羅賓遜全球物流 (CHRW) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the C.H. Robinson second quarter 2010 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 conference is being recorded today, Tuesday, July 27, 2010. I would now 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 that 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'll turn it over to John.

Thank you, Angie. And thanks to everybody who is listening in on the call. I'm going to start similar to past calls by just highlighting a few of the key financial results and metrics that we think are more important. For the second quarter ended June 30, 2010, our total revenues increased 27.4%, to $2.5 billion. Net revenues increased 3.7%, to $365 million, our income from operations increased 4.4%, to $156 million, and net income increased 5.4% to $97 million. Fully diluted EPS increased 9.3% to $0.59 a share. The same numbers year-to-date results for the period ended June 30, 2009, total revenues increased 25.3%, to $4.5 billion, net revenues increased 1%, to $697 million, income from operations increased 1.8% to $292 million, and net income increased 2%, to $181 million. Year-to-date, fully diluted EPS increased 4.8%, to $1.09 per share.

In addition to those overall financial results, the press release gives more detailed growth percentages by each of the various service offerings. So our results for the second quarter of 2010 reflected the continuation of most of the business trends that we discussed in our first quarter conference call. We continue to experience strong overall gross revenue growth, driven primarily by significant volume increases in most of all of our service offerings. Gross margin compression, compared to a year ago, resulted in net revenue growth for the quarter that was much more modest. As a result, for the second quarter of 2010, while we had a 27% increase in total revenues, our net income for the quarter increased 5%.

Our transportation revenue increased over 32% was primarily driven by transaction volume increases in services compared to last year. Fuel and price increases also contributed to the overall revenue growth. While our growth in transactions compared to last year was helped by the overall improvement in industry demand, compared to last year's low points from the recession, we do believe that we were able to continue to take market share in most all of our service offerings. And we felt good about our sales and execution during the quarter. With regards to gross margins, total transportation gross margins for the second quarter of 2010 were 15.8%. Total transportation gross margins for the second quarter last year were 20.6%. Over the past ten years, second quarter gross margins for transportation have ranged from a low of 15.4% to a high of 20.6%, which was last year.

Our total transportation gross margin compression of almost 5 percentage points resulted in net revenue and earnings growth that was much less than our total revenue growth. As we've discussed many times over the past couple of years, we know there are many factors that contribute to the gross margin fluctuations. But the primary driver of our margin fluctuations is the timing difference of price adjustments across our customers and capacity providers. The demand for transportation services increased significantly compared to the previous year. Our total cost to purchase transportation generally increases faster than our pricing to our customers, when demand is increasing and the overall market relationship is becoming much tighter.

Gross margin fluctuations the past couple of years have had a significant impact on our results. We've tried to emphasize in our past comments that based upon our approach to the marketplace, and how we buy, sell, and contract for services, that we understand and manage these margin fluctuations as part of our business model. While the margin compression this quarter compared to last year was pretty meaningful, we think our approach is consistent, and that it continues to help us build and grow long-term relationships with both customers and capacity providers. While we know that we will continue to have challenging gross margin comparisons going into the third quarter, we do believe that our approach to pricing is working, and adjusting to the market very similar to past economic cycles. With the magnitude of some fluctuations increasing due to uniquely large variations in freight demand and volatility and fuel prices.

Moving on to our sourcing business. Sourcing business revenues grew 11.5%, primarily from the acquisition of Rosemont Farms. Sourcing gross margins expanded compared to a year ago, primarily due to the mix of products sold. T-Chek, our information services business, where our primary source of revenue is driven by refueling transactions, showed strong revenue growth of 22% again this quarter. The increased level of shipment activity in the market drove more transactions per T-Chek's customers. T-Chek's revenue growth was driven by increased transactions and an increase in the average transaction fee. Many transaction fees are based in part upon the price of fuel which increased compared to last year.

Moving on to operating expenses then, our total number of employees at the end of the second quarter was 7,466. That represents an increase of 116 employees during the second quarter. The increased volume and freight activity that we experienced did drive the need for us to begin more aggressive hiring during the second quarter of 2010. Based upon our internal score cards, and metrics, our productivity levels are pretty high across our network. We have a lot of good things in the pipeline that we believe will help us sustain productivity improvement as a competitive advantage. However, if we are successful in continuing to grow our volumes, we will likely need to continue to grow our work force to service our customers.

In summary, we were very busy during the second quarter of 2010. The transportation markets were much tighter than a year ago, and we continue to take what we think is a healthy, longer-term approach to building relationships, and adjusting pricing to market conditions based upon each of those unique relationship commitments that are managed by our decentralized network. This approach to the market does result in gross margin fluctuations. We do continue to experience meaningful gross margin fluctuation but believe that our business model and approach is as relevant as ever in the market.

And we continue to believe that our long-term growth target to average 15% growth in our revenue and earnings is achievable. Our people and network are working hard. We feel good about our team. And the current service levels, as well as our ability to hire and train additional team members, on a variable approach as our growth and activity levels require. That concludes my prepared comments. And with that, I will turn it over to Chad, who has some as well.

Thanks, John. I'm going to give some comments on our SG&A expenses, balance sheet, and cash flows. Our total SG&A expenses increased by 8% to $54 million, compared to the second quarter of 2009. The bulk of this increase was driven by the expenses of acquired companies including Walker, which closed during June of 2009, and the acquisitions of [ICC] and Rosemont, which closed during the second half of 2009. In addition to those operating expenses, there are other categories of expenses that increased or decreased given things that happened during the respective quarters. Our balance sheet remains strong, with cash and investments of $215 million.

