羅賓遜全球物流 (CHRW) 2007 Q2 法說會逐字稿

Welcome to the C.H. Robinson second quarter 2007 conference call. At this time all participants are in a listen-only mode. Following today's present takes instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the Starkey fold by the zero. As a reminder this conference is being recorded today, Tuesday, July 24, 2007. 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. On our call today will be John Wiehoff, CEO and Chad Lindbloom, Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our second quarter performance and we will follow that with 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 will turn the call over to John.

Thank you, Angie. A little while ago we, we released our second quarter earnings. I want to start by highlighting a few of the key metrics on there that we focus at. Gross revenues increased 10.5% to $1.8 billion for the quarter.

Net revenues increased 14.9% to $310 million. Our income from operations increased 25% to $130 million. And our diluted EPS of $0.47 was 23% higher than the second quarter of 2006. Our results for the second quarter represent principally organic growth.

We achieved our long-term growth target of 15% in most of our key metrics and acquisitions did not contribute materially to any of the revenue growth for any service line. These results were driven by our core strategy of hiring good people, selling, executing and building out our network of relationships.

Moving on to comments by revenue source. Starting with truck transportation which makes up about 75% of our net revenue. Our truck net revenue for the quarter grew at 15.6%.

As a reminder we define truck to include truck and LTL in all forms including drive and refrigerated and flatbed. It also includes Europe, truckload and LTL. In our release we stated that our truck transportation growth was driven by increased volumes and an increase in our gross profit margin. Pricing on average in the quarter was essentially flat with a year ago. During the second quarter of this year similar to the first quarter our truck net revenue volume growth was about 7 to 8%, generating about half of our growth with the remainder of truck growth coming from margin improvement.

While we did achieve our long-term target growth of 15% net revenue this quarter, our truck net revenue growth has continued to slow corresponding to the slowing demand growth in the overall market. We think it's useful to briefly recap our truck net revenue comments and trends from the past few years to help put this quarter and our current views into context.

Our primary measurement for truck growth is net revenues. Three things drive growth in those net revenues. First, more truckload transactions or volume. Second, price increases. Third, gross margin percentage. So more volume is a good thing. The more you can charge is a good thing. And the higher percentage of that margin that we are able to keep based on the buy/sell spread are the three things that will drive our growth.

Our base long-term growth goal of 15% was set from our historical experience since deregulation. That base goal is driven by targeted volume or transaction increases approximating 15% with modest 1 to 2% price increases. And fluctuating gross margin percentages.

When volume increases are significant, gross margin percentage tends to go down. When the freight market softens and volume growth slows we typically experience expanding gross margins. Prior to 2004 our comments were generally focused on transaction volume and margin percentage with little change in prices.

During 2004, 2005 and the first half of 2006, the industry experienced significant price increases. During this period we experienced truck net revenue growth well in excess of our 15% target, driven by double-digit volume growth, double-digit price increases and gross margin percentages that were seasonally consistent with historical ranges.

For the third quarter of 2006 last year, we reported consistent with others in the industry that the aggressive growth in volume demand and pricing had slowed. So for the past four quarters we've experienced high single-digit volume growth and expanding gross margin percentages driving our growth with generally flat pricing.

Which brings us back to 2007 and the key reference points for us analyzing our truck net revenue growth at mid year 2007. First, we are in a soft truck market with weaker growth in demand than the past several years and generally flat pricing. We've grown our transaction volume high single digits in the first two quarters of 2007. And we are generally at the high end of our historical ranges of gross margin percentages.

Freight demand, our volumes and pricing and our margin percentages can change quickly especially in the transactional spot market where we have significant exposure. While freight volumes, pricing and our gross profit margins will continue to fluctuate we still believe 15% average net revenue growth is a reasonable long-term goal. Similar to the first quarter we feel very positive about second quarter high single-digit volume growth in a flat to down market. Our model continues to take market share. On the challenge side, pricing and margin percentage comparisons will be much more difficult in the second half of this year.

Moving on to our other modes and services, in our intermodal business we were able to add some new intermodal customers during the quarter. Our net revenue growth of 6.5% was driven by volume increases. In the global forwarding business of international air, ocean and customs brokerage services, we were also able to add new business and grow our volume and margin. Volume growth and margin expansion drove net revenue in excess of 25% for global forwarding. During our second quarter we opened three new offices in our global forwarding network and continue to build out our team and network in that business.

Our transportation management business continues to add fee based volume and add to our transportation net revenue growth. Our sourcing business continues to grow as well. Weather impacts on certain commodities drove price increases and margin compressions. That's typical for that industry but we continue to expand our presence and scope in the perishable supply chain services. T-Chek had 5.4% net revenue growth for the quarter. Their growth continues to slow compared to previous years given the current market conditions. However, they were able to add some new accounts during the quarter.

