morgan.

Yes, good morning. Let's see, I wanted to see if you could give us some kind of thoughts on the pace of employee addition. I know you noted obviously that it slowed quite a bit except that acquisition fourth quarter. Given the kind of soft truck load market, could employee comp be flat in '07? Or is there still some growth that you would expect? Any thoughts on the employee growth rate.

Yeah, we would definitely expect to continue to grow our employee head count during 2007. We do intend to open 5-7 new offices, similar to what we completed the last couple of years as we build out our network into new geographys, since we opened with a limited number of people. That investment doesn't have a real disproportionate impact on our personnel and we think it's the right long-term strategy to keep planting those seeds and expanding the network that's out there. We also know that a lot of our offices have new commitments and have growth expectations and will be adding people to the network. So as we've talked a number of times, we do not have precommitted goals or precommitted amounts of head count. It's a very fluid situation based upon a branch by branch assessment of what their volume and needs are. But as the volume growth slows, we will focus more on productivity and taper off that hiring to make sure that our personnel stays as variable as possible.

But you think it's realistic to think that pace of employee growth is probably more moderate in '07 verses the last few years?

Yes.

Okay. If you look at a couple different ways to look at it, but if you say net revenue per average employee or per quarter end employee, the pace of increase on that metric was rather slight in fourth quarter verses the pace you've seen. Would that perhaps increase in '07 as you look to leverage the existing head count?

We try to increase it every year and the bigger and more diverse we get, the more you really have to break that metric down to a branch by branch, business line, by business line. We added 160 people in India in December who really didn't contribute much from a revenue standpoint and in different environments depending upon the specific types of freight, you're working with it can skew the productivity metrics. Absolutely it's true that we will be focusing in on productivity metrics and trying to improve the net revenue per person per month, per load, per whatever, all the various things we used to manage the network.

Okay. And then one last one, I'll pass it along to someone else. The gross margin expansion was pretty impressive in fourth quarter. And I'm wondering, if truck load market stays weak for another couple quarters, can you sustain that type of pace of growth margin expansion? Or is that tough to do for more than a quarter or two?

It's really difficult to predict. The margins during the fourth quarter of 2006 are on the high-end of the range that we've experienced over the last 10 years. We certainly could stay on the high-end of the range during 2007. And what that will do from a comparison standpoint is make it more difficult as the year wears on and we start to compare it to higher margins in the second half of 2006. Like I said in my prepared comments, eventually the formula needs volume growth to achieve our long-term targets. If 2004 and 2005 become aberrations or blips where volume and pricing went way up and we go through an extended period of declining volumes and declining prices, it'll be very difficult, if not impossible to keep expanding margins forever.

Okay. Great. Congratulations on the quarter and thanks for the time.

Thank you.

Our next question comes from Ed Wolfe with Bear Stearns.

Thank you, good morning, guys.

Morning.

Chad, you said 98 million in cash comp in the first quarter. What was the cash payment in first quarter '06?

If you look at the previous year balance sheet, basically that whole amount was paid out. So I just don't remember the number off the top of my head.

All right --

94 million.

So similar kind of number?

Yep.

You said there's 160 people in India and they're not generating much revenue, how do you look at that? I mean, do you start to remove some of these people? Or do you start to build pretty quickly revenue? How do we think about a dilutive situation that strategic becoming less dilutive?

Well, first off, as you all know I'm sure the labor market and the associated costs are a lot of different during, in that part of the world than they are elsewhere and my comment was really focussed on the fact that we only own the business for a month and yet all the head count is in there for the end of the year. The business that we bought is profitable and we have hopes to grow it and don't have any meaningful changes planned to the model other than just to grow it and continue to invest it. But the relationship of head count and labor relative to the net revenue that came with it is very different than the North American truck load market. So if you're doing year-end averages and trying to compute shortcut productivity metrics it might be misleading in the trends.

That's fair. Is there a chance at some point that some of your U.S. people move to India like we're seeing you know you call American Express and you get somebody in India is that part of the though process here over time or is that completely unrelated?

Not in the short-term. We have some integration work to do and would need to grow more. That's certainly a possibility. It would be on a pretty targeted basis with a limited number of people.

Those people are focussed completely on international freight forwarding.

John, the truck market for the last two years, you've really been consistent saying you're seeing more and more capacity entering the market when some of the large truck guys have been saying that's not going on. Are you starting to see some of these small guys leave?

