羅賓遜全球物流 (CHRW) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson third quarter 2007 conference call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Tuesday, October 23, 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 third quarter performance and we will follow that with a question and answer session. I would like to remind you that comments made by John, Chad, or others representing C.H. Robinson may contain forward-looking statements which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I'll turn the call over to John.

Thank you, Angie, and thanks to everybody on the call for taking the time to listen and follow our story. About an hour ago, we sent out our third quarter earnings release. I'm assuming that everybody on the call has had access to that.

I'd like to start by highlighting a few of the key metrics on that report that we look at in evaluating our results. Our third quarter gross revenues increased 8.8% to over $1.8 billion. Our third quarter net revenues or gross profits grew 12.5% to $313 million for the quarter. Our income from operations grew 18.6% to $131 million for the quarter, and our diluted earnings per share grew at 20% or $0.48 for the quarter. From an overall perspective, relative to our long term growth targets of 15% for all of these metrics, we continue to be challenged to reach our goals for the top line gross revenues and net revenues. However, our earnings and EPS were in excess of our long term target of 15%. From a shorter term perspective, the third quarter results and growth rates were fairly similar to our 2007 year-to-date results, with no significant changes or unusual patterns from the previous couple of quarters. Given the continued softening of demand in our core North American truckload offering, we're happy with our third quarter results and believe that we continue to execute our business model with good discipline.

Moving on to some prepared comments by motor service offering starting with the truck category. As a reminder, our truck net revenue category includes all types of truck activity -- drive-in, refrigerated, flatbed as well as LTL. On our second quarter call, I talked about the three drivers of our growth in truckload net revenue, those being volume or shipment growth, pricing, and gross profit margins. During the third quarter, our truck net revenue growth of 12.1% was driven by a similar growth rate in our volume. Our core North American dry van volume increased mid single digits. Volume growth from all other truck services including LTL grew faster.

Our truck volume or shipment growth in the third quarter continues to be one of our primary focus points. We believe that the overall industry shipments and tonnage is flat to down and that we are increasing market share by adding value with good people and processes. Growing volume and relationships in the marketplace has been the driver of our growth this year. The slight price decrease was driven by continued softness in demand. Our gross profit margin expanded slightly versus a year ago and remains at the high end of the historic range for gross profit margins. Volume drove our growth, pricing and gross profit margins moved slightly in offsetting directions.

Intermodal net revenues -- our third quarter intermodal net revenues grew 9%. Similar to the truck services, our intermodal net revenue growth was driven by volume growth. We continue to focus cross-selling and account management with our customers to offer intermodal choices where appropriate. In addition to selling and building relationships, we believe our significant efforts on operational improvements over the last several years has helped to make us enable to make us good choices and execute efficiently.

On air services, our air net revenues include both international and domestic air net revenues. The third quarter air net revenues include approximately $1 million of domestic air net revenues from the acquisition of LXSI. We discussed the acquisition of LXSI on our second quarter call, but it closed early in the third quarter. We expect to continue LXSI -- we expect to continue integrating LXSI into our domestic network and expand our presence in domestic air freight.

Global forwarding services. Our global forwarding network of international air, ocean and customs brokerage services grew its combined net revenues in excess of 15% for the third quarter. We continue to build out our forwarding network while integrating international services into existing customers. For our other service lines, our transportation management, produce sourcing and T-Check service lines all continued to grow their net revenues at rates consistent with the first two quarters of 2007.

Moving to the operating costs, we talk about our people. Our employee count at the end of the third quarter was 7,149. This represents about a 2% increase from the end of the second quarter of this year or approximately an 8.5% increase from a year ago. Building our team the right way with the right people is still the foundation of the company. We're adding people to the team slower than the previous few years due to the softening demand in the overall freight market, but we will continue to add to our team and invest in the future.

Our business model includes significant variable personnel costs. We have management incentive programs that reward growth, including our equity plans that vest based upon overall earnings growth. While we're having a successful year in many ways, our slower growth this year compared to 2006 has resulted in decreases for some of these expenses. Similar to the first two quarters of this year, our personnel as a percent of net revenue has declined compared to a year ago due to these variable expenses.