Looking at operating expenses we've talked a lot that one of our key goals is to make our business model as much variable cost driven as possible. We spend a lot of time managing the people and the headcount across our network. We added 162 people in the quarter, about 9% more than a year ago and about 2.5% more than the first quarter. Total personnel expenses improved from 47.9% of gross profits to 45.4%.

Our variable cost incentive plans are driven by growth calculations. Those calculations are consistent with prior years, however, as our growth rate has slowed so has the growth in the expenses related to those plans.

We continue to push for productivity and network leverage and will try to grow our earnings faster than our net revenues. Last topic that I'll touch on is early in the third quarter we completed a small acquisition in Los Angeles called LXSI. We are excited about a new location in the network and adding some expertise in domestic air and expedited services. These are both third party services that we plan to continue growing. That concludes my prepared comments. I will turn it over to Chad.

Thank you, John. I'm going to quickly cover two different subject areas. Both related to cash flow. One is our free cash flow and the other is share repurchase activity and the authorization that was mentioned in the press release. Our free cash flows for the first half of '07 as you saw were slightly lower than in '06 for two primary reasons.

Fluctuations in working capital and increased capital expenditures. Working capital fluctuations are primarily made up of accounts receivable and accounts payable going up and down. We are comfortable where our receivables and payables were as of the end of the quarter.

There is -- we have been over the last two years showing improvements in our use of working capital. It's just that there was a greater improvement in the first half of '06 than there was in the first half of '07. Yet we still did improve it going into '07.

On the capital expenditure side, the disproportionate growth in CapEx is, is driven by our new headquarters building. At the beginning of the year we gave guidance that we thought we'd have $45 to $50 million of total CapEx with about half of it being related to the building. We are still comfortable with that range. We think that we will probably end up in the lower half of that range. So far we've had a total of $23.6 million of CapEx, $12.5 million related to the building. So we expect to have somewhere between $20 and $24 million more this year in the second half.

On the share repurchases, as we mentioned in the press release, the board authorized us to purchase an additional, up to an additional 10 million shares above and beyond the 1.7 million shares we had left from a previous authorization. We expect that these authorizations will last us several years. The amount that we buy if any during a period will vary based on our cash position, potential uses of cash and market conditions.

During the quarter we did repurchase 864,000 shares and issued about 400,000 shares through option exercises and our employee stock purchase program. That concludes our prepared remarks. We will now open it up for questions.

Thank you, Mr. Lindbloom. (OPERATOR INSTRUCTIONS). Our first question comes from Justin Yagerman with Wachovia Securities. Please go ahead.

Hi, good afternoon, gentlemen and Angie, how are you doing? I guess my first question relates to the hours of service announcement that we had this morning. If you could comment a little bit on how that announcement and the changes in the regulations if they do go through would affect your business and how you see that impacting the marketplace?

We did see the announcement. We have not yet had a chance to discuss the impact with many of our, really any of our carrier partners. So we will need to discuss them before we would know for sure. But in general when there have been any changes around regulatory type things the first question is, will it drive any sort of underlying economics or cost changes to the asset providers based upon their productivity or restrictions and then if so, how aggressive and successful will we all be in trying to pass those through to the shippers who are generally not very excited about reasons like that to have to pay more. So I think what will be happening soon is everybody will be crunching their network to see what type of an impact that's going to have. Obviously working fewer hours would generally stir you toward, maybe it's going to cost more or you will have to have more capacity in order to meet the similar amount of needs as the past and then we'll, just like a fuel surcharge or anything else we will be working to try to adjust those costs and pass them through and correct them as best we can.

And in an environment where capacity becomes harder to come by, though, would you speculate that your business would benefit from that or is it the rate side of that equation becomes a hard factor to gauge in terms of figuring that out?

I think we've learned the last three or four years that in general as I suggested in my comments price increases are positive to neutral for us. So if it does escalate cost I think it will either be a neutral or a potential positive for us. As I suggested from a margin percentage standpoint over time that tends to equal out. So I'm sure like many other costs over time it will level out. But anything, in general anything that causes challenge or change or transition gives us an opportunity to try to help both the customers and the carriers and is probably a good thing.

On this acquisition that you guys made, the LXSI you mentioned domestic air and expedited as the areas that you are targeting. Can you give a little more color around that? Is there any business from the U.S. to Asia there and how do you see that evolving within the general plan in that business?

Well, those are both service offerings that we offer today but they are both very small. And as ground transportation services evolve to more time definite and faster turns we've just been expanding our carrier relationships and our scope of offerings in terms of time sensitive delivery both buy air and by ground. This business in Los Angeles has some pure domestic business. It also has some international connected business where there are components of it that are executed on the ground. So the way we think of it is that we are getting another location in the network with we believe a highly qualified team of people and some service provider relationships that will help us grow and expand the offerings in those categories.

