羅賓遜全球物流 (CHRW) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to CH Robinson third quarter 2009 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's Instructions). As a reminder, this conference is being recorded Tuesday, October 20th of 2009. I would now like to turn the conference over to Angie Freeman, CH Robinson Vice President of Investor Relations. Please go ahead, Ms Freeman.

Thank you. On our call today will be John Weihoff, CEO, and Chad Lindbloom, Senior Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our third quarter performance and we'll follow that with a question and answer session. I would like to remind you that comments made by John, Chad, or others representing CH 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 taking time to listen to our third quarter conference call. About an hour ago we issued a press release sharing the third quarter results for 2009, and I am going to start by highlighting just a few of the key financial metrics on that release. For the third quarter ended September 30 of 2009 our total revenues declined 15.6% to $1.95 billion. Our net revenues increased less than 1% to $352 million. Our income from operations increased 4.2% to $154.8 million. Our net income increased 2% to $95.5 million, and our fully diluted EPS increased 5.6% to $0.57 per share.

Same metrics for the year-to-date results for the third quarter ended September 30 of 2009. Total revenues declined 15.9% to $5.6 billion. Our net revenues increased 1.2% to $1,043,000,000. Income from operations increased 3% to $442 million. Net income increased 1% to $273 million, and fully diluted EPS increased 3.2% to $1.61 per share. In addition to the overall financial results our press release gives more detailed growth percentages by our various service offerings. Consistent with the past calls we're going to share some prepared comments and then open up the lines for questions.

Our results for the third quarter of 2009 reflect many of the trends that we have discussed the past couple of quarters, the changes in the key financial metrics that I just read off are all relatively similar for the third quarter and year-to-date 2009 changes. Total revenues continued to decline for the third quarter of 2009. Transportation revenues declined by 20%. However, sourcing revenues grew by 8.4%, and information services revenues declined by 8.5%. The 20% decline in transportation revenues resulted from generally lower prices in all modes of transportation. The lower prices were driven by declines in fuel prices and related fuel surcharges but also due to the lower rates exclusive of fuel due to soft demand and over capacity situations in all modes driven by the recession. We also had volume declines in intermodal and international air and ocean.

Our sourcing division results continued their positive momentum in the third quarter with 9% net revenue growth. Similar to last 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 the continued growth. Information services revenue from T-Chek decreased 8.5% driven by declines in transactions processed and average lower fuel prices resulting in lower fees. We have discussed in the past quarters this year that one primary way that we have responded to the recession and the challenging environment is to remain very focused on sales and trying to grow our market share. We feel like our business model and strong foundation is something that we could leverage in this environment.

Some assessments of our progress would be that we feel positive about our truckload volumes being roughly flat for the quarter. We feel positive about our volume growth in LTL transactions, and we also feel positive about our sourcing growth. Transaction volumes for intermodal international forwarding and information services are generally closer to what we understand the overall industry activity to be. There is a variety of reasons for our relative growth or strength in each of the modes and service offerings but we continue to invest in expanding all of our capabilities as well as our technology and account management processes to integrate these services across all modes and geographies. That continues to be our growth strategy.

Our net revenue for the quarter was essentially flat. A significant amount of the decline in total revenues was driven by declines in the price of fuel. We believe that most changes in fuel prices function similar to a pass through cost in our total revenues. Our gross margins and net revenue growth also fluctuate based upon the supply and demand relationship by each mode. It is worth noting that our largest revenue category, truckload services, did benefit again this quarter from margin expansion even after factoring out the estimated impacts of fuel. Our truckload net revenues increased a couple of percent this quarter on roughly flat truckload volumes. Consistent with past economic cycles, as we have been able to increase our volume activity, we benefit less from margin expansion. Our estimated amount of net revenue growth due to truckload margin expansion decreased throughout the third quarter and was negative in the month of September.

This trend has continued into the first few weeks of October where we have had truckload volume increases but an overall net revenue decline due to margin contraction. It is also relevant to note that our truckload shipments per day so far this October are comparable to those of this September but represent an increase over the previous year volumes. It is not certain if this trend will continue throughout the fourth quarter of 2009 but we do know that truckload volumes declined and our gross margins expanded throughout the fourth quarter of 2008 as the recession began to impact freight volumes. As we stated many times before, the supply and demand relationships can change rather quickly and it is very difficult to predict them. The fourth quarter of last year highlighted how fast the market can change. While we have the uncertainty of gross margin fluctuations, we do plan to continue to pursue market share growth and expansion of our customer relationships as we believe that is the foundation of our long-term growth goals.