In summary, to wrap up my comments before I turn it over to Chad, freight demand continued softening in our core North American market. When the market is soft, we focus on selling, growing volume, and expanding the impact of our existing team. We've continued to expand our service offerings including domestic air, transportation management, and expanding our forwarding network. Revenue growth is more challenging in this part of the economic cycle, but we believe our strategy, our model and our long term goals remain valid. With that, I'll turn it over to Chad.

Thank you. I'll make a few quick comments on our cash flow statement and then we'll turn it over to you to answer any questions you might have.

Our cash flow from operating activity was relatively strong for the quarter. Our cash flow from operations approximated our net income for the quarter, which is one of the benchmarks we look at internally. So far this year, our working capital has increased faster than our gross revenues, driven primarily by a slight increase in the amount of time it's taking us to receive (inaudible) from our customers. This is partially impacted by the fact that each quarter this year has ended on a weekend, this quarter being a Sunday, where we do not receive two days of cash receipts even though there's activity going on. On cash flow from investing activities, CapEx for the quarter was $8.4 million for the quarter, $3.6 million of that related to the building, and we had another $4.8 million, primarily of technology spending and other things related to growing the business. Next quarter, there will be an additional approximately $4.6 million related to our new corporate headquarters which we have now moved into.

Moving on to cash flow from financing activities, during the quarter, we repurchased approximately 900,000 shares at an average price of $50.18. We also issued about 190,000 shares through option exercises [for the] employee stock purchase program purchasing. That concludes our prepared remarks, and we will now turn it over to questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Tom Wadewitz with JPMorgan. Please go ahead.

Good afternoon. Let's see, I wanted to get your thoughts on what the truckload market feels like relative to the last period of slowing. Is 2001 -- 2000 and 2001, is that a pretty good analogy to how things are playing out this time around and is it fair for us to look back at how your model worked then in terms of how it might work in say 2008?

It's really difficult to be precise in the comparisons. I would say from an overall standpoint, we feel like the market softening and freight demand softening is very similar to previous periods like '01 and '02. There has been a lot of change since then with regards to how people manage their freight, the level of automation, an increase in international activity. So there's lots of variables that can always make the current environment different than any historical one. But from the standpoint of how we've managed transportation for the last three or four decades and kind of the normal fluctuations in supply and demand and the acceleration of freight demand and then the softening -- yes, this feels like in a lot of ways just a typical softening of the demand side.

Okay, and what you see at the present time leads you to think that the softness in demand may last for a couple more quarters?

I didn't say that and I don't know, I don't really know. I'm not an economist. I don't know how long it will last, but I do know that Robinson has been around a long time and the market has continually cycled up and down from a supply and demand standpoint.

Okay, fair enough. On the restricted stock program, you've gotten some, I guess, some benefit to your operating margin performance as that has, I guess, vested at a slower pace this year. If the net revenue growth or gross profit slows again next year, would there be another ratcheting down of the pace of vesting in that restricted stock or are you already at kind of a low end for that?

Well, the formula is relatively simple. You take the shares that are available to vest and you multiply that by the average of earnings per share growth and operating income growth plus 5%, so it's all based on the growth and earnings. So if we grow at 15%, those shares would vest at 20%. If we grew at 10, it would vest at 15, but again it's all earnings based, not net revenue.

Right, okay, and just the last question and I'll pass it along and I appreciate the time. What are your thoughts in terms of small truckers maybe going out of business? Have you started to see that yet or not?

Our data points are such that we don't really know if they've gone out of business when they stop working with us because we just track activated carriers. So we do know that there are some small carriers that we were doing business with six months ago that we're not doing business with now. Whether they went bankrupt or not, we don't really follow that churn. But I think it's a reasonable assumption that during this part of the cycle that there's always a reduction of some levels of capacity, whether it's large carriers scaling back or small carriers going out of business or even temporarily parking their equipment, if freight demand isn't what it used to be.

Right, okay, great. Thank you for the time.