You know, one of the points we've continued to emphasize, is there's a permanent turn while we've been adding a lot of new ones, a lot of little ones drop off for us, even in the last couple of years as well. Each year we're signing up thousands of new carriers, but we lose thousands too that we don't know if they disappear or just choose not to work with us anymore or whatever. And our activity through to date has remained consistent that we're finding a lot of new small carrier to try to do business with and some drop off, as well. So we have not seen any changes in that behavior.

I know you're very good at screening, are you seeing any increase in bad debt from these guys or bankruptcies or your threshold it's harder to find guys or keeping your threshold or anything like that?

No. Again, since we're paying them, the bad debt thing really isn't an issue, it's more of a matter of if you have bad service experience or freight claims or something, because they didn't do what they committed to do and that is where our experience of filtering and phasing them in slowly on the right types of freight to make sure we establish a track record before we give them a $1 million cargo load would be relevant to making sure that we don't ever have too many issues with that.

On the sourcing side, there's been some concerns about the produce in California. Can you give an update of what you're seeing on that side and talk about what the potential impact could be from that?

Yeah, I presume the primary thing you were talking about is the citrus freeze, which was a pretty significant deal to the industry. It always takes longer and is a little more confusing to figure out exactly what the damages were or what the impact will be. But there's no question that the major citrus markets have less product than they did a year ago. And kind of similar to the truck market, there is a lot of analogies between the fragmentation and the supply and demand changes. So what happens in the citrus world is there's just a lot less product flowing but prices are significantly higher and it's a challenge of trying to figure out who gets the product and at what prices and at what margins will be. We do expect some volume declines in our citrus sourcing related areas, hopefully we'll be able to have improved margins on areas where we do handle product. Citrus is not a major percentage of the produce that we work with. I think it depends upon exactly how much of the product goes away, but it could have a couple of percentage point impact on our volume, but hopefully we can make up for that in pricing or margin.

Okay. And then in your release, you talked about part of the yield expansion has to do with mix with your miscellaneous transportation stuff.

Correct.

Talk a little bit more, why are you growing your customs business faster, for instance and what else is in this, what other kind of added value services are in this, and how should we think about the growth of this line item?

The two primary services in that line item, the first is customs as you mentioned, and the other one is freight management where we're running the route guide for selected customers. So we're coordinating there their load tenders to their core carriers. We're just collecting a fee to do that. As well as scheduling appointments. It's actually the management fees and other that grew faster than the customs during that time. But we did have significant increases in customs, as well. There are cases where we do customs only for customers and there's also cases where previously we already have the freight, but not have the customs and we've added the custom services to it, as well, which is why occasionally those customs can grow faster than [Inaudible].

What should we think about, you're growing 40% off a small base, can this continue for at least several quarters visibility wise?

We have limited visibility into the future of that, volume wise just like we do with all of our other businesses. But yes, you're right it is a smaller base. And it's going to be volatile, I would say.

Even though it's fee based, the fees are generally per transaction. So it's the transaction volume that's going to drive it, which is why we have limited visibility into it. I do know that especially on the freight management, we signed up some new customers during 2006 that helped drive the growth during the last half of the year so that a higher percentage growth early on might be more reasonable. But obviously 40% gets tougher to sustain the bigger you get.

I would think so, thanks a lot for the time, guys appreciate it.

Next question comes from Scott Flower with Bank of America. Please go ahead.

Yeah, good morning, all. Was wondering, could you give us -- obviously you talked a little bit about head count. Is that managed more at the branch level? Is it decentralized in the decision-making? Is there obviously an inner play with headquarters? I'm trying to get a better sense of how you're able to manage it so quickly so fast. Is it because it's more responsive at the branch level. I'm just trying to get a better sense of how you managed that item, you talked a little bit about it, but I wanted to get a little more color.

It is very much managed at the branch level. We have a decentralized hiring and firing and people management decision process, which is way we talk so much about the significance of our branch managers to the business model at Robinson because they are very much treated like independent business owners who have to make their own decisions around staffing levels and balancing what they know to be future commitments and productivity goals and different things that they are managing internally. Obviously here at corporate, we have branch supervisors who are very attune to best practices, productivity metrics, comparing the offices, and helping establish kind of the broad parameters that we want to live under. And then intervening where appropriate if somebody looks out of line as to what those might be. On a day by day, month by month basis, we're relying very heavily on that leadership team of managers to execute the model and make those decisions. And when you see a change like our fourth quarter hiring patterns, it's because that's how the network reacted to the changes in the marketplace. We did not change any of our overarching parameters on how we managed the business.