Our operating expenses for the third quarter of 2009 were down 2.6% as both personnel and SG&A expenses declined for the quarter. We've continued to manage our costs aggressively and execute with a variable cost approach. Our compensation plans generally keep most shorter term incentives consistent with consistent levels of earnings while our longer term incentive costs are driven by growth rates and have decreased as a percentage of net revenue as our growth rate has slowed. We continue to believe these incentive plans do a great job of aligning our management team with our shareholders and create the right balance for us to create value over the long-term while managing shorter term profitability.

We were able to complete a couple acquisitions during the third quarter. In addition to the acquisition of International Trade and Commerce, ITC on July 9th, which we previously announced and discussed in our second quarter call, this September we announced the acquisition of Rosemont Farms and Quality Logistics, two related entities that provide produce and logistics services. We're excited about the addition of these teams to the Robinson network and would like to formally welcome them. We've continued to invest in our network this year with these acquisitions and investments in our technology and training that we think are going to continue to benefit us for the long-term. Those are my prepared comments, and with that I will turn it over to Chad.

Thanks, John. I am going to give some comments on our cash flows and our balance sheet. Our net cash provided by operating activities was $156 million for the quarter. Our investment in working capital decreased during the quarter due primarily to decreased revenue, compared to the second quarter, and an improvement in our days of sales outstanding. Our net cash used for investing activities was $51.2 million for the quarter. Our net capital expenditures were $9 million which included $3.7 million related to our data center. We believe that all material capital expenditures related to the data center have been completed. We began moving into the new data center and we expect to be completely transitioned into it by the end of this year. We had approximately $250 million of -- or $250,000 dollars of depreciation for the data center during the quarter, and we expect that to be about $2.3 million on an annual basis.

We also spent $31.1 million of cash on the acquisitions that John talked about. Both of these acquisitions also have earnouts based on growth and earnings. Our net cash used for financing activities was $86.2 million for the quarter resulting primarily from share repurchases and dividends. We repurchased 900,000 shares this quarter at an average price of $55.65. Our balance sheet remained strong with cash and investments of approximately $388 million. We continue to focus on principle preservation rather than maximizing yield. Our current interest-bearing cash and investments are split primarily between municipal money markets, municipal bonds, and Treasury money markets. Our investment income is down significantly compared to last year due primarily to the changes in the overall market yields for high quality investments.

Our largest asset continues to be our accounts receivable which ended the quarter at $885 million. We are continuing to closely monitor and manage our accounts receivable risk and will continue to react to changes in our customer base. Our total provision for the quarter was $3.7 million compared to $4.3 million for the third quarter of last year. It is 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. With that, we will turn it over for the question and answer portion of the call.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Matthew Troy with Citigroup Investment Research. Please go ahead.

This is Bascome Majors in for Matthew Troy. How are you doing?

Good.

You talked a little bit about sequential narrowing in the margin contribution to your net revenue line during the quarter with that recently turning negative. Can you talk a little more to that as to how that looks into an up turn? Is this mostly a function of tougher comps or is it tougher pricing from the carriers, or a little bit of both?

You know, we talked a lot this year about kind of how our model typically works, and I think what we saw during the third quarter was what we would expect as volumes start to improve a little bit, that our cost of higher -- increased or started to compare a little bit more aggressively sequentially as it increased while our prices for the customers were staying fairly flat for the last five, six months. So it is not uncommon for us that when volumes start to improve that we will start to see some margin compression on a per transaction basis, so as volume improved and was flat for the third quarter, and actually has increased for the first couple weeks of October, we do see some margin compression which again for us that would be a normal expectation for this part of the cycle. What's difficult to tell is if that increase in volume is short-term or longer term trend or what will happen in the rest of October or the rest of the fourth quarter, but we do know that there is also from a comparability standpoint last fourth quarter volumes dropped each month, and margins expanded as demand really softened.

