羅賓遜全球物流 (CHRW) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson second quarter 2008 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 July 22, 2008. I would now like the 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, Senior 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 it over to John.

Thank you, Angie, and thanks to everybody who is taking time to listen to our second quarter conference call. About an hour ago, we issued a press release sharing the results for the second quarter of 2008. I want to start by highlighting just a couple of the key financial results on that release.

For the second quarter ended June 30 of 2008, our gross revenues increased 23.5% to $2.3 billion. Our net revenues increased 9.7% to $341 million. Our income from operations increased 11.3% to $144 million. Net income increased 9.9% to $90 million. And diluted EPS increased 10.6% to $0.52 a share.

Year-to-date for the six months, gross revenues were up 23% to $4.3 billion. Net revenues increased 11.7% to $679 million. Income from operations up 14.5% to $280 million. Net income increased by 13.8% to $176 million. And diluted EPS up 14.6% to $1.02 per share.

Our results for the second quarter reflected the continuation of several themes that we have discussed, both at the beginning of 2008 and at the end of the first quarter results. I want to start by just revisiting a few of those topics briefly, because they remain pretty relevant to understanding the results.

The first topic is gross revenue increases, driven both by volume and price increases related to fuel. In the press release, we share some comments on volume and price activity by mode, but the overall picture, driven largely by the truck load results are that we had both volume and price increases during the quarter. But the price increases by our analysis were virtually all driven by fuel price increases.

We did experience continued growth from transactions or volume increases. We continue to believe that we are taking market share and that most all of our service offerings -- we're growing our offerings faster than the market is growing as a whole. Our assessment is that the third party model and our business continues to add a choice for customers and carriers that makes economic sense for a greater share of the market. We feel pretty positive about that aspect of our results.

The second topic is gross margin compression. Our transportation gross margin percentage for the second quarter this year was 15.4%, compared to a transportation gross margin percentage of 17.9% in the second quarter of last year. This obviously had a pretty significant impact on the results for the quarter.

Some background and comments on how we look at gross margin activity for the quarter. To start with as a reminder, we discussed at the beginning of the year that we were entering 2008 with gross margin percentages at the high end of historic ranges. Starting the year at the high end of historic ranges for margins did fit the historical pattern as we had high demand and tight capacity markets in '04 to '06 with a softening of demand and pricing in '07 and coming into '08.

The most challenging time to grow our net revenue is in a sustained market of soft demand. This is the second year of softer demand. As freight demand stays softer, in general, the shipper expectations are for flat to declining prices and the capacity providers face pressure to rationalize down to the market demands.

Volume increases get harder to find as there's less freight available. When you add diesel fuel increases of 50% plus to that environment, things get pretty challenging; and that's the environment we had in the second quarter of 2008. We worked hard to plan for and adjust for market changes including changes in fuel prices, but increases that at times were 50% to 70% increases over a year ago provide enough pain and cost increase for margin compression for everybody in the supply chain, including us.

We have explained many times in the past that our approach toward the market and pricing does not allow us to quantify with absolute certainty the impact that changing fuel prices have on our margins, as most of our capacity is sourced or priced daily in the market at current market rates inclusive of fuel costs. When we analyze our gross margins for the second quarter, if we assume that fuel cost increases simply pass through all of our transactions, that would account for a major portion of the gross margin percentage decline for the quarter. But we did have additional margin compression beyond those estimated impacts of fuel, driven by increases to our cost-of-hire from market conditions.

The next topic I want to touch on is the variable personnel costs. As we have talked many times, our business model compensates us on a highly variable basis. Similar to last year and the first quarter of this year, our personnel costs grew slower than our net revenues grew due to reductions in the growth rates of our variable programs. We have discussed these in detail in the past so I am not going to go into the specifics, but they include cash growth pools as well as equity vesting calculations driven by our growth in earnings.

We continue to think our variable incentive programs do a good job of sharing success levels, both within our various teams and between the employees and shareholders. Our headcount for the quarter in creased by 11% over the previous year. Our staffing needs tend to correlate most to volume growth. It is a challenge for us in this type of environment to continue to build the team, service our customers and carriers, but control total personnel growth in the variable cost model. Our culture is that we are going to be aggressive and continue to try to grow the business, but we think we have good disciplines and metrics to help balance the right mix of growth and profitability.

The last topic or theme that I just want to touch on is the general impacts of the weak economy on our overall financials. Chad is going to address some of the specific items in a moment, but I think it is important from a high level to think about our business model and how several of these topics link together. The financial strength that we bring to the logistics equation is a big part of our contribution to both the shippers and the carriers in variety of ways.

In a challenging environment like this, some of the things that you see in our results include our accounts receivable aging extending a little as shippers feel strain and sometimes delay payments, increases in carrier cash advances and quick-pay programs that we execute with carriers to help with their cash flow, increases to our bad debt provision to address potential write-offs of weaker companies, reduced interest earnings on our cash reserves from lower interest rates, and increased working capital needs to finance transaction increases that were accentuated by fuel price increases.

We use our balance sheet and capital to help bring value and stability to the relationships, and this gets more valuable in challenging economic times. We get challenged at times for having a conservative balance sheet, but it is an important part and an important enabler for us to grow in tougher economic times and you see that at work in the second quarter of 2008. Those are the handful of broader topics that I wanted to touch on.