Our investment in working capital increased as is normal in times of increasing volumes and rates. We had an increase in accounts receivable of $152 million during the quarter, offset partially by an increase in accounts payable of $54 million. Our accounts payable didn't increase at the same rate as our accounts receivable primarily due to increased usage of our Quick Pay and advanced programs for carriers. Moving on to CapEx, our CapEx for the quarter including software, was $8.4 million. In addition to our continued investment in our international forwarding system, we have begun to develop a new transaction processing system for T-Chek, and other development projects to support the long-term growth of our business.

We now believe our total CapEx, including software, will be approximately $30 million for 2010. We have discussed our strategy in the past for share repurchases as a variable way to return excess capital to our shareholders. Our capital strategy has remained consistent. With the increased investment in working capital, we reduced our share repurchase activity during the quarter. We repurchased 358,800 shares at an average price of $58.36. This concludes our prepared remarks, and we will begin the question and answer portion of the call.

Thank you, Mr. Lindbloom. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Jon Langenfeld with Robert W. Baird. Please go ahead.

Hi, guys. When you think about how stretched the local offices are in terms of personnel, can you talk a little bit about that? Your volumes are way up -- 15%, 20%. Your gross product for employee measure looks to be still very high and yet you only added about 2% to the employee base. Could you talk a little bit about how you're digesting all of that volume growth in what is a more challenging environment?

Yes, so I guess a couple of upfront reminders, when we talk about this, is we have close to 250 offices and the productivity and staffing levels vary quite a bit across the offices. So while we talk about the Company as a whole, just remember they are the averages and there is quite a bit of variance across it. When you turn the clock back a year and a half ago to the beginning of 2009. And the freight demand had dropped off so significantly, we talked at that point in time about while we did make some staffing corrections and tighten up the network a little bit, that we still had plenty of people and plenty of capacity. Because we had been staffing up in expectation of continued growth. So as we went through 2009, and into the first part of 2010, a lot of the growth has just been absorbed by the current levels of staffing, becoming more productive.

As we've moved into this year we have seen our -- a lot of the different productivity metrics move up to the high end of the range, and that's why during the second quarter, we began hiring. So we -- the message, I guess that we're trying to convey is that it is not like the place is bursting at the seams or that we can't -- we don't believe that we can't sustain the levels that we're at. But as we go forward, we're going to need to add people to grow the business.

Okay. Good color. And then Chad, can you can remind us, on the restricted stock program, are we investing two [tranches] of that essentially the 2006 and 2009 plan? And does the 2006 plan lapse at the end of this year regardless of whether or not you reach 100%?

Yes, the plan that started vesting in 2006, this would be its last year. But we do annual restricted stock plants, or grants, it is just that there was a larger grant in 2006 and in 2009. So there are also 2007, 2008, and 2010 grants that are also vesting.

Got it. Thank you.

Our next question is from the line of Scott Malat with Goldman Sachs. Please go ahead.

Hi, it is Vern calling in for Scott. Just a quick big picture question. If we look at trucking bankruptcies, they've been up in the last couple of quarters. We have the expectation that they're going to increase. Just wondering what your outlook was for smaller carriers and bankruptcies, and how we should think about this in the context of your business?

We don't track the bankruptcy metrics real closely, just because for us, it is not much of a real-time metric, it is just one component of the capacity churn and the small carriers that we would monitor. I guess from our overall point of view, last year was really hard on all of the carriers just because of the drop in demand and drop in pricing. I would say, in general, during the current year, as pricing and demand is improving, that the environment would be improving for all of them. So we know that capacity has left the marketplace. We know that a lot of them file bankruptcy and leave. We also talked in the past about CSA 2010 and other things that have an uncertain impact on the carrier community and the uncertainties around ordering equipment. So there are a lot of questions about how the supply side will be able to adjust to this increasing demand of freight in the market, but we don't necessarily find the bankruptcy metric as a real high indicator.

Okay, thanks. That's helpful. And then digging a little deeper into that, what have you heard from small carriers in terms of adding capacity, their ability to buy trucks, or replace their existing fleet? We're seeing some signs of increasing CapEx from larger companies, but just wanted to get your perspective from the smaller carriers that you deal with.

We wouldn't have a lot of great visibility into that. I know a lot of -- we deal with close to 60,000 carriers, and there is a fair amount of churn each quarter, and some coming and going. And from our vantage point the primary thing that we're interacting with them on is the accessibility to the freight, and what the rates are. And as I said earlier, while those are improving, on the financing and capital side, that is a lot tougher to get any good visibility to. We do know that historically, a lot of equipment has flowed from the larger carriers down into the resale market into the smaller carriers. So I guess if the new ones are -- if the bigger carriers are ordering equipment, that is probably a healthy sign for how the equipment may trickle down to the smaller guys. But we wouldn't have any current quarter perspective on changes there.

All right. Great. Thank you.

Our next question is from the line of Ed Wolfe with Wolfe Trahan & Co. Please go ahead.

