羅賓遜全球物流 (CHRW) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson second quarter 2009 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be the given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday July 21st of 2009, I would like to turn the conference over to Angie Freeman, C.H. Robinson Vice President 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 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 it over to John.

Thank you, Angie, and thanks to everybody taking the time to listen to our second quarter conference call. About an hour ago we issued our press release sharing the second quarter results for 2009, I'm going to start by highlighting just a few of the key financial results that we focus on in that release. For the second quarter ended June 30th of 2009 our total revenues declined 17% to $1.9 billion, net revenues increased 3.1% to $351 million, income from operations increased 3.7% to $149 million, and net income increased 2% to $92.3 million. Our fully-diluted EPS was up 3.8% to $0.54 a share.

Year-to-date numbers for the second quarter ended June 30th are fairly similar. Our total revenues declined 16.1% to $3.6 billion, net revenues increased 1.6% to $690 million, income from operations up 2.4% to $287 million, net income up 0.5% to $177 million, and fully-diluted EPS increased 2% to $1.04 per share. In addition to the overall results our press release gives more detailed growth percentage business by our various service offerings that we report on.

Consistent with the past calls I'm going to share a few prepared comments and then we'll open it up for questions. I would acknowledge up front that many of the second quarter prepared comments and messages are fairly similar to the first quarter of this year. Our transportation total revenue declines were driven by declines in both volume and price in most modes of transportation. The majority of the price decline was driven by the decrease in the price of fuel. The volume decreases were pretty much across most of our customers, driven by the recession. As we said last quarter, our approach to the current market conditions is to sell aggressively and to try to gain new business to help offset declines in freight from current customers.

Our sourcing division results for the second quarter were, again, a positive highlight. Our sourcing business was able to grow revenues 12% in the second quarter. The revenue growth was driven by volume, primarily with current customers. The relative stability of produce activity compared to other commodities, along with good execution from our sourcing division, resulted in solid growth.

Information services revenue from [T-Check] decreased 15%, driven by the declines in transactions and lower fuel prices resulting in lower fees. From a net revenue standpoint we were up 3% for the quarter. The primary variance between total revenues and net revenues is in transportation. The explanation is consistent with the first quarter, but worth talking through again. Most of the variance in growth rates from total revenues to net revenues is driven by price changes related to the price of fuel. While there are many variations of surcharges and methods to contract for changes in the price of fuel we believe most changes in fuel for truckload shipments function similar to a pass-through cost in our total revenues.

Net revenue growth in our truckload services was driven by margin increases. When freight demand is weak volume growth slows or declines as it did again this quarter. When carriers make decisions to reduce prices we'll generally adjust to that pricing quickly, as most of our carrier pricing is spot market or negotiated daily. Customer rates generally move a little slower, which generates some short-term margin expansion. That timing difference in rate adjustments generally works against our net revenue margins when prices begin to rise and carriers adjust their prices up faster than most shippers.

Net revenue growth was most challenged in our intermodal and international modes of transportation. Our Intermodal volumes were only down slightly from a year ago; however, market conditions were very different this year with regards to fuel prices, competitive bidding, carrier realignments and truck competitiveness. Volumes with current customers declined and growth largely came from new customers at lower prices. Global forwarding net revenue and volume growth were challenged by very difficult market conditions. We had volume declines in most current customers and significant price pressures across the industry from overall volume drops.

Our operating expenses for the second quarter of 2009 were up 2.6%, personnel was up 3.6% and SG&A was flat. As most of you know we have a lot of different variable compensation plans that drive our personnel expense. While there were some variances to prior years in each of the plans one of our primary objectives is to keep personnel as a percent of net revenue as variable a possible. Total personnel as a percent of new revenue was 43.1% in the second quarter of this year and 42.9% for the second quarter last year. A flat SG&A is largely due to managing our discretionary spending down this year, offset by having to absorb some higher bad debt expense from customers who've not been able the survive the recession.