The press release shares some specific comments for each mode and service, but I just wanted to comment on or highlight a few of them for the quarter. Within our international or global forwarding group, we continue to experience good organic growth as we build that business. While we do plan to continue to invest in and grow our forwarding network, it is more important for the long term that we develop a culture of selling and organic growth capabilities and growing our relationships. We feel like we made good progress on that this quarter.

Our transportation management business continues to add new accounts and grow nicely. We have more ways to help a customer today than ever and that team within Robinson is doing some very solid things to help grow our business. Produce sourcing, the environment for the sourcing business is challenging. The cantaloupe and tomato categories that we source in have had significantly reduced activity driven by food safety issues.

Fuel has added a lot of challenges to the food industry beyond transportation. Our sourcing team has been able to continue to grow its relationships in the market by expanding to more food service and more retailer relationships, as well as diversifying our services in things like private label programs, organics, and other branded programs that we are bringing to the market. T-chek also had a good growth quarter. They were able to gain transactions in the core services that they offer, as well as continue to expand their menu of offerings to their customers. And lastly, Robinson's European truck division made good progress in the quarter, as their net revenues and earnings grew in excess of 15%. While Europe truck represents only 4% of the truck load net revenues, we continue to think that that represents a very significant long-term growth opportunity for us.

Last before I turn it over to Chad, I just want to share a couple of other thoughts or observations about the market and the environment. As most of you know, we talk constantly about our long-term growth goal of 15% and try to stay focused on the long-term part of it. I think it is important to emphasize that we are not seeing anything that changes our confidence in our long-term growth goals and how we are approaching the market.

I do think it's helpful to think about, as we reflect on our business and our model, what feels like more of the same and what might be unique or different about the environment. We have talked over the last couple of years about price increases in '04, '05, '06 being unique to the history of the last couple of decades. When we look at the current environment, one area that I think it is important to understand is that while we do see capacity leaving the market and when we look at the current market conditions in a lot of respects, that feels like a very normal part of the cycle for us. It has been very common that the freight demand has moved from tighter to softer conditions, and a lot of the change in the market condition feels relatively normal to us.

There are certain things that have been going on this year that are a little bit unusual when you look back over the last couple of decades. At the top of that list would obviously be the fuel price escalation. Those types of fuel price increases really -- we haven't seen those before, and so there's probably some impacts of accentuating pain on the carrier side or the churn of capacity in the market.

The change in the US dollar and import/export relationship is probably having a unique impact. A weak credit market, making financing tough for both shippers and carriers, while weak economic conditions and weaker credit markets have certainly existed before, these might be unique to new levels that could impact how and when capacity and financing for it returns, when the market does turn next time. And lastly, there are a lot of new environmental issues challenging a lot of current practices, everything from packaging in the food industry to how things are routed on the freight side with regards to trying to eliminate the use of fuel for a lot of environmental reasons as well as costs.

There are some new things, but while these new things are driving some short-term costs and stress, the message we wanted to emphasize is that none of these really seem to change the longer-term supply and demand fluctuations that drive our business model and are what makes us successful. We shared in the press release that we don't see any signs of the market condition changing to this point in July. Our gross margins in July are starting out similar to the second quarter of this year. Increasing rates to shippers remains challenging in a large part due to the pressure generated by fuel increases. While normally shippers would see some overall price relief in this part of the cycle, they're actually continuing to pay more because of those fuel costs that are being passed along.

While these short-term challenges and the current market conditions lead to a little bit of stress, at the same time when we look at it, other observations that we would have about the current environment and the long-term causes of them are things like supply chains, logistics, and transportation will likely be as relevant as ever going forward. Markets and costs could be more volatile going forward. Change looks like it is going to continue to accelerate. Good technology and good people should have a greater impact and return on investment. All of those sorts of thoughts that we think will continue to make us more relevant to the market going forward.

I would sum up the thoughts we want to share with you as acknowledging that we are not immune from the short-term pressures of the marketplace, fuel and a weak economy, but we also feel confident that our business model and long-term value proposition is as good as ever. With that, I will turn it over to Chad.

Thank you, John. I am going to cover some comments on our operating expenses, working capital, future capital expenditures, and share repurchases. I will start with some comments regarding our restricted stock program.

John mentioned that our slower growth reduced some incentive compensation programs, including our restricted stock expense. As we mentioned last quarter, we currently expect that we will have additional equity grants awarded to participants later this year in 2009. Historically, many of these awards have -- for many of these participants have been done on the periodic or a multi-year cycle rather than annually.

One impact of this practice is there will likely be periods where more than one of these awards is being earned and expensed. We had two significant equity grants awarded under these multi-year cycles. One started vesting in 2003 and one in 2006. Our awards have up to five years to vest, but based on our significant earnings growth during the years of 2003 to 2005, our 2003 awards were fully vested prior to 2006 so we did not have overlapping expense.

It is difficult to predict the impact of these new awards since the vesting and expense will be based on earnings growth and we don't know the total size of the awards at this time. It is likely they will increase our personnel costs as a percentage of net revenue since the awards that began vesting in 2006 will likely not be fully vested by the end of this year.

Now, I will move on to some of the comments we made and add some color to the comments we made on other SG&A expenses. As we mentioned in the earnings release, we are continuing to invest in our business to support our long-term future. Our people are traveling and selling as much as ever. We continue to invest in the long-term future by building systems and opening offices. As we have mentioned before, we have approximately 20% more office space than we did a year ago with half of that being related to the new corporate headquarters that we moved into last October 15. We have continued to take a long-term focus on building for the future.