Thanks. Good afternoon, guys. Can you take us through a little bit directionally the truck net revenue growth or the transportation net revenue growth, and also the transportation gross yields throughout the quarter and into July? You made a statement at the end of your release that total corporate yields were tracking up 7% in July. Can you talk about the transportation side throughout the quarter relative to that? And just directionally, at 15.8%, your gross yields, should that, from here the way trends are going, with more pricing coming through, go up or go down?

Okay, when you look at first of all the 7%, through the beginning of July, as total net revenue, I don't know if that is what you meant by total corporate yields, but --

I'm sorry, yes, that's what I meant. Total net revenue, so that compared to, in the quarter, 3.7%, could you take us through not for the truck side, as opposed to the whole corporate side on the net revenue?

Sure. Volumes during the quarter, as we already told you on the last call, April was similar to the first quarter at about 22%. May and June were both between 16% and 17% volume growth. Net revenue per business day increased on truckload services, total net revenue, as the quarter progressed, which is seasonally normal. In the comparisons to last year, there was less decline as the quarter went on, on total net revenues for truck. And these trends are pretty true with transportation, other than the many other [multaq] growth. So the trends of growth were strengthening as the quarter went on. Rates to our customers were also strengthening as the quarter went on, compared to last year's second quarter, the rates were, excluding fuel for North American truck, were roughly flat month-to-month, where they were increasing this year.

So rates to your customers, you're just saying were flat, and that's the equivalent of what was down 3% in the first quarter?

No, I said last year's rate, month-by-month, were the same each month during the quarter. This year, rates increased as the quarter progressed to our customers.

I think you said on the April call that rates overall were still down 3% year-over-year. Can you give that equivalent?

Rates were down 3%? That was for the full quarter.

For first quarter in April, I thought you said that rates from your customers were averaging down 3% still in the truckload side. Is there an equivalent for that in the second quarter?

Rates were -- we had hit an inflection point and rates were starting to grow is what we said on the last call, or sorry --

But for the full quarter and first quarter, your rates were up year-over-year? I thought you said for the full quarter they had been down 3% and directionally moving up --

Are you asking what our total truckload rates to our customers during the full quarter compared to last?

Yes, during the second quarter, yes.

I'm sorry that's in the release.

What's that number?

5%.

And what did that same number look like, if you could just do that sequentially through the quarter?

It was 2%, 5%, 9%, in June.

Okay. Thanks a lot. I will get back in line.

Our next question is from the line of Scott Flower with Macquarie Securities. Please go ahead.

Good afternoon. Just a couple of things. I know, John, just was curious if you could give us at least some color. You mentioned that you got some other productivity things in the pipeline. If you could just give us maybe a little flavor for what types of things this might be and give us some framework of how to think about them?

Sure. So most of the productivity initiatives are intertwined with the technology and the operating system and it really comes down to how we share freight across our network, and how many transactions per day an individual can reasonably accomplish. There would be pricing tools and other things that would support those initiatives that would allow us to figure out pricing faster and make commitments sooner. There is a lot of EDI and Internet connectivity things that would hopefully change manual processes into automated processes.

So the big picture is that we would be -- we have a pipeline or a road map of ideas and initiatives to try to make it so that hopefully all of our employees can be more productive, serve their customers faster and do all of the rest of that. And I guess the relevance of that is when we look at the productivity measures being at the high end of the range, we hope to keep redefining the range to the high side. But we know over time that at some point you just have to add support and add people to the team in order to get through the next couple of quarters, and that's where we're at.

Got it. And then the second question I had was just -- has there been any change in the LTL carriers behavior to you? Have they tried to shift pricing, or shift discounts, or how they relate to you all as brokers or is there really no change there?

We deal with a lot of different LTL provider, at least a couple of hundred, and I would say in aggregate, there is definitely been price increases this year like there has in all modes of transportation. I think when we did our internal review, we concluded that perhaps there were some more aggressive price increases. Because a lot of the larger providers had been pretty aggressively going after market share, last year, when conditions were very weak. So carrier by carrier, it varies a little bit. But because of some of the significant operating losses, and the changes, it feels to us a little bit like the LTL portion of the capacity industry is maybe focusing more on yield and profitability and some of them raising prices more aggressively than others.

And then just one last nuance off that, what percentage is LTL of your truck or transportation business currently?

It is about 14% to 15% of total truck.

Got it.

Total truck for the second quarter, net revenue.

Of total net revenues, from a shipment standpoint, obviously it would be much higher percentage.

Great. Thank you all very much.

Our next question is from the line of Adam Longson with Morgan Stanley. Please go ahead.

Hi, great. Thanks a lot. Just a quick question following up on some of the headcount things, it looks like your branch -- number of branches actually declined in the quarter, and I was curious, in a quarter where you're stepping up headcount, what the rationale behind that was. Was there a consolidation opportunity or was it underperformance or something going on there?

The reduction in branches had to do with two -- I think in two different cases, two branches consolidating, and becoming one branch.

Okay. So that --

The headcount -- our branch size varies from two people to 600 people. So you can't really read into the branch number and headcount. The headcount adds are just branches who are busy adding -- having net adds to their people, more so than the fact that there is a different number of branches.

Okay. That makes sense. And just following up on some of the pricing questions before, when you look at your book of business, obviously you're getting some traction on the pricing side. If you had to guess, and I know it is tough, what percent of your contracts would you say today are either well below market or at a level of profitability you feel is pretty unacceptable?