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

Yes, good afternoon, all. Just wondered if you could give us some sense -- I know -- and maybe I'm parsing the language a little too much. You talk about, obviously, demand softening and that's a relative qualifier. Does that -- maybe I should pose it this way. When you look across third quarter between the months, was there any relative softening between the months on a year-over-year basis versus the prior month that was more pronounced or was it just a generalized statement that things are softer as opposed to they are continuing to soften through the quarter?

I think the comment was really about based on our experience as well as the course of others that the overall demand in the marketplace has continued to be soft. We actually on a net revenue per day basis -- our growth increased throughout the quarter with September finishing the strongest.

Okay. And then just curious on the carrier side, I know that you just obviously answered the question about, a little bit about carrier bankruptcies, but I'm just getting a sense of -- maybe it's hard to track this. But do you get a sense of the carriers that you do do business with that you're continuing to gain share with them on the capacity side? I know that over time that's been one of your goals is a way to create capacity. Is that something that happens in this environment where you can actually provide demand for those carriers and therefore you're able to take share even with a smaller perhaps number of providers, potentially?

Yes, we believe that to be true. However, tracking the universe of equipment for each carrier that we deal with is a challenging thing because their equipment capacity and drivers are coming and going. So we have account management strategies on the capacity side just like we do on the customer side. We hope to and believe that we are penetrating many of those relationships and the fact that we're growing in what we believe is a flat to down market would all provide evidence that that must be true.

Okay, and then the last question and I don't know if you can give us any direction or we'll have to wait until the fourth quarter report -- but can you give us some sense of where CapEx for next year may sort of be, order of magnitude directionally from where [the drops]? You've had a lot of expenditures relative to the new headquarters and I would imagine those go away or certainly dampen quite a bit into next year and '08.

Right. This year, excluding the building, we'll probably have about $20 million of CapEx, which would be a good relative baseline for next year. There will likely be some growth if the business grows.

Okay. Well, thank you all very much.

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

Hi, guys. Chad, what's the story -- you mentioned a little bit about working capital but it's been working against you for a little bit now. Can you give a little more clarification? And when should that start to move more positive for you?

Well, over a long -- if you look over at our history, the working capital does grow as the business grows. As we talked about last quarter, last year, we made some significant improvements in the days of accounts receivable that were outstanding and it has moved slightly against us this year. We expect the receivable collection to go up and down based on our branches' collection efforts, how willing the customers are to pay their bills quickly and things like that. So we expect it to fluctuate around. Don't think it's outside what's normal. We have approximately 45 days worth of receivables at the end of September. We've been as low as 42 days, so we're on the higher end of what we have experienced in recent years. So again, it's going to fluctuate around and while we don't think that it's -- we haven't seen anything that makes it seem like it's going to be different than the normal fluctuations.

You're not seeing an increase in bad debt at this point?

No, we're not actually. Our bad debt experience is actually very good right now as a percentage of gross revenues compared to history.

And John, before in response to Tom's question, you mentioned that it's hard to track who is going in or out of business because once they leave your system you don't know why. Can you just talk to the number of carriers not doing business with you currently versus how that was tracking six and 12 months ago? Has there been much change in that?

Throughout the last several years, each quarter we've continued to sign up a significant number of new small carriers and a smaller number of small carriers would drop off, and that pace has continued. We continue to sign up new carriers and drop off a number of them as well. So the way we monitor our carrier side is that when we haven't interacted with them for a 12 month period of time, then they would drop off of our active carrier list. So our active carrier list has continued to grow, but not at the same pace as it was over the last couple of years. And I can't really give you a lot more detail or color in terms of what our percentage penetration is of any of those because we don't track real cleanly exactly what the total capacity is for every carrier that we interact with.

Have you ever in past downturns before had trouble finding capacity?

No. Our approach on that, Ed, is that everything is going to move. It's just a question of how far things have to deadhead. And I know it's logical to assume that capacity is sort of a fixed thing, but the reality is that capacity can expand or contract depending upon deadhead miles and days that work and all the rest of that. So we've always been able to get things moved. It's just a question of what do you have to pay and how many empty miles will there be. So the general statement is that we will always find capacity. It's just a question of what it's going to cost and how much it's going to take to get it done. So there's no question that it's easier now in terms of finding something that's closer to the point of origin and being able to hopefully pay less for it or having choices of where those carriers want to go.