We also mentioned that we had increased claims activity during the quarter. Our standard process is to tender these claims to the carriers and their insurance companies. In some instances, the carrier or their insurance company rejects or refuses the claim. We had a handful of larger freight claims where we chose to step in and pay the claim, and we'll seek restitution from the carrier if possible. We also settled the contingent auto liability case during the quarter which drove a significant portion of the increase.

We also mentioned that we had a significant increase in our provision for doubtful accounts. As disclosed in our 2007 10-K, our total provision for the year of 2007 was $6.7 million. We are tracking at approximately 50% higher than last year. About half of the increase is explained by the increase in gross revenue. The other half is related to some specific accounts that are having financial difficulties.

Now, I'm going to move on to our working capital. As you review the balance sheet and cash flow statement, you will see that our working capital increased significantly. The two main components of our working capital are our accounts receivable and accounts payable. Our accounts receivable balance increased by approximately 30% compared to last June. The bulk of that increase was driven by our gross revenue growth of 25%.

In addition to the increase in that activity, our days of sales outstanding increased by approximately two days compared to last June. While it has taken us a couple of days longer to get paid than it did a year ago, we feel good about the overall quality of our receivable portfolio. Our total percentage of receivables over 60 days and 90 days has stayed relatively consistent with historic levels.

Our accounts payable balance grew at approximately the same rate as the level of activity. Our carriers are continuing to take advantage of our quick pay program and cash advance services. Approximately one-third of our truck load payables go through our quick pay program.

I am going to move on to capital expenditures. We have discussed previously that we were analyzing our data center needs. Our current primary data center is in our old headquarters building and it was built approximately 20 years ago.

We have concluded that our best option is to build the new data center on our corporate campus in Eden Prairie. We will begin construction this quarter and expect the project to last about one year at a total cost of $17 million to $20 million. We expect to have the expenditures of approximately $8 million during the second half of 2008 and the remainder to be spent in the first two quarters of 2009. This is in addition to the approximately $6 million or $25 million per year that we predicted we would have in 2008.

On share repurchases and dividends as we have previously discussed, we use dividends and share repurchases to distribute capital to our shareholders. We have a history of adjusting our dividend annually and have a targeted payout ratio of 40% of earnings. We use share repurchases as a variable way to return incremental capital to our shareholders. During the second quarter, we repurchased 860,000 shares at an average price of $62.30. We continue to believe that returning excess capital to our shareholders is an important part of managing the Company.

We have always viewed repurchases as a capital management practice and have not tried to time the market. That concludes our prepared remarks. At this time, we will take your questions.

Thank you, Mr. Lindbloom. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). One moment please for our first question. And our first question is from Justin Yagerman with Wachovia Securities. Please go ahead.

Good afternoon. How are you?

Good.

I guess looking back historically in this type of environment, just curious what your expectations are in terms of the lag between the pricing that you are able to push off to your customers and the gross margin contraction that you experienced in the transportation business. Obviously, we are in a different paradigm with fuel and you discussed that, but what has your typical experience been from cycle to cycle?

I think the important part along that question is when will shippers start to tolerate or accept some sort of a price increase. Our sense through the first half of the year is that when we have tried to adjust prices on the shippers side, that there was really no acceptance to it at all because it is perceived to be a continued soft market. Shippers are already paying a lot more for fuel. They just didn't feel they needed to be receptive to that.

What changes the cycle is when freight starts to become tighter and certain freight doesn't move. Then shippers will start to, first transactionally and then ultimately through bid processes, start to accept rate increases that will allow for some of the margin expansion. I think -- nobody knows for sure, and we certainly don't have a guess as to when freight demand will accelerate, but I think that will be the next step that will change the market conditions and allow for some price adjustments.

Was there a lot of freight that you guys turned down because you couldn't get an acceptable margin on it in the quarter? Along those lines, did you see a difference in the fill rate on customer requests? If you were filling 95% of the loads that people were asking you to do, you are now filling 75% of the loads. Where is that threshold where you typically then start to see the spurt in pricing getting passed through again?

We don't have precise metrics around turndowns and fill rates, but I do know that each day we have a certain percentage of transactions that we actually lose money on where it is costing us more to hire the capacity than we are able to bill the customer. And we certainly had a decent percentage of those in this quarter as well, which would indicate that yes, there are transactions that we are turning down because we can't get enough margin. There are opportunities where, or not opportunities but situations, where certain lanes and certain conditions where pricing is just very difficult and we can't pass it along. It really becomes difficult to anticipate on an overall basis exactly when you reach that tipping point, and exactly when freight will sit long enough that people will tolerate price increases in order to get it moved quicker.

Was there a segment of transportation, and especially in the truck load sector whether it be refrigerated or flatbed, where you saw better acceptance on the part of shippers to accept rate increases or pass through whether -- if you broke your margin down by specialty mode?

Not really. I would say the overall environment across all shippers is that pretty much everybody's business is under some variation of strain and everybody's paying a lot more for more transportation because of fuel. There wasn't a lot of sympathy across it.

I do know that the capacity on the refrigerated side was probably even a little tighter and probably had a little more churn to it. But it really didn't translate into a lot of price increases.