Okay. Then just a couple others. I know it's always a balance in terms of, you're not necessarily product contracting, there's a lot of blurriness. As we move through the second half, did you find that you were focusing more on the transactional side of the spectrum in taking advantage of perhaps some of the greater weakness there in terms of the [Inaudible]. I'm just trying to get a better sense of as you went through the second half and particularly fourth quarter did the pendulum swing that direction? And did you move that way in terms, the types of business you wanted to do and we're dealing with?

I don't think there was any meaningful or measurable mix. You are very correct that the lines are blurry and it's tough to categorize these things. But in general, when freight volumes are surging, a lot of that incremental unplanned freight would fall squarely into anybody's definition of spot market activity. And if anything, when volumes decline or slow like they did in the fourth quarter, there would be less of that and that the margin opportunity comes more from where there are annual pricing contracts in place and the cost of higher would soften.

Okay and then just two last questions. One is as you went through fourth quarter, was there any monthly variations that you saw on demand, I mean there's been much data? And again this may not pattern with what you see in your business, but the ATA data suggesting that December was slightly better than November and November was a far worse month. As you looked at fourth quarter, was there any significant variation in demand trends?

That's a tough metric to get around. We put in our release that volume growth was relatively consistent, but the margins expanded a little bit. Part of the challenge with the numbers, some are talking sequentially and some are talking compared to 2005. And October as we mentioned on our last call was a challenging comparison because you had the hurricane in October of 2005. And while that didn't affect us real directly, it clearly affected fuel prices and pricing and margins and comparison. So it was a tough quarter in terms of really trying to compare precisely growth rates and margins from month to month basis. But when you step back and look at the overall results of the quarter, there's no doubt that there was a slowing in the growth rate of demand relative to the last couple of years.

I mean, did it feel any better by the end of the quarter or not really any different? Just want to make sure, you're saying fairly consistent. There really wasn't a lot of variation as you look at the months across themselves verses what is traditional fees.

Not from a volume standpoint.

Okay and last question I have and I know versed a little bit but I wanted to maybe get a little more color on capacity. I know you said there's a permit turn and I understand that. But when you look within your individual carriers. I'm just wondering, did you get any sense that maybe counterintuitively that they actually were slightly, and this may seem strange, adding some capacity just because the driver supply issues were maybe a little bit less difficult than they had been or do you not necessarily get that visibility in looking and dealing with your carrier relations?

We don't really have kind of the global visibility to that. At any point in time, literally when we've got 40,000 carriers under contract at any moment there are many of them that are adding trucks, adding drivers, taking on volume. Whether that's because equipment is coming downstream and the resale market or because they're able to get drivers in a softer market, that would be hard for us to kind of generalize about. But like I've mentioned, it's really the fragmentation of the market and the fact that there's kind of growth and failure in all different environments is part of what we see on a permanent basis.

Well, thank you very much.

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

Hi morning, just a question. You had mentioned that volumes are obviously going to be important. You guys will be focusing on selling and market share. I'm just curious how the other truck broker competitors that your sales and marketing guys might be seeing are acting presumably with some of the demand, slacking, I guess from a broker service standpoint?

I guess you'd have to ask them. But from our standpoint, the market is very fragmented and it's really hard to kind of identify any one in particular. I would say the most relevant thing that we see and that our transportation leadership team talks about is that there's clearly compared to 5 or 10 years ago is a tremendously greater amount of information in the marketplace about changes to supply and demand and pricing and the way markets move that 10 years ago transportation truck load prices would move but a high percentage of pricing would stay consistent for an annual contract or spot markets would kind of move more gradually where today when supply and demand starts to move, a lot of people are reacting to it much quicker. Shippers, carriers, and I presume our competitors, as well to that drive the markets in one direction or another. So, specifically what decisions anybody else is making in terms of how to change their pricing or how to sell or what to do, I couldn't comment on. I know in aggregate, the market is moving faster and adjusting quicker than it used to.