So as far as the volume trends in third quarter can you give a little better color on that for us as well, please?

I want to give you better numbers here.

During the quarter, July August and September they were on a per business day basis our truckload volumes were down a little bit in July and roughly flat in August and September compared to 2008's same months.

And into the first few weeks of October?

It is hard to tell into October because we look at it per business day, and there is one less business day, but kind of low to mid-single digits. It jumps around each day. It is too early in the month to tell what it will project to.

As we move into the up turn, how long do you guys anticipate it taking for some of the pricing pass through to be able to pass through to your customers as the costs begin to flex up? Is that just something that's going to depend on how volumes trend?

It definitely depends upon the overall market condition, but it also depends upon the relationship with each of our customers. Some of the business is transactional and will reprice fairly aggressively when the market allows it to each day. Other customer relationships are priced out for as much as a year and can take a longer time to reprice. They don't necessarily wait the entire year. If there is an aggressive correction there may be repricing sooner, but if it is a modest correction, it would generally ride out the year. It depends on the unique expectation and commitments of each of the 30,000 plus customer relationships and it depends upon how radical the changes are in the market conditions.

And we are the second half of last year as well as this year so far we have been at the high-end of the range. Our current margins when you look at dollars per load or current profit per load is still well within the range of what's normal.

All right, guys. Thanks for the time.

Thank you.

Thank you. Our next question comes from the line of Justin Yagerman with Deutsche Bank. Please go ahead.

Hey, guys, how are you?

Good.

Just wanted to ask a little bit about the trends that you guys were seeing and maybe some commentary on the general environment. You talked about truckload volumes being stable year-over-year, volumes up year-over-year in the LTL market, and you called that out as market share. I was wondering whether or not some of that was inventory replenishment in the quarter and what you were seeing from your customers and if you could break it down how much of that you really think was market share and the truckload and in the LTL market and what percentage of was maybe what we have been hearing from some carriers which is things getting a little better and that would echo your statements the margin side.

We don't get great visibility to the total demand of our shippers and kind of what they may or may not be doing in terms of inventory adjustments, so that piece is kind of hard for us to quantify. The things that we get the best visibility to is the supply and demand relationships and how the availability of trucks compares to current demand, and we have over the last couple of months seen a little bit of tightening, which to us would mean that the supply and demand relationship is coming closer to alignment where for the better part of the last year there has been a pretty significant excess of capacity. So that could be a combination of further corrections of capacity or further strengthening of demand, likely at least some element of both.

We don't obviously have the firm data on exactly what the market would be, but our sense would be that in both the truckload and less than truckload industries that year-over-year there were still some degree of volume declines, and that being flat or increasing our volumes represented some sort of market share movement, so that's where our comments would come from.

Would you say that the truckload market was tighter than the LTL? That just seems to be the general consensus, but curious what you saw.

Probably would have moved more during the quarter, and we would get a greater sense of that. What the LTL capacity, it is not so much of a transactional day-to-day movement because of the fixed networks of the capacity so you don't see the shorter term corrections or tightening in the capacity like you do on the daily truckload piece, so, yes, we would have seen more movement or tightening of the supply and demand relationship on the truckload side than the LTL during the quarter.

John, when you think about the model and obviously you guys have been transitioning fairly well, especially relative to most other companies in general, not just transport companies, with net revenues being down and EPS remaining up, the cost side has been a nice lever for you guys to be able to pull, I guess two pieces to the question. Is this probably the worst that we see? I mean, do you think that with margins crunching you're going to be able to offset that as maybe some volume comes back and gradually as long as we don't see a major spike in the economy and then how fast do you need to bring people back onto deal with any of that volume that comes on alongside of any kind of re-emergence of seasonality that we see?

So while everything that we have seen so far this year would be what we would consider normal or not normal but expected given that part of the cycle or that part of the environment, it gets really difficult to know how fast the market is going to continue to correct. So if capacity continues to tighten gradually over a longer period of time, we would have to manage a little bit differently, and obviously add people slower or maybe not add that many going into next year if the market tightens quicker and demand really accelerates over the next couple of months, we feel very confident about the ability to add people. That would certainly trigger opportunities or situations where we would need to reprice quicker and who knows how successful we would be on that, and it would be customer by customer, so as the demand comes back and as the market tightens out, we would be adjusting in our staffing approach. We would be adjusting in our pricing, but it really depends upon exactly how steep or aggressive those corrections come.