On our last call we discussed that during the first quarter of this year we had made some staffing adjustments in many of our branch locations where the sudden decline in freight volumes had been the most severe. While each of our 230 locations is a little bit unique, the general theme around hiring and staffing during the second quarter of this year was very limited hiring, combined with some level of normal employee turnover, resulting in a modest decline in total employees during the second quarter. We saw good improvements during the second quarter with regards to many of our key metrics around productivity and staffing. Like most companies it's been a challenge for us to balance all the obligations and goals for productivity and profitability while staying focused on long-term success, protecting our culture, being fair to our employees, and making certain that we have adequate resources to serve our customers and respond to whatever opportunities exist.

Our leadership team feels pretty good about that balance today. We continue to be cautious about hiring, but we believe we can ramp up as necessary and we have a strong team in place today that's capable of handling our customers' needs and driving any growth opportunities. Considering the drastic changes in overall market demand during the past six to eight months we were relatively happy with our results. Like most companies the employees of Robinson have had to make some significant adjustments this year to respond to what ' happening in the marketplace. We think our employees have done a great job of adjusting to the current realities and opportunities in the marketplace, so while we didn't achieve our long-term growth target of 15% we do believe our results speak well for our business model, culture and employee attitude.

With that I'll turn it over to Chad for some more prepared comments.

Thanks, John. I'm going to give some comments on our cash flow and balance sheet for the quarter. Our net cash provided by operating activities was $27.8 million for the quarter. Our investment and working capital increased during the quarter due to increased revenues compared to the Q1. Our net cash use for investing activities was $19.5 million for the quarter. Our net CapEx, was $8.6 million for the quarter, which included $3.6 million related to the new data center. We expect to have future expenditures related to the data center of between $2 million and $2.5 million during the remainder of 2009. Our current plan is to transition to the data center in August and September of this year. We expect annualized expenses related of $2.4 million, of which $2 million is depreciation and amortization. Also included in our cash flow from investing activities was $12.4 million paid for the acquisition of Walker, the UK-based international forwarder that we previously announced.

Our cash use for financing activities was $103.6 million for the quarter, resulting primarily from share repurchases and dividends. We repurchased 1.38 million shares at a average price of $51.79. Our balance sheet remains strong, with cash and investments of $357 million. We continue to invest our cash with the focus on principal preservation rather than maximizing yields. Our current interest-bearing cash in investments are split primarily between municipal money markets and treasury money markets. Our investment income is down significantly compared to last year, primarily due to changes in the overall market yields on high-quality, short-term investments.

Our largest asset continues to be our accounts receivable, which ended the quarter at $921 million. We are continuing to closely monitor and manage our receivable portfolio and will continue to make adjustments to customer terms and limits, if warranted. Most of our receivables have 30-day terms and turn quickly. Because of this we tend to find out about problems relatively early. Total provision for doubtful accounts was $6.1 million for the quarter compared to $4.3 million for the second quarter of last year. This increase was driven primarily by specific customer issues. It's very difficult for us to predict what accounts will have issues in the future, but we do feel comfortable with our current level of reserves.

That concludes our prepared remarks. We will now open it up for questions-and-answers.

Thank you, sir. (Operator Instructions). Our first question comes from the line of William Greene with Morgan Stanley. Please go ahead.

Yes, good afternoon. I'm just wondering if you can talk a little bit about some of the -- some of your views on acquisitions. You've done a number of tuck ins, but I'm curious if you can offer any color on how big an acquisition you could do. Is there a size limit that you think about, or what are the attributes that you would think about that would limit your ability to make an acquisition?

A lot of our acquisition focus the last couple of years has been building our global forwarding network, and in this particular case the Walker business is in the UK where, while we had one office, we really didn't have a very strong presence from a forwarding standpoint so it was a nice fit to the network . There really is no theoretical limits to the size of deal that we've explored in the past or that we'd be open to in the future. However, as we build out our network and gain what we believe is a better presence in different parts of the world, the likelihood that we would want to acquire more in those regions goes down because our plan would be to integrate and to operate and grow organically from there. So as we've said many times in the past, there are many parts of the world in Asia and eastern Europe and other places where we don't have a presence where we plan to continue to invest and we certainly would be open to deals larger than these, and building out the network, but the likelihood of buying an existing global network with a lot of overlap, becomes less likely as we get further into

Okay, thanks. Just one follow up. If there are any dislocations in the LTL market how do you think that'll affect Robinson?