Maybe it's sort of in the same vein if I'm hearing correctly. A lot of the margin improvement you saw this quarter isn't really tied so much to a lag between the purchase transportation costs that you're getting from your, you know from the trucking providers verses the selling price you charge to customer. That pretty much evaporates quickly and it's more the annual contract increases as you noted?

It's a very customer-specific thing. It really depends upon - there can be some instances where you honor annual rates and you do worse at times and better at times and when the cost of higher drops, you do better during that part of the cycle. But more most shipper relationships vary in terms of how and when they rebid them and how they adjust their pricing. You can have a lot of customer contracts in place that basically are evergreen until either side decides that they're going to give 30 days notice and not live up to the pricing anymore. There are customer contracts out there today where providers do benefit from a higher billing rate and a lessening cost of higher for whatever predetermined period of time until somebody decides to change it. And that can carry on or get changed tomorrow, depending. So I think the way you phrased it, I would disagree a little bit in that there can be some instances where the margin improvement is driven by remaining contracts and not just prearranged price increases.

Are you seeing more of your customers coming out there and coming back to you and saying we've got to relook at contracts? We want to redo it, we want to reprice it?

I think our transportation team believes that the level of bid activity is slightly higher than it's been the last couple of years. But when a shipper decides to rebid freight, that doesn't necessarily -- you have to understand how they're approaching it and what their objectives are and are they bidding all of the freight, are they looking for price decreases? Are they bidding to their incumbents or to a broader audience? So we do believe that bid activity is increasing, but that's just the first step in the process of adjusting to the market.

Great. Thanks very much.

Our next question comes from John Langenfeld of Robert W. Baird. Please go ahead.

Good morning. Wanted to go a little bit further into this employee productivity. I know in the robust market when things are going well and employee productivity expands, but when things start to slow, is the base of the new employees you've added the less seasoned employees, are they big enough to make a difference in terms of being able to expand the employee productivity of the overall employee base?

Part of it is when you go through periods of high growth like we did -- if you look back to '99-2000 where we went through high growth and in 2001 and 2002 there was a significant slow down. The percentage of the employees that are new in a slow down reduces because the people were hiring less new people and on average the employee base gets more experienced, which does create some productivity for the employees. So just like in times of extremely high growth, where we experience increased productivity just because there's so much business and people are doing more loads. Sometimes in times of slow down, we have also experienced increased productivity on average because the average person is more experienced.

And a typical hire, obviously the answer depends. But on a typical hire does it take one or two years to really hit their stride in terms of productivity?

Ideally they'll continue to improve during a several year period of time. I think we've commented before on the first 3 to 6 months are very important. They come up the curve quite a bit. But then depending upon the role that they go into, there can be continued improvement for a number of years. The other thing that happens, though, is our people would generally start sort of more operationally if you will, but then ultimately become more sales oriented. They hopefully are selling from the beginning. But the opportunity to really establish new relationships or bringing in large amounts of business, that's where maybe not so much in years two, three, four, a pure productivity thing, but your ability to contribute to the success of the team continues to ramp up pretty meaningfully.

Okay that makes sense. And switching gears to intermodal. How much of the change in freight is being driven from you prompting the customer to change verses the customer coming to you and saying hey, let's move this over to truck?

That's always a mutual process. We -- we are always talking to our customers about what the trade offs are. So we're, we believe -- we're hoping that we perpetually are offering choices, and looking at load conversions. And yes a lot of that freight converts because we offer an alternative at a price saving to truck rates that were escalating pretty fast. So I would say it's always a mutual thing rather than it being driven by us or them.

Okay. And then you kind of answered this question before, but in terms of that transportation management fees in the miscellaneous category. I mean, are you still seeing some pretty healthy growth from existing customers as well as the new customers being added?

In the customs brokerage line item of that category, yes. On the transportation management fees, there is a fairly limited number of customers that make up that management fee category like less than 25, I don't know exactly what the number is. So the higher growth rate is by signing up new customers, it's not driven by expansion of those existing relationships.

Those relationships we tend to manage all of their truck load freight. So really the penetration, there is no further penetration for the customer. So those -- the fees from existing customers are volatile based on what their total volumes are doing.

And if you had to compare that base of a couple dozen customers to 3 to 4 years ago. Were we talking just a handful then?

I think we started about 4 or 5 years ago.

Okay. Okay. That's a good base comparison. Thank you.