Yes. Switching focus a little bit on the ocean shipping side, we have been hearing about pick ups in exports out of Asia and some tightening in the pricing in those markets there. You guys net revenues were down significantly obviously pretty weak market for most of the quarter, but as we move through the end of September, and maybe if you have some comments on early October, any thoughts on what you're seeing trending there in the ocean shipping space?

I do not have any more current data than the end of the quarter, but I know throughout the quarter in the ocean mode there was some strengthening of the pricing or the cost of the capacity but it was coming off of such extremely low pricing and severe over capacity that it was really hard to tell percentages really didn't mean very much. Yes, a little bit of sequential improvement as the quarter wears on, but our view of the global forwarding market is that those volumes were probably impacted as severely as any of parts of transportation that we're a part of, and since our network is less mature and has less density in a lot of the lanes, the opportunities to consolidate or really kind of leverage purchase volumes were probably the most vulnerable there to being hit by the industry declines in volumes.

One last one and I will turn it over. Chad, can you tell us where the share count ended for the quarter?

Where it ended for the quarter?

I mean the average number, but you bought back shares in the quarter. Just curious where it ended.

It would be about 450,000 lower than the average give or take. I don't have the ending number with me.

Okay. Thanks.

Thank you.

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

Hey, guys. All right, John, help me understand this. On the one hand I hear you saying that volumes were simply flat in September, and now they're up a little. Yet it's enough tighter that you're starting to get squeezed a little bit. I guess it seems like there is a lot of capacity out there. I am not sure how it could be that much tighter or is it just that the West Coast is tighter and that drives a lot of your volume and so that explains it? Can you help me understand?

First off, volumes were sequentially flat, so September and into October our volumes and our pricing is remaining relatively stable. The squeeze is really in the comparison to the previous year where last year margins comparing to this year's margins, so that's where we're seeing margin compression relative to a year ago. In the supply and demand relationship we would still characterize even the current environment as over supply. There is plenty of trucks where it is just comparing differently to a year ago.

Okay. All right. That makes more sense. Thank you. In terms of as you get into this and repricing can you quantify what percentage of the business is transactional versus a contract that you would -- that would take longer to work towards repricing?

We've tried to guess at that in the past, and it is probably most useful to just share some specific data points. We know we have roughly a third of our business in our top couple hundred customers where there is likely some sort of longer term pricing agreement or commitment. There is probably in the past we have estimated at least half of the business where there is some level of pre-priced rates or some indication of commitment out there.

What gets hard to quantify about it is that the depending upon the relationship that we have with each of those shippers, sometimes they will tend to rest more or less than the anticipated volume that those contracts arranged for. So there can be transactional or spot market relationships along with the longer term pricing one. So it really does become a customer by customer relationship by relationship thing as to how on what percentage of the volume pre-priced rates are honored and for what period of time, but again like I said earlier, if and when you choose to reprice an account depends significantly upon how drastic the market conditions are moving.

And just one more, on the cost side. I was surprised that you had that much sequential decline in personnel costs and the G&A to be honest about that. Is there anything that is driving that or is this sort of a sustainable level and it will just come back up as soon as the business comes back?

I think we had some personnel reductions throughout the first and second quarters that we weren't necessarily seeing the full benefit for until we got into the third quarter, and then we have the reduction of our longer term variable costs that are accruing at a lesser rate because of a slower rate of earnings. That's obviously helped us all year long. Again in the third quarter. If you look at year-over-year, we actually had a bigger percentage decline in the number, the average number of employees than we did in the personnel reductions, so I don't think there is anything unusual in terms of what you're seeing in the base amount of costs for third quarter.

And then SG&A expenses the biggest portion is bad debt or provision for doubtful accounts being down. I mentioned it was $6.1 million in the second quarter of '09 and $3.7 million this quarter.

I appreciate it, guys. Thanks for your time.

Thank you.