It would depend, the size of the dislocation and how much capacity leaves, but there certainly are pretty wide variances in service capabilities and pricing. So depending upon who left the market and what service areas were impacted, what pricing was impacted, there could be pretty significant impacts. We pride ourselves in flexibility and automation and existing relationships where we could put together new solutions so we don't necessarily hope for, or plan specifically for any of those failures but we would be ready to react and try to help our customers get through whatever happens.

But I think it's safe to say that in the past, in periods of distress in the market or dislocations you typically profited from that, is that fair?

Some times we don't -- I don't like the word profit because often times when we get involved in a new relationship we do so in an investment part of it and try to build the relationship over the longer time. I think I agree with what you said but I would rephrase it to say that based upon what we are and how our network functions when there is dislocation or stress in the marketplace we think we can take advantage of those opportunities to expand our relationships and get new ones.

Okay, that's helpful, thanks for your time.

Thank you, Our next question comes from the line oaf Chris Ceraso with Credit Suisse. Please go ahead.

Thanks, good evening. I think you've mentioned a couple of times in the past and you kind of hinted at in your prepared remarks today of how when volumes are declining, you have this benefit between your purchase cost and what you sell to customers, but you've said that a prolonged downturn is a difficult environment for you. We're getting pretty long in the tooth here in the downturn and you still seem to be delivering better results and margin expansion. What should we look for and when do you start to lose the ability to continue to exploit dislocations in pricing?

It's a good question and each -- while in general the market cycles and our results kind of have behaved similarly to the past, each -- the depth and slope of each cycle and each recovery is a little bit unique, We do know that in the fourth quarter of last year is when volumes began to decline rather meaningfully and margins began to expand. So as we said, as the year wears on margin comparisons will be tougher and tougher. Then the other variable that factors into that is how is overall supply and demand and how tight is the truck market. If we continue to see continued softness and continued weakening in demand it may still be weaker than a year ago and provide the ability for continued margin expansion as it continues to soften or go down. If in the second half of this year freight demand increases and the market begins to tighten and the demand relative to the amount of capacity out there, I think by the fourth quarter you'll start to see more difficult comparisons for us from a margin standpoint and we'll have to make it up in volume.

Because like you said, when things start to turn, the shippers will adjust more quickly or you're -- the carriers are going to raise prices more quickly?

That's correct. Just like it takes a while for shippers to do bids and realign route guides it takes a while for us to readdress prices on the shipper's side and to adjust to the market when it starts to move up.

When you look at our performance, although it is pretty good compared to the market, when you talk about our 15% long-term growth rate we are in a prolonged downturn, but we are also significantly below our long-term expected growth rate.

Right. Have you noticed changes in the competitive landscape lately? For examples, have any of the asset-based carriers that have brokerage divisions, have they gotten more aggressive in their brokerage operations to make up for troubles in the asset side of the business?

The market as a whole is extremely competitive but it's hard to decipher that sort of split, when looking at it, so we wouldn't really be able to tell that. It would be logical that that might be the case that asset utilization is so important to the asset-based truckers that when freight demand softens like it has I think there is a tremendous amount of pressure to take all available freight and use it to improve your asset utilization. We've owned truck lines twice in our history and we've had that same experience, so it's a rational economic response. I can't tell you based on competitive pressures that that is happening. but it would be logical.

Okay, just one last quick one. The sourcing business was particularly strong, have you noticed in past cycles that that tends to be a signal that things are getting better or no?

No, I think that's really more an independent thing where food volumes have just stayed a little bit more consistent and we're constantly working for different commodities and different categories with different retailers and food service organizations, so if we win a few new assignments and there happen to be new crops -- that actually is a significant variable in there -- we'll tend to see more stable growth or activity, so I think that's on its own progression of cycles.