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

Good morning, this is Kevin Sterling calling in for Alex. Just a couple of quick questions. Most of mine have been answered. John you talk about the slowing environment, and with slowing volumes, looks like you continue to get nice operating leverage. Do you think you can continue to expand your operating margins if volumes continue to slow in '07?

It gets more challenging. As we've talked before, we plan for 15% growth, that's what our long-term model is based on. And so what that means, when we look at incentive contracts, when you look at occupancy, when we look a lot of those underlying cost drivers, there are several frames of reference where that target comes into play. When we have growth that's higher than that, it obviously creates a nice environment for leveraging those operating expenses and growing our earnings faster. As we come down to 15 or get below 15, leveraging those earnings becomes much more challenging.

Okay. Thank you. And my last question here. Maybe you could talk about some of your other product lines, kind of what you're seeing, maybe on the intermodal landscape and your air and ocean business and in terms of pricing and volume and, I guess kind of get a general feel for what you're seeing out there particularly on intermodal.

Well, intermodal, I guess I did comment a little bit on before. That in general the railroads have been changing some service offerings, escalating pricing to adjust to the market opportunities, so there has been a fairly meaningful shift in some of the types of freights that are being handled by intermodal. So for the last couple of years, we've seen flat or modest declines in volumes with pricing and margin improvements and I believe that's what the railroads have been experiencing, largely through intermodal, as well too. Particularly on the over the road IMC type freights suffered from the international connected train loads that come off of the ports. So I know that similar to kind of what we talked about on the truck load side, if the growth in demand slows that pricing and equipment availability will change in the intermodal world just like it has on the truck load world where there would be an opportunity to go for more volume activity and to try to be more price competitive with some of the products. So we obviously are working with the rail partners just like we work with the truck load partners to figure out how they're going to adjust to the marketplace and what that's going to do to pricing and what that will do to the competitiveness of the products. That's what we see in the intermodal world today.

In the forwarding world, it's a lot more complicated and we're a lot smaller player relative to it. I know that there have been some pretty meaningful declines in some of the prices due to additional ocean capacity that has come on. So there's been some challenge in some of the growth and customer relationships to adjust to this new capacity and declining prices, particularly in certain lanes. But on the forwarding side, we are relatively new to it and working hard to kind of sell high service, high customized type relationships where we can try to add a lot of value with our people and our information. And the buy-sell thing is probably less of a direct correlation to our growth and success than it is just adding offices and adding people and selling to it.

Okay, John and Chad, thanks for your time today.

Our next question comes from John Barnes, of BB&T Capital Markets, please go ahead.

Hey, good morning, guys. Chad on the use of cash going forward, do you have a target pay out ratio on your dividend that you're trying to adhere to or you just kind of looking at what opportunities are out there in terms of gauging what your dividend policy is going to be going forward?

We do have a targeted dividend payout ratio in the neighborhood of 40%, 40 to 45 and that is up significantly over the last 4 or 5 years. When we first went public, our payout ratio was closer, our target was closer 20 to 25%. [Inaudible] currently our payout ratio, but even with that payout ratio, the business if we do not find opportunities, acquisition opportunities tends to generate excess cash. So we use the share repurchase more as the variable way to redeploy capital. So there is no targeted number for share repurchases. It will go, it could go down next year if we find some large acquisitions or it could go up next year if we don't find any additional acquisitions. That's where the variability of return of capital will come.

Okay. So we should expect just kind of the normal steady state on the dividend growth and then any excess. You're just going to do it for the share repurchases. There's no goal on that. You don't have, you don't have a number in mind at the beginning of the year. Do you have any kind of number in mind of share repurchase for making sure the options aren't dilutive or something like that? Or is it just you go into it and say any excess we're going to kick over into share repurchase?

Well, since we've been public, we've tried to manage dilution of not only our option program, but now our restricted stock program as well as our employee stock repurchase program. That's kind of the minimum numbers we've always tried to keep those programs as antidilutive as possible. Obviously you can never be perfect and by that the exact number of shares. That's kind of the base number and we use, the rest is based on redeploying or returning excess capital.

Sounds good, all right, guys. Thanks for your time. Good quarter.

Our next question comes from David Campbell of Thompson Davis & Co. Please go ahead.

Hi, thanks most of my questions have been answered, but you the did say in India that you added the 160 people in the fourth quarter, I think it was, whatever it was. But what about branches, of the 5 branches in the fourth quarter, how much of that was India?