Got it. And I guess lastly, and I will turn it over to somebody else. Just if you could take us through sequentially in the quarter, how things progressed. How much of this margin deterioration occurred in June versus April and May? It would be very helpful.

When you look at the gross margin percentage, we saw a pretty direct correlation as fuel continued to rise throughout the quarter, that the margins continue to get compressed.

Right. And you said that -- so was it in June where you actually saw the market lift things to the point where you got compressed beyond the fuel? You had mentioned that in your prepared remarks. Was that when that took place or was it throughout the quarter?

Throughout the quarter. It was market-by-market, day-by-day, week-by-week. And equipment types also were part of it.

Okay. Helpful, guys. Thank you, appreciate it.

Thank you. Our next question is from Tom Wadewitz with J.P. Morgan. Please go ahead.

Yes. Good afternoon. Let's see. I wanted to follow up a little bit on one of Justin's questions. Just wanted to see if we could parse this a little bit further in terms of the gross margin pressure and whether you think that this is the beginning of pressure from tighter capacity, and there's probably going to get -- accelerate and get a bit worse. Or whether you are already seeing a normal gross margin pressure from tighter capacity and it probably doesn't get much worse.

It is difficult and we don't predict where it is going go or where it is going to go to. But I guess the way to think of it is that you have got supply and demand, right, in all different market conditions and you are thinking about how do those match up or not match up. Well, when you get a softening demand market like we've had for the last year and a half or so, and freight levels are flat to declining, and the freight demand is soft, you see the capacity leaving. You see capacity ratcheting down to try to match better to that demand level. Where it goes from here if that demand level stays soft or gets softer, then the capacity will need to continue to keep ratcheting down and won't provide a lot of increased margin opportunity or changes in conditions.

The real lever point will be if freight demand hops back up or starts to strengthen this fall or this December or next spring or whenever that would happen, that's what will really drive a dynamic change in the margin. As we said in our release and in the prepared comments, we really haven't seen any change in the market condition to date. But as we learned already this year, these market conditions can change pretty fast and things like fuel price changes can accentuate how quickly they change.

The way you characterized it, it sounds like it is primarily fuel that is causing the gross margin pressure in second quarter. And that it is not yet a big impact from tighter capacity. Is that right?

It is definitely both.

Okay.

But from a gross margin percentage standpoint, fuel would be the larger component. Correct.

Okay. And typically in terms of the timing of your contracts, if assuming that the contracts are somewhat of a constraint in getting your pricing up, how long would it take to get those -- most of the business expiring where you could try to price up in response to the higher pricing you may be paying for capacity? Is that a two quarter delay? Or is it longer than that?

That's where it gets relevant to think of the freight in two baskets, one being the transactional stuff that moves daily that can price adjust daily, and other longer-term price commitments that generally get referred to as contractual relationships where they don't move daily. They generally bid annually or something like that. But most of them even have 30-day notice-type things. The market can move pretty fluidly. Things can, at least a descent portion of the freight, can reprice fairly quickly when market conditions warrant it. But if the supply and demand is relatively matched like it was in this quarter, it really doesn't trigger the environment where a lot of bidding or repricing starts to happen.

Okay. It is not necessarily a long time lag, but you have to have the right market conditions. And then, I guess one more and I will pass it along to someone else. I think, Chad, you had some comments on some factors where there's some doubtful accounts. I think you talked about some accident costs in the quarter. Those showed up on SG&A, is that right? Is it fair to think of some of those as being a bit unusual in terms of the magnitude in second quarter and might not be a similar amount in a more normal quarter?

Yes. If you look at the doubtful accounts, like I said, part of it or half the increase roughly is just based on higher gross revenues, because obviously our bad debt and our need for an allowance in our receivable balance is based on gross revenues, not on net revenues. And then, there was a couple what we hope are unusual write-offs. But in these types of economic times, we could have some other customers have financial difficulties where we face some additional write-offs. But like I said in the call overall, looking at our existing receivable portfolio, it appears to be as high quality as it has been in the past.

On the freight claims, yes, it is pretty rare for us to -- on the contingent auto liability case that I mentioned, it is pretty rare for us to have a significant liability settlement because of the way our business works and the way the contracts flow. All of that liability is put back to the actual carrier. In this particular case, we chose to settle it rather than continuing to litigate. That was about half of the increase that we had in total insurance and claims.

If you look at those that you want to characterize as a little bit more one-time in nature, are those $1 million in the quarter or $5 million in the quarter? Is there anyway you can frame the magnitude of them?

I really hate to even -- as far as the claim experience, it is probably $1 million worth of what we would consider unusual. The bad debt provision, I can't really even say what's unusual versus not.

And the auto claim, the auto liability claim I guess?

That was in the $1 million number that I was talking about between some cargo claims and that auto liability claim.

Both of those in the $1 million area. Okay. All right. Great. Well, thank you for the time.

Thank you. Our next question is from the line of Jon Langenfeld with Robert W. Baird. Please go ahead.

Good afternoon. Chad, can you remind us the potential incremental vesting of the restricted stock, will that take place? Would the next layer of that start the first of the year?

Yes. The grants will likely happen in November or December of 2008 with vesting and therefore, the expensing to begin in 2009.

Okay. All right. Very good. And then, so I am clear on the last point with the claims, there were two layers of claims. One is the freight claims, damaged freight, something along those lines. The others would fall in this line of this contingent auto liability claim, which was an accident I am assuming.