Thank you. In our next question comes from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Thanks. Good evening. There have been a few questions on the relationship between revenue and volume on the one side and your margin on the other. Is there a rule of thumb or a rough ballpark number that you can give us in terms of what kind of volume growth would you need to see in order for the improvement on the top line to out weigh any pressure that pricing would put on your margin? Where is the break even so to speak?

There really is no rule of thumb, and it's, as I said a couple of times, it is difficult to say because it really depends upon customer by customer on what the expectations and the commitments are and on top of all of that every year in November and December the demand softens just seasonally. Some of this could just be more of October volume peak than there has been the last couple of years, so the cost of capacity on a transactional basis will soften seasonally in November and December like it does every year I would assume. So it gets very hard to anticipate the precise relationship between the supply and demand and how that would work, but I would just say that our, basically, our business model is premised upon balancing those two forces that as the market tightens up we know that we have to manage that margin and manage the pricing, but exactly how tight it gets and how much margin pressure there is and how and when you reprice, is a day by day decision and account by account decision with no real rule of thumb or preset relationship on how the two would work.

Okay. I apologize if you put this out and I missed it. Can you give us details on the acquisition that you made recently in terms of the revenues associated with the new business, the level of gross profit, how fast you think it grows, and what are the size of the earnouts?

As far as the size of the acquisition what we talked about it was about $150 million gross revenue for Rosemont Farms with a little bit of that being transportation but predominantly produce which has margins similar to our produce business. The earnings should be -- it is really hard to say. It is not going to be all that accretive in the first year, maybe $0.02 to $0.03, and as far as the earnouts go, there is a total of potential earnouts of approximately $20 million for the two acquisitions combined, ITC and Rosemont Farms.

And that extends over how long?

Three years.

Three years. Okay. Has there been any change in the complexion of your customer base because of the downturn in terms of the number of large shippers versus smaller shippers?

No.

Okay. Thanks for your help.

Yes.

Thank you. The next question comes from the line of Adam Longson with Morgan Stanley. Please go ahead.

Thank you. John, when you looked at your contractual business, and I know you said it is hard to measure, do you have a sense of how many contracts are sort of out there above market rates and how much of the gross margin expansion you're seeing is simply a product of those customers?

Well, there was we talked earlier in the year, there was a lot of repricing and bidding activity that happened in the first quarter, early part of the second quarter, and really from a customer pricing standpoint those rates have stayed fairly constant for the rest of this year thus far. What's really changing is the fact that as the market tightens a little bit, that cost of hire will start to creep up where the daily or transactional rate for hiring the truck will tighten a little bit. So because the overall market is still probably what most people would characterize as an over supply situation, I wouldn't say we have very many, if any, customer relationships where the rates really aren't at market. It is more just the supply and demand relationship.

Now, what will happen if the market softens and the capacity, cost of capacity starts to fall in the next few months or soften again, then our margins could expand or compare similar to what they were a year ago. If the market continues to tighten, depending upon how aggressively it does, we may see some more margin compression due to the cost of hire increasing. And when, or if, it is ever appropriate to talk about a rate increase or reprice on the customer side, usually happens after at least some period of sustained tight capacity where the market is giving a clear signal that prices should start to move up, and we're not near that today, but it will kind of be a week by week month by month thing depending on what the market does.

Okay. That makes sense. There is also been a lot of talk on broker failures in the past couple of quarters under the weight of customers not paying and higher working capital balances. Do you see that as a big opportunity for Robinson and do you see any opportunity to use your larger working capital balances or better payment terms to either drive more volume or maybe support your gross margins?

We have always felt that part of our market share gains in the past and part of the opportunity in the future is to consolidate a very fragmented brokerage marketplace by bringing higher caliber service, better technology, better people, more reliability and stability. So, yes, we would continue to look for any weakness in competition or any market failures as an opportunity to go in and be aggressive and continue to take market share.

I don't know that we would do anything differently because we feel like we have been trying to do that for quite some period of time, but I would say in a lot of respects we feel good about the landscape, the competitive landscape, the market conditions, and our ability to grow and all of that is just being offset by overall contraction in the market over the last year. So we'll see as we move forward what the overall demand in the marketplace looks like, but we're, as I said in my prepared comments, we're absolutely going to continue to sell aggressively and look to take market share and take that market share from other third party brokers as well as converting market share to the third party model that we feel we can add value to that where a shipper may be dealing directly with the carrier community today.