That gets really tough to assess, because we price on such an account specific, decentralized basis. And in many accounts, even during more stable times, we may have lots of lanes that we make money on and other lanes that we don't make money on, and the shipper understands that, and in an aggregate it is a healthy relationship for both of us. So it would be hard or misleading, I think, to give a percentage of the business that was under priced. The way we think about it more, is that for each of our 30,000 something accounts there are increasing costs in almost every source of capacity that we get, some of that cost increase can flow through pretty quickly, through transactional pricing, where you will just quote the load each day and you will be able to pass it along.

Wherever there is any contractual or longer term price commitment, we generally see margins squeezed before we will go in and reprice, and when that margin squeeze starts to happen, it will generally happen a lot more severe in one lane versus the next, and we will start repricing it lane by lane or region by region. So again, I think it is probably frustrating to hear that answer from analytical standpoint but we actually think that is a real strength of our business model that those pricing assessments and how the routing is done is handled on a very decentralized basis.

Okay. That makes sense. Have you seen any bit of relief from the whole seasonal downtick here, or anything that would be abnormal that gives you a chance to catch up though?

No, I would say the biggest thing that is different now from the beginning of the year is that as the cost of hire was starting to increase, because everybody was a little weary coming out of the recession. And not really excited about price increases of any sort, I think as the year started out, most shippers were really not receptive to any -- much of any discussion around price increases. And I think almost everybody who we interact with today does understand that the markets tightened a lot and things are changing and at least in many instances, that price increases are appropriate. So we, like a lot of people in the industry, are starting to see some pricing traction, and there is much greater awareness of what the overall market conditions are. But the challenge going forward is how much is that cost of hire going to increase relative to how fast you can pass it along. There is two separate parts of the equation and we've got to manage both of them.

Right. Great. Thanks for the time.

Our next question is from the line of Nate Brochmann with William Blair and Company. Please go ahead.

Good evening, everyone. Congratulations on a great quarter.

Thank you.

I just wanted to talk a little bit, if you could, about the mix of maybe new versus existing customers, particularly about maybe a lot of customers showing up on your doorstep, as they can't find enough capacity out there? And if that is coming through at some higher margin activity for you?

Definitely brand new business that tends to start off as spot is, in this type of environment is, a higher margin than most of our contractual business. Our top customers, when you look at their net revenue, are growing roughly in line or maybe a little bit faster than the business as a whole. But some of that is further expansion versus margin expansion. So further penetration of the account.

Okay. And then just in terms of numbers that you're seeing though, and from the existing versus the new.

I don't have it in front of me but I know that we did add a meaningful number of new customers during the quarter. And obviously, whenever the market is tight like this, your statement is correct that we would see a lot of new customer activity that does give us a lot of growth opportunities. So the important thing for us is that we make any existing service commitments that we make, we obviously have to service those first and take care of the customers that we have. So we have to balance the new opportunities with the incremental costs of capacity sourcing that we know we're going to experience.

Okay. Great. And then second question is related to some of the other businesses. And other modes of transportation, you saw a nice pickup across the board in intermodal, air and ocean. Obviously, part of that is the industry. But was wondering if you saw anything different in those markets from your perspective?

Each of them probably has some of their own nuances that you're probably familiar with. The intermodal business we felt very good for the last several years about our momentum and our service capability in that. We just had some margin compression that is still challenging because the capacity constraints are very severe, at least in the intermodal lanes and portions that we play in. And because we're a pure third party and rely on pool or publicly available equipment, we do have capacity constraints there that do continue to put pressures on our margin. But we feel very good about our service capabilities and our salesmanship and that we can execute on intermodal freight as well as anybody else.

Our ocean business got hit pretty hard a year ago, that industry was probably down greater than any other transportation mode or service, so we feel good momentum again there, but there is some pretty easy comparisons from a growth standpoint. Our outsourcing management fee type business has been strong for the last couple of years, as shippers continue to look pretty aggressively for cost savings and outsourcing and variable cost type ideas. So that miscellaneous category of miscellaneous revenues and management fees continues to show nice growth for us as well.

I would say the aggregate message of all of that is we have been selling a broader transportation account management outsourced solution to try to help our customers with whatever mode or approach to services that works for them. And it continues to feel real good to us, that we can help in a variety of ways, and whether it is truck and rail tradeoffs or managing different routing things, or helping consolidate or build loads differently, it feels like there is more and more ways that we can use our people and our processes to try to add value.

Great, thanks a lot for the color.

Our next question is from the line of Tom Wadewitz with JPMorgan. Please go ahead.

Good afternoon. I apologize if I'm overlapping with something you have already covered here. There is just I guess an overlap in the -- with another conference call. But anyways, in terms of gross margin in transportation segment, do you think you're pretty close to a bottom here? It seems like your comments on July net revenue would indicate that, that might be the case. Or do you actually think that gross margin improved a little bit in the third quarter versus second?

From a margin percentage standpoint, it gets so hard to predict, just because of fuel prices, and mix and fluctuation, and all of the rest of that. I guess the statement that we made in the prepared comments is that we went from, in the last ten years, the high end of the range in transportation, to very near the low end of the range. So we know that comparison from the third quarter a year ago was back up toward the high end of the range.

Where we go from here, there are so many variables in it, it is hard to predict but what we shared through July is basically that the business trends that we're talking about have continued. We have continued to see high demand and volume growth and we've continued to see margin compression, compared to a year ago, that results in more modest net revenue growth. But that the net revenue growth compared to the previous year is improving a little bit.