Okay, thanks for your help.

Thank you. Our next question comes from the line of Edward Wolfe with Wolfe Research. Please go ahead.

Thanks. Good afternoon, guys. Can you talk to the 3% net revenue growth, if you looked at that how it progressed throughout the quarter between April, May and June and into July?

Through -- during the quarter it progressed to get slightly better on a per business day basis, so it started lower overall, finished better than the overall. And when you look at it July that trend has continued. But again it's -- through yesterday that's a pretty small part of the total quarter.

Sure. When I look at the gross yield expansion in truck of over 500 basis points it's greater than the total transportation, I think in words you said something to the effect of intermodal's gross yields was flat year over year. What's the different there, is it just simply rail rates are holding up firmer than truckload rates?

Yes. We had reductions in our prices to our customers to be able to continue to expand our intermodal volumes.

So your intermodal pricing to your customer is weaker than your truckload pricing to your customer?

There was a bigger change in it.

Year over year?

Year-over-year.

But you're saying -- just to understand this -- that the supply side of it is less the issue than the demand side of it. In other words, it's not your cost for railroads firming up on you versus your truck costs weakening it's what you're being able to get from your customer, or is it the spread?

I think, Ed, you're driving more at the relative competitiveness that, a year ago with higher fuel prices and fuel being a smaller component of the rail cost structure, most of the opportunities that we -- or a lot of the opportunities that we pursue were comparing the relative truck and rail pricing, so rail was -- had a stronger advantage a year ago. This year, with the fuel comparisons and the carrier realignments and the market changing through a lot of the bids, there were just many fewer opportunities where -- on a transactional basis where rail was as competitive. So we were able to replace a lot of that volume with different, more-dedicated, lower-priced freight, but there's a lot of moving parts in there that factored in to the variances between truck and rail year over year.

Okay. One last one. You spent $65 million in repurchasing stock, which I think is a record for you guys in a quarter, how should we think about that going forward. Was it related to valuation or was it -- how do we think about it and going forward?

It was not a related to valuation, it was -- we -- once during the quarter we monitor our cash balance and try to hold it between $300 million and $400 million so we redeployed cash through share repurchases pretty equally throughout the quarter to accomplish that goal.

Okay, thanks for the time, guys.

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

Yes, thanks, question on the data center. I just want to confirm that there's minimal or low switching risks with that new system when you light that up. That's not a customer facing application it's just a pure back office data center?

It is.

Okay. If I think about it what kind of capacity does that give you going forward? This investment, what kind of timeframe does that buy you, or how do you measure that investment in terms of what it's provided you in terms of future capacity?

Okay. As far as transition risk, it is moving all of our applications, which includes completely internally-focused systems, as well as externally. To manage that risk that's why it's going to be done over a two-month period so we bring a piece of application live over the weekends. Pretty much we're going to transition not try to shut the whole old center down and the new one up, so we can always roll back if something doesn't work or a portion of it. So we feel pretty good about the risk of transition. As far as future capacity, the data center is going to be running at maybe a third of capacity. It's pretty difficult to predict how long that will last us because machines keep getting smaller and smaller and more efficient.

Right.

-- (inaudible) for the foreseeable future. Our last data center that we're moving out of we put in place in 1990.

Right, right. Okay. Then going forward, as we think about your capital investment, are there any foreseeable projects or requirements over the next two to four years, that would drive an uptick like we saw at the data center?

We do own more land here at our corporate headquarters campus and we may, in the next two to four years -- probably more towards four -- start construction of another office building. Other than that it should be consistent with current levels excluding the data center.

Okay, thank you. Last question for me is, with folks hopeful that we'll see some improvement in the broader volume environment the back half there are expectations that just from pure seasonality and back-to-school build and holiday peak that there should be some improvement, are you seeing anything the the market? Are you hearing hard commentary from your customers that people are starting to look for capacity or have an intention to shift more as we head in to the third quarter and fourth quarter, or are we talking conceptual here in terms of hope for a volume lift? Thanks, guys.