Is there ocean exposure there?

I don't believe so.

Just a question, the tax rate was even year over year but down from first quarter, how should we be thinking about that tax rate as we go through the year, Chad?

The tax rate is in the range of what we've guided people to and we expect to be in the 38 to 38.5%. It's going to fluctuate based on -- it's very difficult to predict where we are going to be in that because it will fluctuate based on how many options are exercised. FAS 123 R made income tax expense much more volatile than it had been.

So 38 to 38.5 for the rest of the year?

That's kind of our normal range that we expect, yes.

Got it. And just lastly before turning it over to anyone else, as you looked at the quarter, how did you kind of see seasonality playing out throughout? Did you see a normal progression as you ramped through the quarter or was it generally choppy throughout?

It was -- when you look at growth over last year and if you look at it on a per business day basis it was the strongest in April and down a little bit in May and then about the growth on a net revenue per business day was relatively consistent in June compared to May.

Not kind of what you would typically think of for a second quarter?

Well, the May and the June were still growing. And if you looked at it sequentially but it didn't grow as much as it did over previous years and months.

Got it.

So there's still seasonality.

Okay. And I lied, one last one, what did you buy back shares at average price in the quarter?

Our average price was about -- it was $53.28.

I appreciate it.

No problem.

Thank you.

Thank you, our next question comes from Tom Wadewitz with JP Morgan. Please go ahead.

Yes, good afternoon. Let's see. Wanted to see if you could provide some thoughts on gross margin. You mentioned that, I guess in the transportation piece in particular you mentioned the comps are tougher in second half. Is it difficult to see year over year improvement given those tougher comps or is that something that's still kind of realistic to think that there's some upside from where you were a year ago?

You know, there's potential for minor improvement but within the range of what we would see as historical we're already towards the high so there wouldn't be a lot of room. The one thing that I think is relevant about that, though, is at least historically there's been that relationship between volume growth and margins that when usually historically it has taken accelerated volume growth in order to start moving that margin percentage back towards the middle. So in general our expectation would be that profit margins can stay higher in a soft market and, you know, you sell and you wait for the market to turn and volume to increase and when that happens you are probably going to sacrifice some margin.

Right. Okay. But, so it's realistic to think that you probably maintained some pretty strong margins, maybe a little bit of upside but the pace of improvement probably slows a bit. So on the volume growth side given that it is a pretty soft market, the volume growth is in transportation is pretty impressive. How should we think of that going forward? Does that get tougher to sustain or can that actually accelerate? I guess it actually accelerated a little bit in second quarter on a year over year basis versus first quarter. So any thoughts on how we think about that going forward?

It's difficult for us to separate brand new customers from existing customers because there's a lot of churn in the I.D.s, customer I.D.s and acquisitions and whatever but our best estimate historically is that when we've been growing transaction volume at double digits something approaching our long-term goal of 15%, say in the 12 to 13% range, that there's been an element of that that is taking market share and getting new customers and we know that we added a lot of new customer I.D.s in the quarter just like we believe that we always can. But then at times we get a tailwind from the marketplace where there is growth in the freight and growth in the volumes and particularly given our spot market capabilities we think we get a decent share of that growth when the market takes off. So in a flat market, we would hope to continue to target this type of growth as taking market share and expanding our network and presence. And if the market got worse and started to decline we could have a greater head wind that it would be tougher to take market share and when things pick back up then we would look to try to grow volume faster.

Do you have a sense of what the market looks like, whether there is some signs of improvement or does it still seem to be a pretty weak truckload market from a demand perspective?

It's very difficult to tell. We really don't have any insight into that. And it's hard, like we said before when we analyze our business, there's per day, per month, holidays fall and different things and it's hard for to us gain any insight especially even until a month or a quarter kind of progresses a little bit further which is why we stay away from speculating or trying to anticipate the next quarter.

Right. But based on what you saw in second quarter it was still a pretty soft market.

As Chad said, May and June were consistent and then down a little from April.

Okay, what about your view -- maybe I will end with this last one and give others a chance, your view on capacity, have you started to see some of the more marginal smaller providers go out of business or really come under a lot of pressure or has your ability to -- the capacity you see in the market, has that remained pretty stable?

There has been some churn in the carrier side of it. What's challenging for us is that we are not really on the leading edge of that. We just know those that were working for us who go away. We don't track the bankruptcies or anything like that and even in good times there's a certain amount of churn in there. So, yes, I have heard anecdotally about different carriers here and there. We are not able to quantify that in terms of whether it's more than a year ago or how much more. But there definitely is a continued churn of some of the capacity.