It was an accident from a couple of years ago.

Okay. But those are two different buckets you highlighted in your prepared remarks?

Yes. There were freight claims. There was one or two stolen trailers of relatively high value goods where we chose to step in and preserve the customer relationship, and will seek restitution from the carriers.

Got it.

Where they rejected the claim.

But the carriers are still around. The insurance companies of the carriers are still around?

Yes.

Okay. Very good. And then the piece of the CapEx you had talked about, the $8 million. You said it was above and beyond the $25 million. The $25 million was just your standard CapEx guidance this year?

Yes.

Correct. Is that -- when we think about normal run rate CapEx, $25 million to $30 million in the coming years, outside of this data center, is that a realistic range?

Yes. It will probably -- outside of what we have been calling and we've had a few of them recently, real estate or building expenses that at this size of the Company that's a pretty good range and it could grow as the business grows.

Yes.

But the bulk of the CapEx is technology-related which grows as you add people, desks, and phones which grow as you add people.

Right. And speaking of people, in terms of the headcount growth, even looking at the sequential with headcount additions, were those spread throughout the business? Or were there some areas in particular that took on more headcount?

They were pretty much spread throughout the business. With college graduations, as well as taking on interns, we have increased the amount of interns that we use during summer as part of the growth, but it is pretty much spread throughout the branch network.

The final question is just on the volume growth side. You're still well, well above market. Just wondering, the general trends of the volume flowing from where they were in the second half of last year, really the fourth quarter and the first quarter. Is some of that due do you think to the shippers and the carriers now being more comfortable if you will with the high fuel prices? And maybe in the fourth and the first quarter, the volatility caught them off guard so they were forced to think of more alternatives than the standard carrier shipper relation?

That could be true in some instances. I think it is really hard to generalize it across the board as to what's going on in every shipper's shop, in terms of how they're approaching the market. But the market conditions have been changing fast and challenging. That thought process certainly could apply to some, but I think you see a wide range of how contracted out different shippers were and how they're reacting to a softer market, in terms of honoring or not honoring those contracts, and how everybody is looking at fuel prices and all of their routing decisions. It is a pretty fluid environment when you have got things changing so aggressively like that.

Good. Thanks for the color.

Thank you. Our next question is from the line of Matt Troy with Citigroup. Please go ahead.

Thanks. It's interesting your comments earlier on the other SG&A, specifically, investing in future business. I think you have cited travel, pursuing sales leads, new offices and people. How do you measure the return on these investments? How elastic are they? What I'm trying to get at is how quickly can you rein them in, should these growth opportunities that you're chasing not materialize and call it say, a few months timeframe?

I think fairly quickly. We have always had a decent level of turnover in the business. We are constantly adding staff at a level greater than that. In the past when our metrics have led us to the conclusion that we should slow down the hiring process, between that, and the high degree of variable pay that we have, we can bring it back into line fairly quickly. When we look at the business today and we look at the volume growth and the market share that we believe we are taking, we think that is driven in a large part by having an aggressive sales funnel and hiring a lot of people and motivating them to go out and build relationships.

We want to manage that carefully, but also continue to encourage that behavior. If we can build our market share and build a stronger network and a greater presence during this part of the cycle that when the market turns, we should be well-positioned.

Okay. If I look at it and it might be difficult to disaggregate, but was this a case of throwing more resources at the core trucking business, the chase -- the scarcer freight, but tougher rates? Or was this more investment in growth areas like ocean air, international, and some of the more longer-term opportunities? Or was it really balanced?

It was across the board. The headcount increase was in all the various business lines.

Okay. But away from the headcount, also, just when you talk about some of the investment in SG&A, other SG&A, should we think about this as just more hustling on the more mature trucking opportunity or an opportunity to ramp investment in the higher growth longer-term things away from truck?

All of the above. The truck load business is 70% of the revenue and about 70% of the people. Our mindset there is that we are 1% to 2% share, and there's some macro things that look like it is continuing to support our model and continuing to drive share opportunity our way. We don't want a weak economy to get in the way of us pursuing that.

The net revenue per employee is a great statistic for you folks. I have to go back several years to find a quarter over -- or year-over-year decline. You did see that this quarter and I think you explained why. Is that a metric that you can manage to get back into the black in the back half of the year? Is that just simply slowing sales hires? Or is that a metric we should focus on in terms of your ability to measure the discretionary costs?

It is definitely a relevant metric that in fact is probably one of the key ones that drives a lot of the hiring decisions. However, the metrics that we really rely on are office-by-office. As we grow and diversify our service offerings, the appropriate metrics by business line, by office can vary quite a bit. We don't really share those for competitive reasons. So yes, it is a very relevant metric. It's one that we look at a lot throughout the network in terms of making the appropriate staffing decisions, but the guidelines that we have are not absolutes. We allow freedom where we think we have opportunities to pursue or business that we know we are ramping up on that they need the flexibility to staff up for them. Yes, it matters. Yes, we are managing that and it is a very important thing to follow, but there is some ranges and broader guidelines that we will use to manage ourselves throughout the rest of the year.

And also, it was down less than 1%. It was a tight market with margin compression like we talked about, which both of those would put a constraint on the net revenue per head.

Right. Again, that order of magnitude not a big amount, but it sticks out because I think 2002 first quarter was the last time you saw a year-over-year decline. Just the infrequency, I think is what raised a flag for me.