Okay, shifting gears for a second, seasonality? What's your sense of -- historically third quarter was a stronger quarter. Last year it was, but in '05 and '04 fourth quarter were stronger quarters, and from an earnings perspective almost every quarter except for '01 has been up in fourth quarter over third quarter. How do you look at fourth quarter given this freight environment and what feels like a weaker peak versus the seasonality of third quarter?

When we talked earlier about variations from year to year or cycle to cycle, it does feel like the last couple of years with the hurricanes and ramping up and international shipments with larger customers trying to manage inventories differently and stuff, that perhaps whatever history of patterns there were around fall peaks might be changing a little bit. So we've always said this, Ed, but it really is difficult to predict. It's really hard for us to say at this point what the fourth quarter is going to feel like and whether or not it will follow historical patterns or not.

Okay, cash flow? You've been buying back stock in a kind of steadier flow. Should we assume this is the new kind of $40 million plus a quarter kind of range? How should we think about that?

We do look at it every quarter and again, it's a big part of it is capital redeployment. We know that the cash can't continue to build on the balance sheet so it will, the repurchases will vary based on our cash flow generation and any acquisition opportunities we see.

What do you see on the acquisition front? Is there anything out there?

We're continuing to look at things. Nothing imminent or nothing specific to talk about. Kind of the same story as before. We're looking for other third party logistics businesses that could help us build out our network and offer new services.

Okay, thanks, guys. Appreciate it.

Thank you. Next question comes from Alex Brand with Stephens. Please go ahead.

Thanks. You guys hear that breathing? Because that is driving me nuts.

Yes, we do hear it but it's not us.

It's not me either, but just a couple of quick questions. And I apologize if you said this in your intro because I just got on in Q&A, but the sort of gross profit spread range that you're in now but you're clearly at the top end of -- are we getting close to the end of when -- let me ask it a different way. When will we comp against that higher end range that you think is probably unrealistic to move beyond your historical spread range?

I think we've been pretty close to that. One of the things that for several quarters now, Alex, and one of the things that we've tried to point out in our release is that there's two issues in the margins. There's mix, so when we have more higher margin activities like management fees or LTL business, that's going to drive up the transportation margin. So from a mix standpoint, gross profit margins could continue to move up, but within the dry van truckload category, for instance, relative to our historic ranges, we've been on the high side of that range for several quarters.

And history -- if history repeats itself, we would start to move away from that when volumes started to accelerate. And those incremental loads that we would get, we would probably have to start paying more to cover them and those margins would start to compress a little bit or come back. So that long term inverse relationship between volume and margins, what we would expect is that when the volume and demand in the marketplace starts to come back, that's when we'd start to move away from that high end of the range.

But from a comparison standpoint, is it first quarter of next year when you're comping against kind of the high end of the historical range on truckload?

Yes.

Yes.

The first quarter this year was, yes, at the very high end of the range.

Okay. And in the quarter, your volume growth was pretty good and I think you said last quarter that you felt like sort of the high single digit market share growth was a sustainable number based on sort of the historical pattern. Is that kind of what you still feel like? I mean this was obviously a little bit better, in the double digit range. Do you feel pretty good about the sustainability of that?

We pointed out the separation between the dry van truckload activity, which is the largest component of it, and we did have higher growth in some of the refrigerated or LTL services. So depending upon the mix of business and how successful we are, all of the growth is obviously selling new services. So that's something that we have to continue to do each quarter and execute it. But that would certainly continue to be a reasonable goal for us. What we've talked about before is that our long term 15% growth goal implies some periods of tailwind of incremental freight from current customers and some periods of time when there won't be incremental freight from existing relationships. So we have to sell and take market share to grow and that's where we are right now. So yes, in this environment, mid to high single digit volume growth would be a reasonable target for us.