We don't get great visibility to that so we can't hand out anything specific that would make it feel better, but I think probably the most optimistic statement is if you look at the last several years of activity. As I mentioned earlier, in the fourth quarter of last year things dropped off pretty hard, so as long as we can sort of stay at the current seasonal run levels I think year over year, at least,you'll see some relative strengthening when you get in to the second half of the year. That's obviously very tough to predict and we get, in some cases, annual bids but there really are no volume guarantees and they're all subject to fluctuations on business activity and in terms of firm orders probably a week or so is the most lead time we get to a visibility of hardshipments so it's just really hard for us to predict what the future's going to be like.

Got it. Thank you.

Thank you. Our next question comes from the line of Tom Wadewitz with JPMorgan. Please go ahead.

Yes, good afternoon. I wanted to ask you first on your view on gross margin. You had -- I think you naturally tend to see a little lower gross margin in second quarter typically versus first and you had some of that. Do you think given there's still probably a lot of excess capacity in the market that you can sustain the type of gross margin you had in second quarter for a couple of more quarters? 20.6% transportation gross margin is pretty high number but given that there's a lot of capacity do you think that can last for a few more quarters?

I guess it is possible, yes, but it's also it could go down. It really depends on supply and demand mix, and even though the demand is still relatively weak there's still -- there's also plenty of supply still available. (inaudible) If there's a fall peak, which there hasn't been in a few years, it could tighten up and reduce margins.

Okay. Do you have any sense of capacity leaving the market in a meaningful fashion that would give you potential tightening, or is it just really tough to get visibility on what the truckload market might look like over the next few quarters?

It's hard to be precise about that, but we do know each month we're signing up new carriers and looking for new capacity, and we do know that in the second quarter, while we signed up more than 1,000 carriers again the total number was a little bit less than the last four or five quarters. So it does feel maybe that there's a slight reflection of capacity having -- leaving the marketplace.

Right. Okay. And then the last question on the headcount. It looks like your headcount was down about 2% sequentially and you said that's less hiring plus attrition, is that an approach that you would expect to continue so that sequentially you'd see some further reduction in headcount in third quarter and maybe fourth, or was that a one-time type of thing and then you'll get back to holding headcount flat or increasing it a little bit?

It'll largely depend upon what happens with volume across the network, because the network will react pretty quickly to whether or not they need the additional staff to do it. However, from a year-over-year comparison standpoint last year we were hiring pretty much throughout the entire year, so even if we hire the full level of replacement turnover in the third and fourth quarter our year-over-year staffing would probably continue to decline a little bit.

So you think right now, given that you're in third quarter that you'll be down a little bit further third versus second?

Compared -- I was talking compared to previous years. Third versus second it's difficult to predict.

You don't know yet, okay. All right, thank you for the time.

Thank you. Our next question comes from Jon Langenfeld with Robert W. Baird. Please go ahead.

Is there something about the high bidding season -- the high volume of bids out there that allowed your trends to diverge again from the general market trend. If I look back at the fourth quarter, volume's down 4%, down 10% in the first and now they're kind of regained their footing, down only 5%, while the market is as bad or in some cases worse than the first quarter. So is there something about that bid process where you guys did better than you might traditionally do, or is it just simply the market share gain?

There's a lot of different factors. Certainly there was -- we talked about in the first quarter that there was unprecedented level of bid activity and given the sudden freefall in the market, I know an anecdotally that there were a lot of customers playing the market more so than ever to take advantage of the January, February softness. So it clearly had a unique environment in the first quarter that could have had some impact on our share and volume activity. We, like everybody else, were repricing a lot of business during the first quarter. We also pride ourselves in freeing up our people to get out and sell and go work on those relationships. So some combination of pricing and realignment and unique circumstances, and hopefully a big part of us just staying active in the marketplace and winning back freight volumes and freight relationships through long-term relationships, hopefully that all's part of it.

Okay, good. And then on the acquisitions can you give us an idea for how much revenue, either growth and/or net, that they would bring to the business?

We didn't disclose it but they're both less than 1% each.