The last question -- it was interesting your commentary on your allowance for doubtful accounts, which you said was up 50%, half of which I think you attributed to just growth in the business, the other half due to potentially some one-off incidents. Just curious, tactically, operationally, how do you drill down in times like this when customers and carriers might be looking for more flexibility, might be looking to lean on your balance sheet a little bit more? What do you do just to rein in the controls a bit to make sure it doesn't get away from you on the credit side?

Sure. The only place that carriers owe us money is T-Chek. With T-Chek, obviously, the carriers are the customer. They did drive part of the increase. Jevic was a customer of T-Chek. We did take a hit on Jevic when they went out of business.

But as far as how we manage -- when you look at whether it is those customers or the Robinson customers, we have a centralized credit function that continuously monitors customers' credit ratings and how well they're doing financially and look at our exposure. We have some policies in place that have some ratios and some calculation, but we will use judgment at times. When you look at most of the larger write-offs we had during this quarter, most of those we had proactively been reducing the credit limit.

I can think of one example where the credit limit and the exposure about six months ago was at a $1.5 million. By the time the customer filed for Chapter 11, we had managed their credit limit down to $0.5 million. Yes, there are -- customers put a lot of pressure on you this time. They don't like it when their credit limits get cut, but those are tough decisions that you have to look at the potential reward versus trade-off. How poor is their financial condition and how bad is their trend?

One other point that's relevant along your question is that the credit limit decisions that Chad is referencing are clearly a very important element of the broader topic that we talk a lot about in relationship building. And so when our people are out selling and building those relationships with the customers we are looking for a long-term commitment. We want to build long-term relationships and the quality of the freight and the environment that you know we are trying to establish with that shipper, the credit terms become one key element of that.

What we're doing in this type of an environment, in addition into tightening the analysis that Chad references is to make certain that we are emphasizing the long-term relationship element of it as well.

Right. Got it. Thanks for the details.

Thank you. Our next question is from the line of Alex Brand with Stephens, Inc. Please go ahead.

Thanks. Good afternoon, guys.

Good afternoon.

Have you guys said what you are looking at in terms of contract versus spot now?

We have not. We have in the past stated out of our 30,000 active customer IDs that we have about somewhere in the neighborhood of 300 customer IDs that make up roughly half of the business on the transportation side. In those larger relationships, there's generally some variation of a contract or prepriced commitments. At times, we have estimated half and half of being a mixture of transactional or prepriced and contractual business. In virtually all of our customer relationships, there can be some combination of the two. Or even with those larger customers, there is transactional freight. There's many smaller customers that we have longer-term price commitments to them.

I think the one relevant way to think about contractual or precommitted pricing is that when prices are relatively stable like they are now, there's less bid activity going on either way than when rates or capacity is moving in one direction up or down. You can look at the underlying contractual commitments and what's in place. But maybe even more important is the overall market environment and how stable it is, leading to rates generally staying more constant.

I am trying to figure out so --in longer term price commitments, is that what's driving unprofitable transactions because I am trying to understand, where do you draw that line where you say, "We can't do that unprofitable transaction for you anymore despite the relationship we want to have with you?"

I know it is sometimes a difficult answer to accept, but that's a very decentralized customer-by-customer decision around the length of the relationship, the historic profitability of the freight, and what commitments were made. There are relationships where we have a longer-term pricing agreement. We will accept margin compression to the point of losing money on loads if that's the commitment we have made to the customer. How and when to renegotiate that commitment, and exactly what we are looking for to correct it, varies account by account.

Okay. Is there the distinct possibility that you are going to go through a period here where because fuel is the unprecedented dynamic in this cycle that you might have a higher level of unprofitable transactions than the Company has ever experienced in a previous cycle?

I wouldn't imagine that because when we reach margin compression to the point of losing money, we generally don't tolerate that very long unless there's an absolute contractual commitment which we -- a must-haul type where there's volume commitments and we have very few of those. It could be that there's continued pressure on margins given fuel price changes and shipper attitudes and receptiveness toward repricing, but to the degree of having very high and continued levels of shipments where we lose money, that would be unlikely.

Okay. And you talked about that you think you're still having market share gains. You clearly are doing better than the industry. But you do have tougher volume comps in the back half of the year. How good do you feel about maintaining -- what I think you have said before, you thought was a high single-digit ongoing share gain?

I know that we are investing as much as ever in quality people and training them. The flexibility that we allow to the network and making decisions around hiring new sales people and building those relationships, the first half of the year shows some confidence and being able to continue that. But I also know that market conditions change fast and it has been a pretty whacky year so far. We feel pretty good about it. There's good momentum going into the last half of the year, but it is hard for us to know with absolute certainty exactly what the second half of the year is going to bring.

All right. And just one more, John. When you talk about the 15% growth rate and you have said in fairness, you have always said, sometimes it is going be below that. When you think about that, are you thinking about we want to grow 15% every year? Or is this something where you could say, we are looking at a compounded annual rate starting in 2000 or '02. Is there a long-term base year where you say, this is where we are going to measure ourselves from this point?

So many of our incentive plans, including restricted stock vesting, are all premised around a 15% growth rate. Internally, our culture is that that is the definition of success. In my 16 years here, I don't really remember ever having a budget that didn't come close to that in terms of a planned growth rate. But obviously, we haven't achieved that in all of the years that -- the last 15 years or so.