Okay, that's all I have, guys. Thanks a lot.

Thank you. Next question comes from Ken Hoexter with Merrill Lynch. Please go ahead.

Great. Good afternoon. Just on the average net revenue per employee, it kind of slowed a bit. I know you always say that your hiring is local. Is there kind of any shift that you've seen in hiring trends as we go into this kind of a bit of a slower period?

No. We really didn't do anything different. Again, as we grow larger and more diverse in our services with people, a lot of employees in Asia and South America and different business lines, we really break down those metrics by service line and by geographic location. And by our measurements, our net revenue per person metrics were fairly consistent.

Okay.

So no, no changes.

Are you saying the growth in that slowed down?

Yes, the growth slowed down. It went from about 5% to I guess about 3.5%.

We're continuing to leverage -- as John mentioned in his prepared remarks, we are continuing to leverage the employees we have and try and get more and more productivity out of them, but again, the 5% growth on that revenue per person has been -- that we've experienced recently is high relative to previous years and we're still happy with 3.5% increase.

Great. And on T-Check, I guess as you talk about the slowing trucking environment, should we kind of see that staying in a mid single digit until you start to see a rebound? Would that be directly related to the kind of the trucking flows?

Yes, I think in a slowing environment like this, their net revenue growth would be more consistent to what it's been this year, so yes. T-Check, like many other areas of Robinson, is working on new and different services and marketing as well, so we would never be content with lower single digit growth. But similar to the freight management services within Robinson, when the activity levels and the demand for the trucks is slower, T-Check doesn't get incremental transactions from existing customers like they do during high growth.

Makes sense, and then over on the -- I just want to clarify something. I guess John in opening comments said that volumes were up but pricing was down a little bit because of the soft demand. Can you kind of talk about what level of declines you're seeing in the marketplace on the pricing side, and has that gotten worse over the past couple of weeks or has it stabilized?

I think our van pricing compared to last year's third quarter was pretty consistent with what other truckers have been reporting, which is down about 3% on a per mile basis.

Yes, and has that gotten any worse, has it stabilized the last few weeks, months?

Again, we don't comment on anything during the current quarter or during the quarter.

Can you talk about progression, did it continue to deteriorate right up until the end of September?

The rates compared to last year's rates -- the rate of decline was relatively consistent.

Okay. Thanks for your time. Thanks, John, thanks, Chad.

Thank you. Next question comes from David Campbell with Thompson Davis & Company. Please go ahead.

Hi, John. Chad, is there anything unusual about the sourcing gross revenues in the third quarter? They weren't up very much relative to recent past. Anything unusual about the third quarter sourcing?

No. The gross revenues of sourcing really just fluctuate due to the variations of the commodity prices that we buy and sell, so it's difficult for us to really shed a lot of insight without going down the 100 or so commodities. But it's just the fluctuation in the different prices.

Depends on the mix of your commodities?

Correct.

Okay, and in answer to a question, I thought you said September's volume growth was the best of the three quarters. Or did I mishear something?

Our net revenue growth per business day was stronger in September than in the other month is what I said.

Oh, okay. And have you seen any increase in potential acquisitions in this softer environment or is it still about the same as earlier in the year?

We have not, obviously, closed any deals or had any more positive experience, which is why we continue to increase our share repurchases and manage our capital that way. As you know, acquisitions are kind of hit or miss and you never know where you really stand on them, so it's hard to say exactly how the pipeline compares to a year or two ago. But it is our hope -- our first preference from a capital management standpoint would be to invest in new and different services and do internal growth and acquisitions. So we're going to keep looking and hopefully we'll be more successful.

Okay. Well, my other questions have been answered. Thank you very much.

Thank you.

Thank you. Our next question comes from Mike Hamilton with RBC Dain. Please go ahead.

Good afternoon. As you look at the various initiatives that you've got going in terms of driving revenue, what things do you think are worth commenting on at this stage? In other words, taking a 12 or 18 month perspective, what areas of focus do you really expect to see gain some acceleration?