And then the headcount from the first one that is in the numbers, the employee numbers?

Yes.

But the second one would be next quarter?

Correct.

Got it. Okay, thanks a lot.

Thank you. Next question comes from the line of Alex Brand with Stephens, Inc. Please go ahead.

Good afternoon, guys. Chad, the -- on the balance sheet I think your DSO's look like they may be higher than I could see in my model going back, is there a timing element there or just you happen to get paid a little slower?

I don't -- the way I calculated it, which is based on the quarter's gross revenues compared to the outstandings it was about 43.5 days. That's -- last year's June was 45 days.

All right. So the sequential change, though, there's nothing to read into that?

From forty -- sequentially I have 42.6 to 43.5. So, no, there's nothing to read into that in my opinion.

All right. What about the trend in volumes. Jon was just asking you about the -- sequentially it was less bad, down 5%, what did it look like by month, was it less bad by the time you got to June?

Yes, April was the worst and it got less bad to the point where July truckload volumes are above flat.

All right. Can you -- do you care to be specific by month?

I don't have the precise numbers here.

Okay, fair enough. Just on the LTL side, I don't think you were specific in the press release on that, is there a specific growth number for that volume?

Transactions were up little bit more than 20%, but tonnage per transaction was down something like 12% or 13%.

We're not sure shipment count is as good of reflection of volume gain as it is in the truckload side because of the variances and shipment size and how LTL is handled, but the volume growth was pretty meaningful.

Okay.

Transaction count, yes.

All right,guys, thanks for the time.

Thank you. Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please go ahead.

Great. Chad, you just talked about the volume trends through the market -- through the quarter, what about pricing, did that accelerate as your volumes started to improve? On the down side you said it was down 5% for the quarter.

Our pricing per truckload, excluding fuel surcharges, our best estimate was it was flat April, May and June. Same rate all quarter approximately.

Same rate being the down 5%?

Well, yes, except the rate was increasing during last year's third quarter, so --

second quarter.

-- or second quarter, I'm sorry -- so each month was different, growth rates, but the rates this year's second quarter, which is probably the most applicable thing, were roughly flat throughout the quarter.

Okay, so just to understand that clearly it's not a case of using -- seeing price decline to get more of the volumes, your actual dollar per load was relatively flat through the quarter?

Our rate per mile, excluding fuel, throughout this quarter was consistent during this year's second quarter.

Okay. And do you feel like -- I guess if your volumes were down 5% for the quarter, the market, somewhere down in the upper teens, low 20s, do you feel like you accelerated on a market share gain through the quarter?

It's hard to get a feel for that. When the year is done you can look back and there's more firm industry data and stuff. It's hard to get a sense for that in the short term and we really didn't do anything different, throughout the quarter. We just stuck to the plan of selling and building relationships. And as far as how much share we're taking or how the whole industry is doing we believe we're out selling and taking market share but it's hard to know exactly what the industry did in the second quarter or why we may have done better than we did in the first quarter.

Okay. Thanks, John. On the acquisitions you made, the number you threw out before, the 1%, was that on revenues you were saying that they were less than 1%?

They're both less than 1%.

Okay. Great, thanks for the time.

Thank you. Our next question comes from the line of John Barnes with RBC Capital Market. Please go ahead.

Hi, good afternoon, guys. Real quick, just on the data center again, I just wanted make sure. Is there any change in deappreciation as that data center comes on line? Are we going to see any kind of deceleration on that?

Yes, I mentioned that in my prepared remarks there. It's about $2 million per year once it's on line, or $2.1 million.

Okay, thank you. Sorry about that.

No problem.

Are there any -- and again I'm sorry if I missed this -- any material cost associated with the transition as you move everything over, at the SG&A line or --?

Just buying the capital equipment is by far the biggest cost.

All right, so more on the CapEx line, not so much on like SG&A in terms of just the total cost of moving?

No outfitting and the move is also capitalized as part of a project, getting it on line.