Actually that's a good question, David because 7 of the, we did add 7 offices in India. As we've talked before, our definition of an office is really a management center that's controlled by a P&L. And so periodically every couple of years we've had a couple of consolidations particularly in the sourcing area where we still have two geographic presences but they're managed together. So during the quarter while we show an increase of 5, it was actually 7 from India offset by a couple of redefined consolidations and other parts of the business.

The consolidations in the United States?

Correct.

And what about Europe in terms of branches? Were there any added there in 2007?

There were none during the quarter. I don't remember, I think there were two or three during the year in Europe.

So you would end up with 20? No 17?

I don't know what the precise number is. But in that neighborhood. Somewhere around 20.

I think it's 18 or 19.

Okay. Yeah, right. And so -- so there are 18 and 19 at the end of the year. And more people, I would imagine, as well.

During 2006 our growth in Europe since we did the acquisition in 2005 and added 9 or 10 offices and opened a few truck load offices, during 2006, we did open one or two incremental offices, but in general our head count and office count was relatively flat in Europe as we continued to integrate in those offices and try to drive the organic growth in the investments that we've made. If you look at our kind of European business, realistically now between the truck load and the forwarding piece, we've grown it pretty fast from a location and acquisition standpoint for the last couple of years. And we're in a little bit slower growth mode in terms of adding offices and heads for our 2006 and 2007 just to let it get integrated and do the systems work and get the productivity levels up a little bit and then we'll be back to more aggressively opening offices or looking at further acquisitions.

[Inaudible] is very insistent about controlling imports and exports in Europe with having their own rail, nonasset based rail and road network. Is that something that you're in the long run likely to do more of? Or is that not part of your thought process there?

You know, in the long run, I guess we'd all like to control everything. So yes, integrated services and putting the modes together on a customer by customer basis is part of that integrated offering that we all have some degree of aspiration to. A lot of customers do prefer to separate their providers and manage the process themselves. When we've talked about our goals and our direction of individual mode competency verses the integrated logistics, we wanted to make sure that we think we're the best at each offering we provide out there. So today in Europe, especially where we're smaller and developing at a different pace, we're really focused more on becoming very good truck load service providers, very good rail providers, very good forwarding providers, we don't have a lot of integrated door to door control across Europe right now just because we're building our competencies in each of those. But within Europe and globally, that is part of the long-term vision is to just get better at each of those offerings and then sew them together for the customers that want it. Okay. Thank you very much for your help.

Our next question comes from Mike [Arbor] with Ramsey Asset Management. Please go ahead.

Hi, guys. In 2004 you kind of had the opposite scenario in terms of capacity from a perspective in volumes. And gross profit yields took, for a couple quarters, took a hit. Would you expect the reverse -- is there any reason why we won't see shippers we should expect that activity is up. Is there any reason why we shouldn't expect things to return to a little bit more of a normal environment after a couple of quarters like it did in 2004?

That would be the normal historical expectation, I guess on how the model and marketplace would react. The only caveat I would reiterate, which I said earlier is the market is reacting quicker than ever to all of the different changes out there. So I don't know exactly what's on each shippers mind in terms of how aggressively they're going to react to a softening marketplace. Some of them may be very happy to just see flat rates and have a higher service relationships in terms of load acceptance and others, some may be looking very aggressively to recover some of the cost increases and try to do bids quickly and try to drive rates down. If you do that, the risk is that you lock into lower pricing and suffer severe service failures if and when the market tightens back up. And it could do that very quickly entering 2007. But I think that's the tradeoff that we and every other shipper out there has to kind of think their way through.

Okay. Thank you.

Our next question comes from John Larkin with Stifel Nicolaus. Please go ahead.

Hey, good morning, John, good morning, Chad. Thank you for taking my questions. You mentioned the 15% growth target again. Could you give us just a little more on that in terms of whether it's a 5-year objective, a 10-year objective, and whether that's kind of a long run average growth objective, for gross revenue, gross profit, EBIT, net income, EPS all of those measures and whether in good years you might expect to do 20 or 25 and perhaps in a more challenging year something less than 15%.