We do think of that as being our definition of success, and something that we will strive pretty aggressively to try to get toward regardless of what the environment is. But as we suggested many times, as the year wears on depending upon what's happening with freight demand and market conditioning -- market conditions and overall economic growth, we may know that going into next year that it's not nearly as likely that we will get there.

To answer your question, it is definitely a long-term view. It's not that we have an exact base starting year. If you look at any five-year or longer period, you will see that we probably achieved -- I haven't done it on every year, but I believe we probably achieved on a five-year basis a 15% CAGR.

Yes. It's probably been [higher].

Going all the way back to 1977, I think is where we analyzed it back to at the IPO time.

Okay. Fair enough. Thanks for the time, guys.

Thank you. Our next question is from the line of John Barnes with BB&T Capital Markets. Please go ahead.

Afternoon, guys. Sorry if I missed this earlier. Just curious as you look at truck load versus LTL, was there a greater degree of margin compression within truck load versus LTL? Or was it somewhere across the board?

There was much greater degree of margin compression within truck load. LTL margins were relatively consistent with a year ago.

In terms of your operating expenses on a go-forward, you hire more summer interns and that type of thing. Is that something that will ebb off at the back half as internships come to a close and that type of thing? Should we see some reduction in those expenses or will they just be offset by layering in additional maybe more full-time employees?

It really depends on -- the hiring decisions are decentralized based on what branch managers see. John talked earlier a lot about the parameters that branches have in place and the flexibility that they have. It is really hard to say. You're going to see headcount drop off because the summer interns go back to school. As long as the Company continues to grow, the headcount will probably in total continue to grow.

Okay. You guys haven't done anything material on an acquisition in a fair amount of time. With the balance sheet the way it is and we have heard from a number of companies that acquisition multiples, valuation multiples are starting to come in at more reasonable levels. Is your appetite for the right kind of acquisition still there? Can you just talk to what you have seen from a pipeline standpoint? Do you believe multiples have come in enough to maybe warrant getting aggressive there?

We went through a period of time with the private equity and the credit that they were able to achieve that -- in our industry, especially because of the strong cash flow metrics and things like that, it was very difficult for any strategic to be competitive in a bidding process. I do, and we have seen and believe that multiples are coming in a little bit, but haven't seen large transactions to prove that. Yes, we are definitely still looking for the right acquisitions. We're active in the marketplace continuously looking at deals. We keep very strong parameters on the deals we will do, both from a financial perspective and a valuation perspective. As well as cultural fit, the right type of business model, focused on third party logistics. Good customer relationships, et cetera. We are very still going to maintain our level of selectivity when we are looking at acquisitions.

As you look at those criteria that you have, what are the two -- one or two most difficult parameters to get over right now? If multiples are coming in, is it the right strategic fit? Are there cultural issues that are standing in your way, or are the multiples still -- valuation issues still first and foremost?

It's -- I would say that in all markets, we have probably killed more deals based on cultural fit and business model and things like that, than we have numbers.

When Chad says business model, often times that's asset commitment and different philosophies around how to service customers that we don't think will fit in our approach to serving them.

Sure. Speaking of that say commitment, I have asked you this question a couple of times before. Just curious as to have you seen any further decisions within the rail industry to change the asset ownership position on -- especially like intermodal containers? Your answer at one time before had been, hey, if we were forced to own containers, we would look at doing intermodal differently or leave that industry. Have you seen anything in that regards?

No real anything changes, other than that three of the four major railroads continue to make commitments that they're going to add container capacity and that they will continue to provide access from a traditional IMC method. A lot of us expect that intermodal will continue to be a pretty relevant option for a lot of shippers going forward. That's a topic that we are going to stay close to and try to make sure that we have competitive service offerings on all of the railroads. Not a lot has changed, just a lot of discussion about what is the optimum way to access capacity and get pricing on each of the major rail relationships.

Okay. Lastly, as you look at capacity and you talked about truck load being as tight as it is, you have gotten this question before about other competitors entering the market, some of the more asset intensive truckers getting into the brokerage business. As capacity gets tighter, do you feel like the competitive environment is more difficult this time around, because of the new entrants into the market absorbing more capacity, making it tougher to come by? Or has anything really changed on that front and it has always been a competitive market?

In the universe of what drives a tight market or a soft market obviously, competition and a competitive market is one element of that whole thing. And it always has been a relatively competitive market. It still feels to us like the dominant variable is freight demand. When shipment levels move up or down, they move much more quickly than the capacity side. They move much more quickly than competitive adjustments. While clearly, there's evolution in the competitive factor of it, it really doesn't stick out as a lead variable in terms of what is driving the tight or loose parts of the market.

Okay. All right. Thanks for your time, guys.

Thank you. Ladies and gentlemen, our last question is from the line of Edward Wolfe with Wolfe Research. Please go ahead.

Thanks guys, for hanging in there. This is very educational. I appreciate it. Am I right that you said that in July the gross yields were flattish for transportation?

Gross margin percentages in July were consistent with the second quarter.

Consistent with the second quarter of '08?

Correct.

The margin trend that we saw in the second quarter.

Okay. And on the LTL side, they were flat with a year ago, give or take?

Correct.

What is the difference -- if fuel is the biggest part of the impact on squeezing yield, what's the difference between LTL and truck load? Are they not getting as much of compliance?