Everything, hopefully. We really have separate teams within the company that focus on each of the different services offerings that we have as well as account management teams that work on integrating the service offerings and trying to figure out, listen to our customers and figure out what it is that they want or need. So each of our service line areas has 15%-plus growth targets and hopes to be successful in what they're doing, and a lot of what their actual growth will turn out to be depends more upon our customers' decisions of how they're going to manage their business or how well they grow. So it is hard to predict.

Obviously, things like transportation management services are newer to us so it's easier to grow them at a higher rate. The global forwarding network has a lot of places around the world where we don't have a presence today and we have a lot of unexplored territory, so we have pretty high growth aspirations for that. Within the truck category, our European truck business has a lot of opportunity to get into new lanes and to get into new customers, so there's a litany of things like that where we probably have slightly higher volume growth expectations than we do in the traditional dry van North America services that are a little bit more mature.

Along that line, is there any area where you're driving more investment at this stage, I mean in the big picture?

Our investments are people and technology and we're investing in both of those. We're hiring people in each of those categories. We continue to invest a lot in the LTL arena. We talked about our domestic air investment, which -- obviously, expedited ground services and domestic air services sort of coincide. But in general, our goal is to be a broader supply chain services company and invest in all of these different modes and services. So we are trying to do new and different things in each of them both from adding expertise of people and adding technology and process investments, and how fast we go in each of them is a combination of how well our people do and what our customers are asking for.

Thanks, John.

Thank you. Our last question comes from Justin Yagerman with Wachovia Securities. Please go ahead.

Can you hear me, guys? Can you hear me?

Are you on?

Yes, I think I'm here; sorry, I'm calling in from a cell phone. Coming at the capacity question from a different angle, wanted to get the sense that if in the T-Check division you've been seeing an increase in defaults on payments or any sign of that sort of thing coming from smaller carriers in the marketplace.

When T-Check does business with smaller carriers, they tend to be pre-pay accounts, so we don't -- even when those small carriers go out of business we don't experience very much bad debt loss due to them because they have to pre-fund. So it's really only when we extend receivables in our T-Check business, it is to well established carriers that we check their credit and things like that. And even with those carriers, the terms are relatively quick, like three to five days on average.

Have you seen any of that activity slowing down in a big way or I guess asked a different way, have you seen a decrease in the sign ups at T-Check?

No, we haven't. As a matter of fact, we have some specific initiatives around targeting small owner/operators with our fuel card services as well as broader MasterCard branded services so that they can use it for more than fuel. So we've actually had growth in the small carriers that we're signing up, but it's probably more driven by the fact that we're offering broader and different services to them rather than just fluctuating with their overall success in the economy.

Okay, that's fair. When you look at -- I guess you guys have an interesting view of both the domestic and the international economies and -- as you look out, have you seen an increase in kind of the decoupling between international and U.S. from an economic standpoint right now? And maybe a little color on what you're seeing from the truck business that you have in Europe would be interesting.

The challenge with that is it varies so much on a customer specific basis. We have many customers that are trying to work with us and integrate their supply chains, so we are doing both international and domestic services for them. We have other customers that separated and don't give us good visibility to what they're doing. One specific example that has had a meaningful impact on the trucking environment is the Canadian situation, with regards to the Canadian dollar being now worth more than a U.S. dollar and the significant change over the last several years around that. There has been meaningfully different flows in terms of when trucks want to cross the border and the rates they're asking for. So even when we think about international and currency and border crossing issues right within the North America truck market has probably been one of the more vivid examples of how the U.S. economic situation has had a pretty big impact on the freight flows.

All right, that's really interesting. Thanks. I appreciate the time, guys.

Thank you.

Thank you for participating in our third quarter 2007 Conference Call. This call will be available for replay in the Investor Relations section of the C.H. Robinson website at www.chrobinson.com. It will also be available by dialing 800-405-2236 and entering passcode 11097521 pound. The replay will be available at approximately 7:00 P.M. Eastern Time today. If you have additional questions about our third quarter results please call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you. Ladies and gentlemen, that will go ahead and conclude our conference call. We thank you again for your participation and at this time you may disconnect.