Very good. Okay, and then one last question, on capacity. With lender leniency there's been some comments about -- that the lenders are keeping some of the carriers in business a little bit longer, have you seen anything in terms of the quality of the carriers you're signing up? Has it gotten any worse, are you having to stretch a little bit or do you feel like the quality's still there and you really don't have concerns about the quality of your carrier base at this point?

I think we feel good about that. We have pretty consistent quality standards that would ensure that the right caliber or capacity gets put on the freight, so we really don't se issues with that. I think one comment relevant to what you mention there, though, that I think we've said over the last couple of quarters, when you look back at the magnitude of the industry volume declines and the softness in the freight demand, while pricing has declined, say 5%, I don't know if ours is in indicative of everybody else's in first quarter it was low single-digit percentages and from what we've seen from others I guess it's our opinion that that's a fairly modest decline in pricing relative to 15+% of the freight disappearing. So that would seem to suggest that capacity is hanging around and that maybe what you suggested is that there's been a lot more inertia to the capacity and lender patience than you might otherwise think.

Yes. Or do you think -- if we're in for a longer, slower recovery, do you think the price that you'll pay for capacity will run like it has historically in a recovery, or do you think it'll kind of track along with a slower recovery, that pricing will recover slower because you haven't seen this mass exit as the capacity from the marketplace?

It really depends upon the tightness, the supply/demand relationship. So if demand stays soft and continues to trickle down but capacity gradually leaves the marketplace, I think you'll continue to see more gradual price movements, again all exclusive of fuel, like has been for the last couple of quarters. If there's a period of time where the capacity starts to correct more aggressively or freight demand returns in any accelerated way I think you'll see some volatility come back real quick. So there's a simple supply/demand relationship with two moving parts and depending upon how each side plays itself out the market actually responds pretty predictably.

Yes, what do you think is accelerated? If volumes were to correct, say up 2%, 2.5%, a low single-digit volume recovery, is that a better environment for you? Does it allow you to adjust your pricing in line with those volumes, or is that even -- even that modest level of growth going to cause some dislocation for you in terms of pricing?

I think in that type of range it would end up being lane specific. When industry data is a couple of percent here or there what you'll typically see is a wide variance in pricing and behavior lane by lane, region by region.

Okay. All right, thanks for your time, guys, appreciate it.

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

Yes, thank you, John and Chad, for taking my questions this afternoon. Just thought we'd come at the health of the capacity question maybe a different way. I know that one of the attractions for carriers to use C.H. Robinson to find loads is your quick pay program. You would expect if they were under more financial distress than they have been that perhaps you would see the percentage of your capacity using that increase, have you seen changes in that percentage?

Not a significant growth in it but a slight growth, yes.

Just a slight growth. You talked about the criteria that you apply to new carriers that you sign up, is there a financial component to that criteria?

Just that they have operating authority, good safety stat ratings and insurance. There's no minimum margin, they don't have to be profitable or anything of that sort in order to be signed up.

The way it would work is, to begin a relationship you need those required elements, but then every single carrier works their way into a proof of operating history, as well, too, where we would track any sort of operating metrics, performance claims. We have a scoring system that we would track them on. As a carrier grows in our relationship or grows in their size we would have a wide variety of different types of business reviews where we would ultimately look at profitability and their longer-term strategic desires or whether the freight matches or not. So a carrier would have to get a little bit larger and a little bit more integrated with us before we'd start looking at their profitability and sustainability.

Is the average size of the carrier still rather small, or have you seen a increase in the size of carriers that are being recruited into your system?

The way it breaks down is that the larger carriers, the 400, 500+ trucks. have stayed around 10% to 12% of your freight activity. The core of our activity, the vast majority of our freight moves on the carriers with 50 trucks to 500 trucks. A lot of the ones that we sign up are 50 trucks or less and then we try to grow with them. The change in the dynamics of the size of the carrier and the carrier qualification, if somebody's got several hundred trucks we probably already know of them and have them in the network but it's the continual working and finding of the new, smaller ones and then the success of moving them into a medium-size carrier where we would have a longer-term relationship with them.