Okay. All right. Great. Well, thank you for the time. Appreciate it.

Thanks.

Thank you. Your next question comes from Ed Wolfe with Bear Stearns. Please go ahead.

Good afternoon: John, you just talked about the churn of capacity. Is the churn of capacity different than it was six months ago or three months ago?

It's difficult for us to quantify that, Ed, I just know from visiting our offices and talking to our people, hearing some examples of that happening. But it's, we are not really able to quantify it.

Do you have any concerns about finding capacity into peak season?

No, no, I think the marketplace, because it's been soft the past several quarters, I think the marketplace should be able to react pretty well to whatever evolves in the next several months.

Okay.

It could affect pricing though, obviously. If it tightens up, there's less empty miles, people will run further away and it will affect pricing if it tightens up but I'm sure the industry will get through the peak.

If it were to tighten up, my guess is what you learned over the three years before this year is that works for you?

You know, when volumes increase that if it drives price increases like it has in the last three years that can be helpful for us. There is this trend that's always been there though that when things tighten and volume picks up, margin percentage can -- we sometimes have to pay more to take on that extra volume and that can pull the margin percentage down. So that phenomena that I tried to describe earlier that's been there from the beginning works against you when volume picks back up. But, yes, volume and price increases are good for us.

When do you think you will have a sense whether capacity is tight enough in the peak that there could be some pricing?

It really can move week to week. I mean it's hard to say and it's seasonal, too. Sometimes it will start to tighten up in the Southeast or the Midwest but not in other places and kind of our offices we just sit back and watch it day by day, week by week and as the story can change pretty rapidly as it goes through. So you know it's probably not a very fulfilling answer but literally we just learn a little bit more each day and when it's over we summarize it.

Directionally we haven't heard great things about July so far. Do you have any comments on July's demand?

No.

Okay. When I look at your cost, line items, your personnel, your other G&A, your depreciation as a percentage of net revenue just seems to get better and better. At 58.3% and I look at the last four or five years, normally third quarter improves over second quarter. Is there anything in here that should concern me as I apply that last five years, the third year has been a little bit better than second year to my expense line items, was there anything here that was exceptionally?

No, there's nothing unusual. We did point out that many of our compensation programs, John mentioned it and it was mentioned in the release are variable based on growth. The fact that even though we have grown earnings significantly it's lower than it was last year so that's providing some of the leverage.

Is that operating income growth?

Pardon me?

Is that based on EBIT growth?

Some programs are based on branch by branch, specific based on their pretax growth some are based on pretax prebonus growth, restricted stock and some other incentive pools are based on the average of earnings per share growth and operating income growth. So there's many different formulas.

Chad, the working capital, you made some comments about it but it's now two quarters in a row where it's worked against you. Were your comments -- I kind of interpreted it that --

It worked --

It's timing and it's going o come back, is that what you're trying to say?

If you look at historical quarterly cash flows you will see the first and the second quarter are the weakest and the third and fourth are greater other than last year and then last year we made some significant improvements in the working capital. If you look at our, something like our accounts receivable minus our accounts payable compared to a year ago, it grew slower than gross revenues grew, it's just that last year's improvement was so good and unusual.

Okay. So would you expect that that bounces back a bit in the second half of the year?

It -- I don't know of any reason why it would react differently than it has in the past.

Okay. And the acquisition that you made, is that $26 million, that's gross revenue? I'm assuming it's got a similar transportation yield to your transportation yield and that you are going to report that in the airline?

Yes and it would, some of it would be reported in air freight. Currently we do have some domestic air as John mentioned and that is reported as air. It's primarily international air today but there is also some domestic air. And that acquisition is about 45 to -- about half air and half miscellaneous other services including truckload and LTL.

Okay and when did you close that?

July 13th.

And in terms of using your cash flow, your purchase -- your rate of buying back stock is about twice what we've seen this quarter. Should we interpret with the larger buyback reauthorization that going forward it's not -- we should assume a bigger amount than we've seen in recent years?

Like I said in our comments we expect that authorization to last several years and that our, the amount we buy back in any particular quarter, any particular year will depend on various factors including our cash balance, any potential uses for the cash we see and market conditions.

Okay. In terms of acquisitions can you give us a sense, are you still looking for other tuck-in air, ocean, what are the areas that you're looking for?

We are looking for acquisitions to support any of our growth initiatives, nothing has changed on our attitude towards acquisitions.

Okay, last question on the sourcing side you mentioned some pressures on the yields there. Can you talk about when you expect those to subside a little bit.

Most of them cycle through with growing seasons. There were a number of freezes and floods and it can raise prices compared to the previous year. But it generally lasts like three to six months. So the, this was typical quarterly fluctuations the way I look at it from quarter over quarter. And I don't know that those same reasons for margin compression may or may not even exist in the second half of the year.