Okay. I think you gave the increase by month, and what you're getting from your customers, I think the 2%, 5%, 9%. What would that be by month in terms of what you were paying for capacity?

Compared to a year ago?

Yes, on a year-over-year basis.

10%, 11%, 16%.

And this would just be for truckload, correct, Chad?

Yes, this is North American truckload. Which is the same comparable it was for the rates of the customer.

Again, that's how you get to the number for the full quarter that was given in the earnings release.

Okay. So they're both accelerating through the quarter. Do you think you stabilized with what, 16% in June, you think that is as high as it gets or do you think it keeps accelerating as you look to July and third quarter?

That's the difficult part of all of this. That's almost impossible to predict. It really just depends upon how tight the market is, and what happens to the cost of capacity, and is there a fall peak, and all of those other things that -- it is not like we know and we don't want to share it. That is really impossible to predict.

Right. Okay. A quick thought on gross margin in sourcing, that seemed to show some nice improvement, and then I will pass it along.

Really just the mix of products each year and each season, we do a variety of things from some more import-oriented items where we handle them and package them a lot more and the margins are higher. And then there are higher commodities that are lower margins but pretty simple to handle. We didn't have a tremendous amount of volume or growth from the organic side, but we did have good growth from the acquired business of Rosemont Farms, and when you mix it together, we just had a higher mix of -- a better mix of higher margin product.

Okay. Great. Thank you for your time.

Our next question is from the line of Chris Wetherbee with FBR Capital Markets. Please go ahead.

Great, thanks, good afternoon, guys. I was wondering if maybe I could follow-up on that question when you talked about the sequential progress of the cost of capacity relative to your pricing? When you think about July, that relationship between the price increases you're getting and what you're paying out, does that seem like it is holding relatively constant? Do you -- is there a more acceleration, a bigger acceleration on the price of capacity relative to the cost of price improvements you're getting?

One of the reasons why it is hard for us to share mid-month metrics is because we don't really have clear year-over-year comparisons on pricing information until we get to the end. So that's why, for us internally, the net revenue is the best day-to-day gauge of how those two things are playing off of each other.

We track net revenue day-to-day. We do not track pricing day-to-day.

And net revenues are up 7% through July, based on what you have in the release, right?

Total net revenues.

That's for the total company, not just transportation.

Do you have a sense of what it is, at least order of magnitude relative within transportation that you're willing to share, I guess?

No, I think we're going stick with the total net revenues up 7%.

Fair enough.

That's on a per day basis. The number of business days are different in July but they're the same for the full quarter.

Okay. That's helpful. Thank you. When you think about pricing on the truckload side, is there any discrepancy at all that you're seeing from the price of capacity with larger carriers relative to smaller carriers? And I know you tend to be a little bit more focused with the smaller guys but is there any difference there that is meaningful at least from what you're seeing?

Yes, and there would always be so. I think we've talked about this on past calls but at least from our vantage point into the marketplace, the larger carriers typically have the more significant dedicated headhauler arrangements, with larger shippers, so it is common to have trailer pools. And they have in general, a little bit different business model where the need to return the equipment and service, the headhaul freight for the more dedicated customers is more important. So their pricing on a lot of the capacity of theirs that we would have access to would be the traditional capacity. And that's where you will see the greater fluctuations in pricing in the market.

Based upon what is available or what is not, because if that capacity is committed to going, running round trips and it has to return and it is going to return today, whether it is empty or not, they're going to be much more aggressive on pricing, when freight is loose in the market. When it tightens up like this, the probability of finding their own freight or being able to do other things would go up quite a bit. A lot of the medium and small carriers that we work with, that have much less of a fixed route guide, or lanes that they're going to run into, they will adapt to the market quite a bit more, with the absence of that headhaul freight. So we do see a much greater swing or much greater variation in price and capacity availability between big and small carriers, when market conditions change like this.

Okay. That's actually very helpful. I appreciate the color there. That makes a lot of sense. I guess switching gears quickly, one last one on the ocean side, clearly a nice pickup there coming up from a bit of a low number last year. When you think about capacity in general, from an ocean perspective, dos it seem fairly tight at this point? Or just a little bit of color if you could on that segment.

We've worked very hard with our capacity providers on the ocean side to plan for -- that portion of our business is probably much more dedicated or contractual because of the nature of the business. And I know that we feel good about having access to capacity, and being able to move the business with the relationships that we have in place. And I also know that for those customers or new customers, or those customers that have much greater volume than they anticipated or planned for in the beginning of the year when the contracting cycles with the steamship lines are out. That can be very expensive to find incremental capacity. So we've been able to get capacity, but much like many of the other modes, if you plan for it, you're okay. But the incremental stuff, the spot market, is generally moving at pretty high prices.

Okay. So you're seeing that on the ocean. That makes sense based on what we're hearing, so that is helpful. All right. Thank you very much for the time. I appreciate it.

Our next question is from the line of Ken Hoexter with Bank of America Securities Merrill Lynch. Please go ahead.

Great, good afternoon. As the peak season comes through, I know you talked a bit about the contracts, but what percentage of your contracts do you feel like you've already gone through to re-price, maybe over the past year?