Maybe just one final question on the bidding activity, it sound like there was a tremendous amount of activity in the first quarter that may have tailed off a bit in the second. Did you feel as though just about the entire account base has been through that process, or is there a potential for another wave of that in the second half of the year?

A lot has been through. I think your assessment was correct that there was probably unprecedented levels in the first quarter of everybody rushing to the market and then leveling off a little bit in the second quarter. Most shippers preserve the privilege of rebidding when they deem it to be appropriate rather than on a preset schedule, so if the market changed a lot, softened a lot, you might see more of them coming back to take a bite at it. If the market starts to firm up a little bit you probably would see a lot less.

Okay, that's very helpful. Thanks a lot.

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

Thanks. I got most of my answers, but there's one left and that is the ITC acquisition in July, assume it has one branch and that's Laredo and where will the revenues be in the profit and loss statement in the third quarter?

The bulk of their revenues are customs brokerage, which we report on the miscellaneous line within transportation. They also a limited amount of transportation, as well, which would show up in the modes of transportation.

Okay, and it's just the one branch in Laredo?

One physical location, yes. They clear things through many different border crossings, though, remotely.

And it's a good example of how our business is evolving, because while the revenues from this acquisition would show up in the customs brokerage area a bit driving influence in the acquisition was to facilitate truckload transportation across the border in a very smooth way so that we can offer integrated door-to-door services even more efficiently from Mexico to the US or vice versa. So while the revenues will show up in customs brokerage it's an example of how our services are integrating and that we think one of the primary benefits, maybe the primary benefit from owning the business will be the support of the North American truck services.

And it's 1% or less of your revenues, both gross and net?

Yes.

Okay. Thank you.

And your next question comes from the line of Nate Brochmann with William Blair & Company. Please go ahead.

Hey, John, Chad and Angie.

Hello.

Just wanted to talk a little bit, I think there's been a lot of concern in terms of whether you can hold margin and how long you can hold it and I know a lot of it depends on dynamics, but isn't another -- one thing to consider is -- I know you don't disclose this exactly, but if we were to assume that maybe roughly you're at 50% contract and 50% spot right now that maybe if pricing increased a little bit that it might be a little tough to go back and get that price immediately on the contract business, but if the market were to move that that -- you might be able to take advantage of the higher margin spot activity to help offset that a little bit. Just wondering how we should maybe think about that dynamic?

I think what you just described is an accurate reflection of how our model works, that there is committed pricing and a lot of our margin and expansion and contraction follows exactly what you said that the customer side would move slower and that would have an impact on our margins. If -- whenever there has been a period of time when freight demand starts to spike up and there is a shortage of capacity that true, last minute, expedited spot market-type freight can be at very good margins even when our portfolio might be contracting a little bit. So it's a mitigating factor. The volumes and the margins work inversely and then you have some spot market activity that, again, helps to mitigate the fluctuations or the volatility in the net revenue growth.

Great, thanks. And then just my second question is, I know that you are starting to make a little bit of inroads with the European truck network a little bit, just wondering with what's going on in the economy over there where that progress is to date and second quarter?

So the European truck results from a volume and growth standpoint, the industry and our results are all generally similar, that we're suffering some volume declines in some areas but benefiting from some margin expansion and we believe we're taking share similarly to how we are doing here. Again,. we're much smaller. It's about 3% to 4% of our net revenue. We also have some unfavorable euro conversion so that when you report out in US dollars the European piece is having a harder time growing its net revenue right now because of the currency piece. But our experience over the last six to nine months is that our strategy and our approach and our building out of our network on the European truck side we feel pretty good about it.

Great, thank you.

Thank you. (Operator Instructions). All right, looks like there are no further questions. Ms. Freeman, I'll turn it back over to you.

Okay. Thank you to everybody for participating in our second quarter 2009 conference call. Like to remind 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 800-406-7325 and entering the passcode 4099798#. The replay will be available at approximately 7:00 p.m. eastern time today. If you have any additional questions, please feel free to call me, Angie Freeman, at 952-937-7847. Thank you.

Thank you, and ladies and gentlemen, you may now disconnect