Right. There were some increasing prices on certain commodities. When you look at our dollars or cents per case of profit even though our margin percentage was down we actually made more per case than we did a year ago.

I get it. Thank you very much.

Thank you, the next question comes from Jason Seidl with Credit Suisse.

Good evening, gentlemen, a couple quick questions. You said that pricing is essentially flat for the quarter in your truck division. Can you break out pricing between truckload and LTL?

You know, we don't, and the reason for that is there are some definitions in terms of what is LTL and what is truck when we have different shipments that we consolidate and put on to a truck.

Like a multi-stop truckload, right?

Pardon.

Like a multi-stop truckload, is that what you refer to?

Yes. We do do some internal metrics around that but we don't disclose anything.

Have you seen some of the LTLs weakening of late? Because I know you probably noticed FedEx came out with the announcement the other day that they are reducing their fuel surcharge by about 25% which is essentially a rate reduction. Are you seeing anything about weakening LTL rates?

Nothing that sticks out to me. In our business again it's different because we are generally sourcing capacity all in and so surcharges can be blended into the rate or calculated separately. All we can really do is look at the average price per transaction in one period to the next and it was generally flat. So I'm sure there is variance within there amongst different carriers but nothing we can really pull out in terms of a specific carrier or LTL versus truck.

Okay, if I could just switch to your intermodal gross profit growth. Obviously slowing a bunch from the first quarter but you had fairly difficult comps over the prior year. What should we expect for intermodal in the back half of '07 here?

We don't give any specific guidance other than our long-term 15% growth. So it will really depend on how well we do at penetrating the market and continuing to add customers and continuing to add volumes just like with the rest of our business.

Okay and not to beat a dead horse on the share repurchase program but given your average price in the quarter last quarter, there is no reason to believe that you wouldn't be almost as active barring any massive increases in your share price during the quarter?

There is no specific changes to the program or specific changes in the environment that we see today. But that's by no means committing that we are going to do what we did last quarter.

Okay. Thanks for the time as always.

Thanks.

Thank you. Next question comes from Scott Flower with Banc of America Securities. Please go ahead.

Good afternoon all. Just wondering obviously there's seasonality and there's lots of mix effect but and again I know there was a component for when we are looking at net revenues on a total transportation basis, but the sequential spread fell faster than it has sequentially 1Q to 2Q and again I'm aware that there could be all sorts of mix effects. But does that get to some of the transparency in the market moving quicker was it just a mix effect in the different componentry of business within your transportation portfolio? I'm just trying to get a better sense of why that moved as it did from 1Q to 2Q?

Just to be clear, Scott, you are talking about the gross profit percentage for total transportation?

Correct, 17.9% in the quarter.

Compared to.

What it was -- in other words, the change in 1Q is close to 20% and when, as I look at 1Q to 2Q changes over time it seasonally tends to get a little tighter but it doesn't typically tend to drop quite as much as we saw 1Q to 2Q this year.

You are talking sequential first quarters to second quarters.

Correct and again that may be just a function of 1Q is spectacularly good because rates came out faster, it could be a function of mix, typically there seems to be some seasonality and understanding there's lot of complexity in terms of exactly where the net revenue margin actually is. But typically on an average basis it doesn't tend to drop quite as much 1Q to 2Q as it did this year and I'm trying to get my arms around that.

I think the biggest factor is the fact that it was 20.2% in the first quarter. We don't analyze it sequentially in changes like that.

Okay. Then help me a little bit, obviously you've been continuing to grow your transportation management business and I'm just trying to understand that on a miscellaneous basis how that progresses, how that is being positioned in the marketplace, because obviously that is continuing to grow more rapidly than sort of your overall book of business.

It's, it's a fee based business so basically rather than bidding on transportation at predetermined rates or in a spot market it's a longer term contract, generally at least a couple of years where we are providing route guide management and execution with our generally very technology driven where we are helping a customer manage their process, distribute their route guides, score their carriers, do everything that a typical transportation management service center would do. There, I don't know the exact number but there is like less than 25 customers in that business today. It's something that we've been focusing on for the last six or seven years. And it has continued to show a fair amount of demand in the marketplace. There are a lot of customers who are exploring the possibility of using a service like that. It's a challenging business line from the standpoint that it is a very automated process. There is a lot of set up costs. There is a lot of -- there is some standardization but there is a lot of customization that goes on. So we, we have been somewhat aggressively but also being very targeted in terms of the customers that we are taking on and trying to get smarter about how to implement and how to execute that business and understanding profitability, all those different things that we are working through. So, yes, it's a key growth initiative for us. We've been at it for five or six years and we are going to continue to learn and get smarter and work with the right customer opportunities to try to grow it.