Okay. And then just one quick one and I will pass it on. If you look back historically, the transport gross margins used to bounce around between kind of 16%, 17% prior to '06. They have sort of risen steadily since then. Putting fuel aside, is there anything sort of mix related or structural that you think has driven them higher over the past several years or is it realistic to think we may see those margins again? I guess sort of what is your view on what a sustainable gross margin might be in a normalized straight environment at this point?

Definitely has been a mix shift going on you when you look at the different categories of transportation net revenues, things like miscellaneous which has become a bigger percentage is close to 100% margin. Most of that is fee based business as well as LTL has a much higher margin than full truckload. So air does as well, so there is definitely a mix shift driven part of the margin expansion. Exactly what is sustainable is really difficult to predict, but the upper teens I think based on the current revenue mix is sustainable absent large fuel increases again, or we can go right back where we were last year if fuel prices spike way up. That is basically a dollar for dollar pass through.

Thanks for the time.

Thank you.

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

It is Ed Wolfe with Michael Beer. Just a couple of quick ones. The LTL volume growth in the quarter was what?

It was right around 30%.

Year-over-year.

Year-over-year. The margins were roughly flat, and the gross billings per transaction was down quite a bit both because of price of fuel, underlying rates and the weight per shipment.

How much was weight per shipment then?

Somewhere in the low double digits, around 12%.

What was that like in second quarter year-over-year?

About the same if I remember right.

Okay. Do you know what the doubtful account number was for fourth quarter '08 for the current quarter's comp?

Yes. I can find that in one second for you. $4.3 million.

Thank you. John, I just want to see if I am thinking about this right. If truckload volume growth was flat in third quarter on a positive nine comp a year ago, all else being give or take the same last year's comp in fourth quarter of minus 4, just making the comps the same assuming demand is at the same level, would imply year-over-year positive 13% kind of volumish. Am I thinking about that right assuming no major change in demand?

I think so. I don't have last year's fourth quarter volume numbers in front of me, but if they dropped off quite a bit sequentially during the fourth quarter of last year, so if you sort of assume that demand stays constant, I mean, there is seasonal adjust -- each month is going to taper off a little bit, but if you assume that we have continued strengthening in demand like the first two weeks of October, you could see a volume increase in that range.

Okay. Just want to make sure I wasn't missing something there. In terms of the net operating margin at 56.1, you talked about the year-over-year there was a little bit of improvement on the bad debt. Is there anything else that -- is this as good as it can get or can you keep growing the business better faster than the employees are reducing the employees faster than the volume is going away or however you want to look at that, but it is pretty amazing. I am guessing this is a record margin in a quarter.

It is near the best if it is not. It is pretty good. We've had if you look back over the last ten years, it has been gradually improving, and I think our message for the last year or two has been that we're not anywhere near out of productivity initiatives or trying to leverage the scale on size of the network, but the math just gets harder harder and harder to move the needle a lot on that percentage, so we do feel like it is sustainable. We do have lots of goals to try to improve it, but the magnitude of improvement going forward is not likely to be like the last ten years have been.

I don't know if we look at it the inverse number at 43.9% operating income to net revenue. I don't know that it will stay exactly that high, but it should stay above 40, we believe.

Okay. Thanks, guys. Appreciate the time.

Yep.

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

Good afternoon. Wanted to ask you about how you think incentive comp might affect you next year? I am not sure, I think you may have two programs that would be in place or have been in place this year and would affect next year, and I am wondering if you can give kind of a directional sense of if you do see a material pick up in volumes and you maintain, you build some momentum in the net revenue, will you see a pretty significant head wind from some of the incentive programs kicking into a greater extent?

Maybe. It depends how much earnings grow really, so it is not really just driven on volumes or net revenue. If earnings started to grow significantly, yes, it could add a percent or even more of net revenue in personnel expense.

Will you have two programs, two vesting programs in place next year or --

There are two sets of three year grants currently outstanding that would continue to vest through next year, yes.

We actually have more restricted stock that's vesting in outstanding this year than we did the previous year. It is just that -- we did in 2008. It is just that our growth rate has been so much slower this year that the overall expense is down.