Most all of the relationships are looked at weekly, across the network, so what portion of them have been repriced, we wouldn't know, because it goes lane by lane and it is done across our branch network. But it is really -- I think it is an important difference to understanding our business and how we do things versus an asset-based model where you can control pricing centrally and make distinct decisions to a finite number of contracts, or by lanes. We have literally tens of thousands of relationships with thousands of lanes in each of those relationships. And they get repriced on a pretty fluid basis, depending upon what the service commitments and the contractual agreements are across there. So it really isn't conceivable for us to aggregate to a percentage of what has been repriced.

All right. Thanks, John. Now, I guess now, as the -- as we hear a lot about the fleet aging and some of the carriers not really being able to finance and replace some of the tractors, does that create any service issues as you use a lot of the smaller carriers, as you see that age creep up at all?

We haven't seen any of that. To us, it really equates to a pricing issue. If the capacity side has a difficult time adding capacity, for whatever reason -- old trucks, financing, driver shortage new regulation, whatever, that pretty much translates into shortages and price increases that we will have to deal with. One of the things that we would pride ourselves on is making sure that the service standards don't suffer during whatever capacity shortage there might be. It might take more money to get that freight moved, but in terms of committing to the on-time pickup and delivery, and managing claims and all of the rest of that, we haven't seen any noticeable movements in our service. And we wouldn't expect there to be any. For us, it is really just a pricing issue.

All right. Great. Thanks for the time.

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

Hey, guys. Thanks for taking my call. It sounds like spreads began to come in a bit sequentially as you moved through the quarter. I was hoping you could give some color, I guess, as to the actual gross margin by month movement, maybe what it is tracking at in July? And then how you would incorporate peak season surcharges into any pricing discussions that you guys are having as you look out to third quarter and fourth quarter?

Okay, we are not going to give out gross margins month-by-month or for July.

Okay.

As far as peak season charges, all different types of things are considered, especially on the truckload business, when you are pricing and/or repricing business. So sometimes when you are looking for a year-long business, you have to not just consider the peak season, but what is it going to do on a year-long basis. And if it is a customer that we have a long relationship with, and we believe we will get the freight over a year-long period of time. As you're pricing, you have to consider that year-long type relationship versus just pricing for the peak season. If it is a customer that tends to come and go, or purely interacts on a transactional basis, yes, we will reprice month-by-month or day-by-day. Like John said, most of our pricing arrangements are continuously being reviewed by the different account managers that deal with the customers.

Okay. That's really helpful. And I guess when I look at cash flow, and think about how we should start to see things trending as we move into hopefully a healthier period in the economy, I mean, should we begin to see a greater degree of free cash flow generation? It feels like right now that, I mean, the accounts receivable has been moving up pretty considerably, and digging into what would otherwise hopefully be a strong free cash environment given what your bottom line results look like.

Yes, it is to a greater extreme in 2010. And I think a lot of that has to do with the great incremental sequential growth and gross revenues and receivable balances that you mentioned. But if you look over the history, the first quarter and second quarter tend to be seasonally a ramp-up period where the third quarter and the fourth quarter gross volumes in terms of dollars tend to be pretty -- more flat with June. So as you ramp up volumes, being gross revenue volume, it takes a ramp-up of working capital. If everything sustained itself and we collected in the same number of days and we did the same gross volume and we paid in the same number of days, you would see some stronger cash flow numbers. And if rates go down, and volumes go down, and fuel goes down, any of those things happen, it is a decrease in the working capital requirements, and our cash flows could exceed our earnings.

The cash flow is in some ways, I mean, funding the market share growth that you guys have been paying with the Quick Pay and what have you, to bring business in, or is that the wrong way to look at it?

No, it's -- we always have a spread between receivables and payables, we always pay faster than we get paid. Historically, that's a range from 13 days or so to 17 days. We're near the high end of that range right now. Our DSOs aren't necessarily at the high end of the range. It is more that our days of payables are shorter, and the bulk of that is an increase in people using Quick Pay and cash advances while they're on the road.

And we have consistently talked about the fact that yes, we do use our balance sheet to take market share and we do that through helping medium and small carriers with their cash flow. And we also do that through not having debt and having financial stability to offer to the shippers, so that they don't have to worry about the churn on the capacity side, or the credit worthiness of what is happening out there. So from the standpoint of utilizing capital, and utilizing financial stability, to help add value in the marketplaces is definitely something that we have always done and will continue to do.

Thanks for the time, guys. Appreciate it.

Thank you.

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

Hey, guys. When I look at the gap between your pricing and what you're paying for transportation, is there a point that should be soon where you can accelerate your pricing to catch up? Or are we just behind the curve until truck pricing comes -- becomes stable or comes down because of the contractual commitments that you've already made?

A big part of it is more of a comparison thing, that we're comparing to a year ago. Our gross margin for the quarter did not fluctuate out of the ten year range. So a lot of it is just a comparison standpoint. From a year ago, where we had the recession hitting us hard, with the volume declines. So the way we think about it is you have this range of margin, or you have this range of activity, and you're going to fluctuate within it based upon the market condition. And there are certainly parts of the freight that we're moving today that need to be re-priced, that we're working on, and at some point, hopefully the market will allow us to catch up on that. But probably the more relevant thing is just comparison stabilizing as we get further through the economic cycle.

So maybe the focus should be on the fact that your pricing power has started to calm and it is accelerating? That's maybe the more important thing, cyclically?

Yes, I think that is truly true of the industry as a whole and not just us.

Right.