Right. And then just a couple other last quick ones. You mentioned in the release talking about in some of the air business that there was some project based I guess efforts or transactions. How should I think about that? Is that more that those are one-offs or short duration and we should be just watchful of that as we look at that line item in terms of extrapolating or how should I interpret that remark in the release?

We have a couple of customers where we do sort of seasonal agricultural shipments and those shipments can start early or run late and the volumes can vary. And so they are recurring customers that we've referenced in several of the past years but sometimes the volume activity will shift from quarter to quarter or be very high or very low in a given month depending upon crop yields.

Okay, and then this last quick question, if you could refresh us how much of your business actually is order of magnitude LTL versus truckload? I know there are gray areas but however you might define something as LTL, like versus truckload, obviously the predominance being more truckload like.

We know that between 10 and 11% of the truck, our gross profits are generated from LTL. It could be higher than that because like John said depending on how you define LTL, we have a lot of multi-stop, multi-pick drops or multi-drop truckloads that could be classified as truckload.

Right, order of magnitude is fine. I hear you. Thanks very much.

Operator?

Thank you, our next question, John Langenfeld with Robert W. Baird. Please go ahead.

When you look at that acquisition on the expedited side, how much competency do you have there? I'm kind of thinking back to the flatbed acquisition you did, one in Minnesota and one of the comments you had made, we did this to help gain competency more than scale. How did that relate to this expedited one?

When we've talked about it internally I would say those two acquisition opportunities are pretty analogous that they are both service offerings that we offered to customers prior to those acquisitions. But in many cases there would be certain lanes or certain commodities where we just weren't competitive because we didn't have as broad a scope of carrier relationships or people who know the uniquenesses associated with how to palletize a certain commodity or how to strap a certain thing onto a flatbed. So when we look at an acquisition like this it's really not bringing a new service item to our offering or to our menu, but we hope that it's going to make us much more competitive when we are talking to a customer or quoting a customer because we'll have a much greater density of people who understand how to do those things, what types of capacity might make a competitive offering and we can share that knowledge across the network. So, yes, I do think those are both good examples of where we are using North American acquisitions to enhance our network.

And the main push from the owner of this organization to come into the C.H. Robinson umbrella in this particular instance what would it have been in your mind?

You know, I think this one is probably fairly typical to many of the other smaller acquisitions that we've completed where you've got a fairly energetic entrepreneurial type ownership but at the same time a lot of their net worth and capital ends up being tied up in a very demanding, very stressful situation. There's a lot of pressures to take on receivables and maybe some operating leases from a financial commitment type standpoint that constantly has you doubling down on the types of things that you want to do to serve your customers. And if you aligned with somebody like our network you have so many more resources to leverage off of you can diversify your personal situation a little bit and yet you can continue to work with those customer relationships and probably serve them in even a bigger or better way. My sense is that that was the driving motivation in this deal just like many of the others.

Okay, makes sense. And then switching over to the bid process this year, the elevated activity in terms of shippers bidding out freight, anything different you notice in terms of trends, in terms of the type of freight you were getting commitments on or the duration or anything along those lines?

No, not really. Most of the accelerated bid activity was really towards the beginning of the year and I think, I guess probably the most interesting component of that will be to see what the fall peak season and the second half of the year turns out to be and what sort of contractual compliance there is to those new rate structures and kind of how the thing matures during the second half of the year.

Yes, I would agree. And then lastly when you talk about the gross margins being near the high levels on the truck side, could you remind me did that, did you basically get to those levels in the third and fourth quarter of last year?

Yes, they moved pretty quickly there in the third quarter of last year.

Okay. Very good. Thank you.

Your next question comes from John Barnes, BB&T Capital Markets. Please go ahead.

Hi, good afternoon, fellows. As you, you mentioned your higher CapEx number because of the new corporate headquarters. Have you begun the move in process yet?

No. We will be moving in some time in the middle of October, during October.

All right, so it's going to be a fourth quarter expense. Can you quantify at all as to what kind of expense you are looking at incurring due to that move in?

I would say all of the cost of the building plus the furniture and everything else will be depreciated over time. The move cost will not be significant.

So it's not a big margin impact to relocate to the new facility?

No, it should not be a big impact at all.

Given that you had a little bit higher than normal CapEx this year, should we see kind of a reversion to the main next year or is there anything else major planned of this magnitude in '08?

Well, we do have some more land that some time in the future we will likely build another two buildings. I'm not, we are not certain yet whether, when we will start the next building but we will let everybody know. Besides that so far we've been spending $5 to $6 million or so a quarter on normal ongoing CapEx. We expect that to continue and to grow with the business.

Okay. So we should see the reversion of that barring your construction of the next two buildings for headquarters, or three buildings, that's a good problem to have, right.

Yes.