So with two programs vesting would that make the I guess the way it would play out in next year different from what it would have been in prior up turns or is that not particularly something to focus on in terms of two programs instead of one?

The last time there was a big up turn in '04 there was not two different grants vesting. I think what that would mean, Tom, if we had significant income growth, 15 plus percent, I think you would see a slightly higher increase in our personnel expenses than you would have seen maybe as much as 1% net revenue that you would see it growing faster than maybe you would have had in previous cycles where our earnings were increasing. As Chad said earlier, that phenomena only occurs when we're growing our earnings because the vesting is based on the growth. So if our earnings are flat you won't see the uptick in personnel expense.

That makes sense. One on the SG&A line and in an up turn and I will pass it along. What are your thoughts about again if you see a material pick up in demand next year? Would you expect to rachet up the SG&A spending considerably or are you comfortable with the modest increase versus the current level?

There would be some increase to the current level obviously. People are doing a lot less discretionary travel right now in some other expenses, but I don't think it is going to go up significantly faster than net revenues. Obviously credit and finance are bad debt expense has been a big variable this year or over the last two years.

So you would likely see some operating leverage where that might go down as a percent of revenue SG&A?

I don't know that it would go down much. I am saying I don't think it would grow faster by a significant amount.

Right. Okay. Great. Thank you for the time.

Thank you.

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

Good afternoon. Chad or John, can you talk a bit on the truck side, what percent of the business is truckload and LTL at this point?

It is somewhere around 12% or 13% of net revenues is LTL, I believe.

Okay. And when you think about the potential of a disruption on the -- within the LTL universe, can you talk a bit about what that would mean for your network and your ability to distribute those volumes?

Well, today because the marketplace still has a fair amount of excess capacity, I don't think we would be too concerned about the ability to redistribute freight with any kind of reduction of capacity that might happen in the marketplace. As demand strengthens, if demand strengthens, and the supply and demand relationship comes closer into line, then obviously it would become more of an issue, but I guess the way we would think about it is if that demand continues to improve it is probably going to drive some meaningful improvement in the network density and profitability of the carriers as well too, so likelihood of a file you're decreases as the volumes increase.

So one of the value propositions that we bring to the marketplace is our network of providers and our automated relationships that we believe gives flexibility to a shipper. So we feel like we're benefiting in the marketplace today from the standpoint that our value proposition we think has a lot of relevance, and we feel pretty prepared to react and help our customers regardless of what the marketplace throws at us, and at the same time we're working hard to try to be a better provider or shipper to the carriers that we're working with because it is very important that they get the right kind of freights tendered to their network to optimize their profitability as well.

And, John, on the truckload side, as you get a market that starts to turn, and I wonder are those truckload companies we just went through a very aggressive bid season, those that might have bid maybe a little low on some rates and if we start to get a bit of tightening, do they tend to still show up to those customers or do they tend to be the first ones to run to the spot rate and do you see those customers start to chase or need the demand and access to a broker such as yourself?

That's the interesting part of the marketplace is I think you're going so see all of the above. Depending upon how a aggressive and people were in their bidding and depending upon exactly what their profitability and sustainability is, you will see a wide range of behavior on the capacity side when the market starts to tighten. So I am certain there are providers out there that will move the moment the market provides them the opportunity to, and there are lots of other providers out there who have long-term committed relationships that they will continue to honor, and 40 or 50,000 relationships in between that we try to sort out and manage and do the right thing on both sides.

Just a quick one. You're very decentralized on your hiring. Have you started to see any of the offices if you're seeing volumes start to firm up, have you started to see any of the regional offices increase hiring yet?

There are some of the offices that are posting positions. I think somewhere around 30 or 40 of the offices its might have an opening on our site. There is always a blend of kind of natural turnover and replacement of positions. That doesn't necessarily mean that many locations are actually adding to staff, and even though we corrected some staffing levels and adjusted to our metrics fairly aggressive in the first part of the year, most of our locations still carried a little bit of extra staffing and we have a lot of different productivity initiatives out there. So our hope is that we have got a lot of capability and a lot of room for growth at today's staffing levels, but we also know that we have got a good process in place and a good training model and we'll add to the team very quickly if that becomes appropriate.