I think that it gets into differences in how the services are priced with LTL companies' carriers generally giving longer-term price commitments. I know there were several of the larger LTL carriers who were significantly discounting or not applying fuel surcharges during the quarter. The LTL relationships that we have, while there are transactional elements to them, they tend to be more automated with a little bit longer-term pricing relationships.

On our truck load capacity side, we hire almost all of our capacity on a spot basis. Really fuel is adjusting realtime there. On LTL, more of our capacity is formulaic-based, preagreed to. Both on the sale and the buy, it is a higher percentage of contractual pricing.

Wouldn't you think if you had a longer contract on the LTL side and there was more contract that when fuel spiked, you would get hurt with that more not less? What am I missing there?

No. I think the LTL arrangements would tend to have fuel surcharges going both ways in those contractual relationships where on the truck load side, we are purchasing all inclusive transactionally. It wouldn't -- you wouldn't --it would pass through more seamlessly on the LTL relationships.

Okay. That makes sense. Can you talk about -- John, you started to talk about how the in '04 through '06 period, it was a unique period in terms of the rate increases that were going on in the marketplace. Do you get a sense that we could be entering in a period like that at the end of '08 and '09? Or are things going to get that tight or do they feel similar to that?

I think there's a distinct chance of that because if you look at in '04, '05, '06, what was driving the price increases, most of the carriers were attributing it first to driver shortages and the compensation that they were having to pay to attract new drivers. And secondarily, to incremental cost of equipment for new OEM stuff, being new emission standards. You had hours of service, a lot of those things in there.

From our understanding, some of the motor carriers might have better information, but from our understanding of it, those driver demographics are still an issue. There's still emissions issues. The hours-of-service limits are still out there. As capacity gets driven out of the marketplace in this soft part of the cycle, and now add to that credit issues around financing questions of how capacity will return, you can build a plausible argument that there's plenty of room for continued price increases when the market starts to tighten.

Did it happen as quickly, you think, as third or fourth quarter?

It certainly could start to happen. How much it could get, I don't know.

Okay. Switching gears for a second, when I look at your model, depreciation as a percentage of revenue was up quite a bit at 2.6%. Can you talk a little bit to if there's anything going on there?

Part of our occupancy, being the new owned building that we are sitting in right now, the headquarters, rather than having a rent expense for this building, we have depreciation. That's definitely a big part of it. When you look at our overall cap or our overall property and equipment, and look historically over the last five or six years, when you look at the net increase and the net balance on the balance sheet, the biggest drivers are real estate, both the building that we bought and refurbished a few years ago in Chicago, the land that we bought here and then building the building here.

On an absolute basis, Chad, that almost $9 million is a fair number to work off of going forward?

Yes. This stuff is going to -- this stuff that will be fully depreciated, I am looking for the $9 million number.

$8.8 --

Of depreciation? I don't think so.

Land?

Hang on. The amount for the quarter was $7.7 million. Year-to-date amount is about $15 million.

Okay. That's my mistake. It is our model. So that $7.7 million is a descent number going forward?

Yes. It has grown from -- a year ago it was $6.6 million. The biggest chunk of the increase is this building, the building plus the furnishings within the building and the equipment within the building.

Okay. That's fair enough. I had a little typo in here. That's my mistake. Just cleaning up a couple of other things, the stock option plans that you talked about, where the grants are at year-end and then they start to have the impact in '09 --

Yes.

Any sense of the magnitude of that in the past -- how do we think about that?

It -- you said stock options, but it's restricted stock, just for clarity. We plan to do it at the end of the year. It is really -- our best guess right now, if earnings were up 15% and the grants were roughly the size we expect them to be, they might be in the magnitude of 1% of net revenues. That would be our best guess at this point, but again, there's a lot of variables that are yet to be seen.

Okay. And then just final question, when you look out at your carrier base, the number of carriers that are out there, have you seen enough of them go away or shrink recently that you have concerns for meeting demand as you go out the next couple of quarters?

Not concerns for meeting demand at the current levels of freight demand. But I think it ties into the earlier question that we have certainly seen enough capacity leave the marketplace that we know when freight demands rise and the market conditions change, that there's going to need be a lot of capacity that returns. There's going to be a lot of challenges around drivers and financing and equipment to make that happen. Not under the current market conditions, but I think that's a -- there's definitely been enough capacity leaving the marketplace that it could make it interesting if freight demand returns quickly.

And is there some kind of number, is it GDP at 3%? Is it 2%? How do you think directionally about what that means?

We don't really look at those metrics. It is difficult because as we are trying to take market share and with each customer, you never know for certain what their total volume of freight is versus how much you are getting.

The broader economic metrics don't really help us in the short-term to try to measure that. We look at it mostly as to -- when we go home at the end of each day, what were the market conditions. Were there more loads to move that we didn't have capacity for or the other way around? That's really how we will start to see the change in freight demand.

Okay. Thanks a lot for the time. Appreciate it.

Thank you.

Unfortunately, we are out of time. That will have to be our last question. We apologize to those of you in the queue that we could not get to you today.

Thank you for participating in our second quarter 2008 conference call. 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 www.chrobinson.com. It will also be available by dialing 800-405-2236 and entering the pass code 11116078 #. The replay will be available at approximately 7:00pm Eastern Time today. If you have additional questions, please feel free to call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you, ladies and gentlemen. This does conclude the C.H. Robinson second quarter 2008 conference call. You may now disconnect.