All right, and then lastly just looking, again, I don't want to beat the capacity situation to death but I just want to make sure I got your comments right, you've seen some churn in your own carrier base. But you don't believe it's any concern going into peak. At this point you feel like you're adequately supplied with the available capacity you need?

That's correct. We stated that we think the industry and we'll have access to plenty of capacity to get through the peak seasons.

All right, very good. Along those lines a number of the publicly traded carriers that I follow have mentioned that they have gone out of their way to cut out hauling for brokers and other, other transportation providers, that they felt like just the pricing pressure was too much to bear. I mean, have you seen, are you seeing more of your business with your smaller carriers, has there been any kind of mix shift in terms of the size carrier you are dealing with or can you tell from the business you've done this quarter?

No, there really hasn't been. We -- we do kind of track the business activity by carrier size and there is always minor movements. You can tell by lane sometimes when a carrier makes a different routing or pricing decision or sometimes you'll see minor movements in it. But we've been working really hard to try to differentiate ourselves in the marketplace. We've talked in the past about carrier management strategies. And I know that a lot of times, at least some asset based carriers really move away from third parties and brokers that they feel are not going to have integrity in the relationship and maybe are going to try to put [assistorials] on or take even more and so we, we have a pretty good mixture of carriers out there and we are working really hard to try to preserve our relationship with all of them at all sizes.

All right, very good. Nice quarter. Thanks for your time.

Thank you, your next question comes from David Campbell with Thompson Davis and Company. Please go ahead.

Yes, thank you very much and most of my questions have been answered but I did want to know if you could tell me where the three global forwarding offices were opened in the second quarter and the number of employees involved.

Well, they were all opened organically with two or three employees each. So it wouldn't be a significant headcount. The locations were Singapore, Amsterdam and Seattle.

Okay. And the one in Seattle is primarily, you mentioned it was global so it's primarily ocean freight or?

Yes, we actually have had a domestic freight office there for quite sometime and we felt there was an opportunity with some personnel to try to start coordinating some of the forwarding activity there as well. So we've had a presence in that marketplace before, so. Most of these decisions are very personnel driven in terms of where we think we've got the right person to go, to go do that as opposed to some deep geographic analysis.

So they weren't driven as much by customer demand as they were by personnel?

Mostly -- the first consideration is having the right caliber person who is ready to take on the opportunity. Obviously we try to target them towards markets where we think there is opportunities or existing business but number one criteria is absolutely the, having the right person.

Right, right. And how do you see the international marketplace in the second quarter? Was it fairly stable for you?

You know, there is a lot of transition. There is currency movements and there is new capacity and a lot of opportunity. We are relatively small from a market share standpoint in that so we are out trying to build relationships and spread our story and do what we do. But there seems to be plenty of opportunity and plenty of transition in the marketplace.

All right. Well, thank you very much. I appreciate your answers.

Thank you.

Thank you, our next question comes from Donald Broughton with A.G. Edwards. Please go ahead.

Good afternoon, gentlemen. A little surprised by the strength of the top line, not by the margin. And as I look through the entrails here it looks like you have very broad-based growth by the lines of business we can see. Perhaps you can give me a little bit better understanding. Did you experience more growth in a few large key accounts? Was it growth across your entire account base? Was it a higher rate of addition of new accounts?

The best answer to that is growth across the entire account base. We did sign up a lot of new customer I.D.s in the quarter. We are always adding a lot of new customer I.D.s and trying to grow them into top accounts over time. So we continued our aggressive marketing and signing up a lot of new customers and that is the primary growth driver. Our top 100, top 300, the larger, more mature accounts that we look at had less growth than we did as a whole during the quarter.

Because I know we talked about the last several months that certainly the conditions that we saw in '05, '06, really set up many distribution managers to be, well, in a position to be outsourced or at least a portion of those departments to be outsourced and that was a trend that could be working in your favor. Is that continued to come to fruition for you, for you guys, or is that a theme that we should not be thinking about as a revenue driver anymore?

I don't recall us specifically making those comments. I know that the way we think about it and have talked about it is that these significant price increases that I referenced earlier caused a lot of strain and a lot of reanalysis for a lot of us in terms of what was the most cost-effective way to do things in mode. So there was a lot of transition created that provided opportunities to re-bid things or to try to help customers in new ways. But I don't really know for certain that it's caused any directional outsourcing or don't really recall ever seeing that as a trend.

All right, fair enough. Thanks, gentlemen.

Thanks.

Thank you, the next question comes from John Larkin with Stifel Nicolaus. Please go ahead.

Thank you, John and Chad for taking my questions. A couple of years ago you were using your balance sheet strength to do what I would call some accounts receivable financing for some of the carriers and that seemed to be a pretty profitable endeavor and also differentiated you from some of the other truck brokers out there. I haven't heard too much about that the last couple of quarters. Has that been de-emphasized or is that actually one of the reasons why you are having so much success at tracking capacity?