Yeah, I would, you know, when we went public 10 years ago, that was our 20-year growth average. And we said we didn't see any reason why for the next 5 to 10 years we couldn't sustain that 15% average. And so it's been 10 years and we're making the same statement. I would probably describe it as a 5 to 10 year rolling target. That it's a long-term target that obviously the world can change and we can change. But today for the foreseeable future that I would quantify to be the 5 to 10 year time frame, that is still our long-term target. And it definitely applies to all of the key metrics that I talked about before in terms of gross revenues, volume, net revenue, income from operations, and EPS. We have always fluctuated between the single digits and 20s to 30s depending upon the cycles in the market and where the leverage is coming or not coming from on a quarter by quarter, year by year basis.

Okay. That's very helpful. Also there's been a lot of talk this morning about productivity and what a great job you all did in kind of slimming down the rate of growth of head count to reflect the lower growth in transactional volume. But as I run around the industry, I hear a lot of talk about electronic load boards and that sort of thing. And on the one hand I would think that might be a competitive threat to C.H. Robinson, on the other hand might be a mechanism for you to even automate more fully more of your mundane, run-of-the-mill transactions, freeing up perhaps the manpower to do more selling activities. Is that a fair vision of how that's playing out?

There's no question that technology evolution is both an opportunity and a threat for us, just like everybody else in the industry. I think the load board thing is sort of tangential to it. That really doesn't have much of an impact. That just kind of some automated matching that's going on over in the corner that's a very small percentage of what happens out there. The true automation productivity gains come from the routing algorhythms, the track and trace information, the reporting analytics you can provide to a customer to really help them with. The whole discussion around technology impact and the evolution on our ability to sell our competitiveness, our productivity, all of that is absolutely relevant, but it's a much broader complicated conversation.

Okay. That shed some light on it. With respect to the fourth quarter and perhaps what you're seeing so far in January, are there any particular regions of the U.S. that have been particularly soft? We've heard from a number of trucking companies that would suggest a couple of regions, particularly the Southeast and the Southwest have been exceptionally difficult.

Not really. Our business is very spread out and it's hard for us to really analyze regionally, but we can sort of at times get anecdotal or inputs from the offices in those regions. But I'm not aware of anything over the last 4 or 5 months along those lines.

Thank you. And then one final question on the intermodal side. As some of the railroads, at least are asking their IMCs to provide their own boxes and their own chassis, is that ultimately something that C.H. Robinson would use some of its capital to do to really carve out a strong position there?

We did do some of that 8 to 10 years ago and then stopped doing it because it didn't seem like it was the right thing for our customers or for us. We do continue to talk with our rail partners about. The real underlying issue there is all of the rails need to experience a better return on investment in the equipment that they have that's running on the free loading containers that don't get used real effectively. And one way or another, all of us in the intermodal industry have to help the railroads improve that metric and improve the return on that capital. I have never really completely understood why it would make sense for that to be our capital rather than a third party or the rail capital or that it really matters. It's really about improving the management process and that's what we are trying to work on. If the ultimate formula for managing that most effectively with our customers and our rail partners would be for us to put some limited amounts of our capital forward, we have done that in the past and would do it again. But today we feel pretty strongly that it's about information management, process management, and improving the return on investment for whoever puts up that capital rather than somebody stepping up and writing a check.

That's very helpful.Thank you for answering my questions.

Thanks, John.

Our final question comes from Jason Seidl of Credit Suisse. Please go ahead.

Thanks, gentlemen. When you look at any acquisition opportunities, obviously you guys have a lot of cash even after you're going to have your 90 plus million payout here. You're going to generate a lot this year. Where should we -- should we continue to expect you guys looking on the international basis for acquisitions?

Yes. We talked about that. We will do acquisitions to support any of our business lines or to expand in the new third party logistic services. Over the past few years, you're right, that we have been focus, if there is a focus, or there's probably a slightly more focus on expanding our international forwarding network. That's where we're being more proactive. But we continue to look at other acquisitions that we become aware of in any business line.

And can I assume that this acquisition, India, this is your first foray I mean there's probably going to be several other add ons, that's probably a pretty quick growing marketplace.

Yeah, there could be further acquisitions and some organic office openings as well in India.

Okay. Perfect. That's all I have guys, thanks, nice quarter.

Thank you.

Thank you for participating in our fourth 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 C.H. Robinson website at C.H. Robinson.com. It will also be available by dialing 800-405-2236 and entering the pass code 11080688 pound. The replay will be available at approximately 2 p.m. eastern time today. If you have additional questions about our results, please call me Angie Freeman at 952-937-7847. Thank you.