Fair enough. And is there anything you can tell us about perhaps your larger customers and their outlook for the second half, and things they might be telling you about volume expectations?

No, we don't get great visibility to shipment expectations for the second half of the year. I would second what has been widely publicized in a lot of the media. There seems to be lots of anxiety, and a lots of uncertainty as to where it sorts out. Everybody is certainly aware the larger customers that we interact with -- everybody is certainly aware that there could be some real capacity shortages if there is a peak season. And because of all of the industry things that we've talked about earlier, and lots of planning and making certain that if market conditions get really nasty that they're in line for equipment and that we're ready to service them in the fall.

And then in the next discussion, it is all about double dip and will things get soft again and will it fall apart. So it feels like more polarized perspectives. And to us, the way we've always tried to approach it is to be flexible and be ready for whatever the marketplace is going to give to us. So we're certainly planning for the customers that we know we need to take care of. But also talking about tiered rate structures and flexibility and trying to make sure that we're all ready for whatever the market might deal to us in the second half of the year.

Thanks for the time, guys. I appreciate it.

Our next question is from the line of Anthony Gallo with Wells Fargo. Please go ahead.

Thank you. Thank you very much for taking my questions. John, since you touched on it, would you mind putting this period in perspective, looking back over the last ten years? We know that 2008 to 2009 to 2010, we've seen some pretty wild swings in volume, but could you just put some perspective on how tight things are now versus how prior periods and just a little color.

Sure, I think we commented in terms of early 2008 and early 2009 that the industry demand dropoff was greater than anything that we had probably seen since deregulation. That 15%, 18% drops in industry demand, and the market was unbelievably loose, and so, for the first half of last year, that is when we were generating these gross margin percentages that were at the high end of the range for the last ten years. And I'm guessing maybe even much longer than that, if we went back further. I don't have that in front of me. But it might be for the last 20 years or 25 years. So right now we're comparing to the high end of the range, and the market is tightening very aggressively. We've talked internally about over the last several months, it is tightening at a pretty fast pace, compared to what we've seen in the past.

But if you look at other metrics today, around route guide depth or looking at our load boards around supply and demand, I think what most of our transportation people would tell you is that the market today is not as tight as it has ever been in the last ten years or 20 years. It is getting there. It is tightening up very fast. But that -- if you look at service failures, and route guide depth and some of those other things, it sure could get a lot tighter going forward so it feels tight. It is tightening fast. It a lot tighter than last year. But from a ten year, 20 year perspective, not at the all time high.

That's helpful. And last question, a little housekeeping around the sourcing business, would there be anything unique about seasonality in the second half? I know you've got some acquisitions [lapping] so just a little help on that, please.

No with every acquisition and with every season comes the variability in freezes and crops and promotions that different retailers may run and all of the rest of that. So there -- we would expect some continued variation in commodity mix for all of those reasons but I don't think there is anything predictable that we would know of for the second half.

Thank you. That's all.

Our next question is from the line of David Campbell with Thompson Davis and Company. Please go ahead.

Hi, John and Chad. I just wanted to get a little bit of your opinions about the differences in trends between truckload and less than truckload? For example, where your cost increases percentage-wise different between truckloads and less than truckloads in the second quarter in terms of per pound? Or how would you describe the differences in those two products?

Where we can get a nice clean average cost per mile, normalized in truckload, that is really impossible to do in LTL. Because have you different class, different weight, so it is not just weights, there's weights, there is distance, there is class of freight which is basically equivalent for density. So it is very difficult for us to know if -- what our underlying rates change by, especially since we're using 100 different carriers. Or more than 100 but 100 that we use in a significant way.

Okay. Well, I understand that. So, it is really hard for to you tell what the trend -- how the trends differ between the two services?

Yes, because we --

That's the bottom line.

At least with our systems, it is impossible to scrub down to a comparable number in the two periods. I mentioned before that some of the carriers have been very aggressive at increasing their pricing, so what that would mean is that in a lot of the different tariffs that they would provide to us from a pricing standpoint, they're raising those tariffs on average a higher percentage. But there still might be literally thousands of origins and destinations and classes that they're adjusting at varying percentages. And when they do that, some of the freight will continue to move under that same tariff and others will move to a different carrier, or a different tariff, because of the price increases when it goes through the routing guide. So even we have seen some fairly aggressive price increases from the industry, but quantifying that into exactly what did we experience on a similar type shipment, becomes a very confusing exercise.

Okay. Great. Thanks. All my other questions have been answered.

Thank you.

Our next question is from the line of Matt Brooklier with Piper Jaffray. Please go ahead.

Hey, thanks. Good afternoon. I will be quick here. Given your comments regarding tightness in capacity, and I think it would be across all modes of transportation, and thinking about the second half of this year, how are you guys thinking about contractual capacity versus spot rate capacity, or spot capacity? Has there been any change here in terms of the mindset as we move out into the second half of this year? And granted, it is tough to tell directionally where things will head, but as things are tight now, and volumes continue to feel strong in July. Is there any reason for you guys to change your mix between contractual capacity and the spot capacity?

I think it varies a little bit mode by mode.

Okay.

In intermodal, for example, where capacity is very tight, there are things you manage equipment differently and you keep it under your control. And we may be doing other things to try to make certain that we gain access to as much capacity as we need in a real tight condition. On the truckload side, we're always attempting to match our capacity commitments with the customers. So that would translate into more business reviews and more communications with customers, to make sure that we do understand what the volume commitments might be going forward and try to make sure that we have good matches there.