Great. Thanks for the time.

Thank you. The next question is a follow-up question from the line of Chris Ceraso with Credit Suisse.

Thank you. Just one quick follow-up. You mentioned that the provision for bad accounts went down sequentially. Is that a result of you seeing improvements in delinquencies or what gives you the confidence to be taking the provision down?

Our aging is in really good shape and has been all along. It is really just been -- it is really just been less customer specific issues happen this quarter than last quarter. Last quarter we had a couple big customers that we made provisions for. This quarter we did not have any significant accounts that we felt we needed to specifically reserve for.

And you said it was also down versus a year ago. Is that the same issue?

Yes. It is driven by, the big variability is driven by customer specific problems. We just have fewer, no significant ones this quarter.

Okay. Thank you very much.

You're welcome.

Thank you. (Operator Instructions) Our next question comes from the line of Nate Brochmann with William Blair and Company. Please go ahead.

Good afternoon, everyone. Great quarter. Wanted to follow up a little bit on the market share gains, John, in terms of whether that's coming a little bit more from newer customers that you haven't had relationships with and if so what some of those strategies may be to be going after those, or whether that's coming from more of a penetration strategy within your top accounts.

I would say it is both, Nate, that we are emphasizing account management and cross-selling of all modes and services as aggressively as ever, so I do believe that a lot of our LTL growth is coming from historic truckload customers where we're being more aggressive about pursuing different opportunities and services from them, but in addition we have tried to remain very a aggressive in the marketplace and while we're being cautious with credit limits we also feel like we're being prudent in terms of taking some risk with new relationships and making certain that we're active and out there in the marketplace.

If you look at our business model and the fact that we train our people generally on the broader transportation cycle and both the customer and capacity side, one of the opportunities that a over supply or a loose capacity market provides to us, is that we do have more opportunities to spend more time looking for freight and looking for customer relationships and making sales calls because we're not required to spend quite as much time looking for capacity, so in the ebb and flow of how we manage our business it is an emphasis on getting out in the marketplace both with current accounts and cross-selling and trying to penetrate as well as looking for new opportunities.

Do you feel that mix of those new opportunities that are coming on are ones that you can build long-term relationships with or some of them just looking for some short-term cost savings or the flexibility that you provide in terms of what might stick going forward?

There is always some of both. We have lots of relationships that come and go, and one of our general strategies is to try to take those transactional relationships and educate them from our point of view with information and scenarios to help them understand how we can help them more with a committed relationship and a longer term arrangement with more integration and more automation and more data.

So we see lots of both types of opportunities where people want to make more holistic supply chain or logistics changes and they're working with us to do analytics and implement some of the freight programs in a much more integrated automated way, and then we get thousands of transactional customers who use us when the market provides the right opportunity and may go away from us when the market changes, but that can work both ways with the capacity side as well too. There are lots of people who come to us when they need us, when the market conditions warrant us, and we're okay with that, and one element we just need to make sure we sort it out and treat everybody fairly depending upon the type of relationship that we have with them.

Great. That's great color. And then, Chad, just one quick question on the cost side. Were pretty much all the costs with the new facility in the D&A pretty much in there for the entire third quarter?

No, they weren't. I gave the numbers of the D&A that was in there which was $250,000 for the quarter because it really ramped up part of it started in August and then the rest in September. It will are more like $2.3 million of depreciation on annualized basis.

That's helpful. Were there any kind of one time quote unquote operational expenses that were kind of embedded within the move that might dissipate a little bit or are those --

Nothing significant. All significant costs are captain capitalized in a project like that.

Great. Thank you.

Thank you. There are no further questions in the queue. We will turn it back over to Ms Freeman for the closing comments.

Thanks, everybody, for participating in our third quarter 2009 conference call. I would like to remind you that this call will be available for replay in the investor relations section of our website at CH Robinson.com. It will also be available by dialing 800-406-7325 and entering the pass code of 4164763-pound. The replay will be available at approximately 7 p.m. Eastern Time today. If you have any additional questions, please feel free to call me Angie Freeman at 952-937-7847. Thanks.

Thank you, ladies and gentlemen. That does conclude today's conference call. Thank you for your participation and using ACT conferencing. You may now disconnect.