Our, you are referring to what we call our quick pay program?

Yes.

It's not financing accounts receivable for carriers. What it is doing is paying them in two days rather than 20 days which are our normal terms. The reason we haven't talked about it a lot lately is it has stabilized. So it's growing with the business. Pretty consistent, somewhere around 30 to 35% of our payables, truck payables are going out through that quick pay program. But it hasn't caused major changes like it did a year or so ago when the use of it was increasing.

So you would expect it to stay around a third of your total business being handled in that manner.

Based upon what we've seen it's been relatively stable there for quite sometime.

Okay, and then secondly your ocean, air, and miscellaneous businesses seemed to grow very nicely during the second quarter and I'm wondering if that's a new emphasis on those three businesses that could ultimately lead to perhaps a little better balance and perhaps a little less dependency on truck? Is that something that is a strategic initiative or is that just happening based on what's falling off a tree into your various offices around the country?

I think it's been a growth initiative for the last ten years that we want to build out our forwarding business and when we talked about the more recent acquisitions in Europe especially that there was going to be some good mode diversification and we would be able to sell into that. So absolutely it's a growth initiative of ours and we not only consider it good to diversify but it's also just kind of an organic growth opportunity that we've been working on for quite sometime. So the only thing I would change in your statement is its really not new but, yes, it's a key initiative for us.

It just seemed to get more traction here in the second quarter than perhaps you've been getting so that's a good thing, I guess. And then with respect to the domestic branches, I guess there weren't too many new domestic branches added. Are you getting to the point where you've got just about all the geographic markets covered and the domestic growth will therefore come just from expanding existing offices or are there still some areas where you feel like you would benefit by adding additional domestic offices?

We still plan to open domestic offices for the foreseeable future. We've evolved that process where we've been sort of doing group interviews and the office openings the last couple of years have come more in clumps rather than spread more evenly throughout the year. So we are still expecting three to five of them in the second half of the year and that's already pretty much in progress; we just haven't announced the precise names or locations yet. But we still feel like for the foreseeable future there is at least another 50 or 60 cities that it makes economic sense for us to have an additional presence in where we think we can help pursue those market share goals and carrier relationships more effectively by having a presence in those cities and we will continue to develop people for those jobs and identify them and put them into them as we think they are ready.

Are those 50 or 60 just domestic?

Yes.

Okay. That's amazing. Now, you have any opportunities to maybe add multiple offices in the same city, is that a strategy that makes sense particularly in places like Chicago where there's a lot of freight and a lot of far reaching geography to cover?

Yes, we already have three offices in Chicago and there are a number of other large cities where when we target the office openings there may a southern suburb and a northern suburb that we have an office in. Obviously, we have got three offices in LA and those are big marketplaces. Each of those offices will have slightly different levels of expertise and focus and different modes and they will work together on different things and they will be geographically spread so that we can kind of be on the ground marketing in efficient ways both in terms of hiring people from local universities and communities as well as just face to face customer and supplier carrier interaction.

That's very helpful. That's all I had. Thank you very much.

Thanks, John.

Thank you. Our last question comes from Jessica Carl from Merrill Lynch. Please go ahead.

Good afternoon, it's actually Ken Hoexter as well, hey, Chad and John. Just on that miscellaneous expense, or revenue side, is there something particularly that's just a freight management where you've been growing, just wondering why that's growing so much faster than truck just as a follow on to a previous question.

Mostly because it's a newer service line with a limited number of customers. So when we've added some it's just as a disproportionate percentage increase. So it's really just coming off of a smaller base of growth.

Is that something you are trying to go back to your current base to increase penetration or is that something you are doing with new sales?

No, I described earlier it's a business line that we think has a lot of potential but we are growing selectively with the right types of opportunities to make sure that we evolve the service to the right sort of value-add to the customer on the right kind of pricing.

Fine, and then I just want to wrap up on the share repurchase plan. I think, Chad, did I hear you right that you can do it over a couple of years or there is a certain time frame you want to finish this?

No, there's no, with the new authorization just like with our previous one -- the shares that we are buying right now we are buying off of a, off of an authorization that was granted in 1999. So the 10 million share new authorization is expected to last several years.

Okay, great. Thanks.

Thank you for participating in our second quarter 2007 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 Web site. It will also be available by dialing (800) 405-2236, and entering the pass code 11092490-pound. The replay will be available at approximately 7:00 PM Eastern time today. If you have additional questions about our second quarter results, please call me, Angie Freeman, at (952)937-7847. Thank you.

Thank you. Ladies and gentlemen, we thank you for your participation, and at this time, you may disconnect.