Similarly on the ocean side, it comes down to talking about space, in the fall, with the providers and blocking it out. So yes, when capacity gets tight, our carrier relationship conversations will change, and the data that we put in there will be different. But it is hard to generalize, as to exactly what we would do differently, because the market is tight.

I mean is it fair to say you guys are signing up for more capacity on a contractual basis here and now? Or is it you're looking at things and keeping more of an even balance between the contract and spot capacity?

On the truckload side, which is the vast majority of the business, it would not be correct to say that we're taking more of a contractual approach. We certainly work the relationships differently, and make certain that the capacity that we've worked with in the past is going to be available in the future. But we do stay fairly [short] with our commitments. Again, it is a mutual thing. Most of the medium and small carriers want that. So what that translates into is we take price risks. That we don't have long-term contractual pricing with a lot of the truckers, so that means if the market does get tighter, we have the challenge of continuing to pass on price increases to avoid the margin squeeze.

Okay. And just my second question, if I look at your headcount, you guys added roughly 100 heads sequentially from first into second. If we assume good growth here, continuing into the second half of this year, how many more heads do you think you need to add to the model to, I guess, stay balanced to some extent?

The heads can come a little lumpy, just because of the recruits process, and starting them in classes and all the rest of that, but it will vary depending upon shipment activity so it is hard to predict. But it is not unimaginable that we could add more than a couple -- more than 100 to each of the remaining quarters, that we would continue to staff up at least the levels of the second quarter or more. Because as I mentioned earlier, for the last year or so, we've had the advantage of growing into our capacity a little bit and we don't have that going forward. So if we have this type of volume growth, we will definitely be adding heads faster than we have in the past few quarters.

Okay. Thank you.

Our final question is from the line of Tom Albrecht with BB&T Capital Markets. Please go ahead.

Hi, guys. Thank you for taking the question. Really, two questions. Can you provide some commentary on flatbed, because whether that is volumes or rates, because that seems to be the one space that has backed off from volumes we saw in April and early May. And then secondly, can you just address whether it is more competitive today, to get loads from the shipping community, or if you've seen any change relative to your experience in the business?

Okay. On the flatbed question, we are seeing an increase in gross revenue per transaction, so we are on average charging significantly more to our customers. But our gross margin percentage, like the rest of truck, is down. So our cost to capacity is increasing even faster. We are experiencing some modest, or actually, our total volumes in flatbed are roughly flat compared to last year's second quarter. I do think the flatbed portion of the truckload industry has not seen quite the same aggressive tightening that the drive and/or refrigerated part has. But we're relatively small in that compared to the other numbers.

Okay. That's helpful. I was thinking it was about 6% of your shipments. So it was flat year-over-year. And then what about just in terms of the other question, the competitive element in getting business from the shipping community? There is a number of mid-sized brokers compared to five years or ten years ago, but they don't have everything that you have, and I just wondered if you could address that.

When we talk about competitiveness, and ultimately, I guess, that would translate into either more difficult getting volume growth, or margin compression, and because our margins fluctuate for so many other reasons and because during this period of time there is lots of volume available in the marketplace, it gets really hard to assess the competitive impact on a quarter-by-quarter basis. What we have felt in the past, and would generally feel to be true today, is that there is more competition, there is more people taking a third party approach, and a lot of the carriers are pursuing it more aggressively.

But we also believe that there is a lot of customers and a lot of people in the industry who understand the service capability and the value of the approach, such that the total portion of transportation, especially on the truckload side, that is going through a third party or a broker is probably increasing pretty significantly. So relatively, if the third party model is taking share, and we're doing a better job of, as an industry, of proving that our model is valid, while there may be more brokers, that doesn't necessarily mean that it is more competitive from a relative standpoint. So we do feel like what we are, as an industry, is more accepted and more prevalent today, and there are more of them.

And it certainly will continue to get more competitive, but it has been a very competitive industry for the last couple of decades, and every -- pretty much every shipment that we do is subject to multiple bids, or lots of different things that have always been very competitive. So we'll -- it certainly is a factor. But to us, that's more of a longer-term issue that we've just got to continue to monitor and make sure that our productivity and people training and systems and all the rest of that stays ahead, as an industry leader.

Okay. That is helpful. And on the flatbed, one more time, so flat year-over-year, but I mean sequentially, did you see a leveling off over the last three months, four months, even if you look back into the first quarter?

I don't have monthly flatbed volumes with me, so I can't answer your question.

That's fine.

We were looking at the data, and there is some -- I mean the flatbed thing is confusing because it does look like some of the pricing increases have been there, but our volumes haven't been real strong. And I guess what we've always talked about is because housing and some of the construction industries can have such a material impact on that, you can see some pretty unusual variations across the country and across the pricing, so we don't have great data on that.

Okay. Well, that's helpful. Thank you.

Unfortunately, we're out of time, so that will have to be our last question. We apologize that we couldn't get to all of your questions today. Thank you for participating in our second quarter 2010 conference call. I want to remind that you this call will be available for replay in the Investor Relations section of the C.H. Robinson website at CHRobinson.com. It will also be available by dialing 800-406-7325, and entering the pass code 4325612#. The replay will be available at approximately 7 PM Eastern time tonight. If you have additional questions, please call me, Angie Freeman at 952-937-7847. Thank you.