羅賓遜全球物流 (CHRW) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson fourth quarter and year-end 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, this conference is being recorded Tuesday, February 1, 2011. I'll 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 fourth quarter and full-year performance and we will follow that with a question-and-answer session. For those of you who are planning to ask questions, please limit yourself to two questions and then rejoin the queue. We're hoping to be able to accommodate more people in our Q&A session today.

I would like to remind you that any 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 factors about factors that could cause actual results to differ from management's expectations. With that, I'll turn the call over to John.

Thank you, Angie, and thanks to everybody who's taking the time to listen to our fourth quarter conference call. About an hour ago, we issued a press release sharing our fourth quarter results for 2010. I'm going to start by highlighting just a few of the key financial results on that release. For our fourth quarter ended December 31, 2010, our total revenues increased 15.8% to $2.3 billion. Net revenues increased 14.5% to $388 million. Income from operations increased 14.9% to $164 million. Net income increased 17.6% to $103 million, and fully diluted EPS increased 19.2% to $0.62 per share.

The similar metrics for the year-to-date results ended December 31, 2010. Total revenues increased 22.4% to $9.3 billion. Net revenues increased 6.2% to $1.5 billion. Income from operations increased 6.5% to $622.9 million. Net income increased 7.3% to $387 million. Fully diluted EPS for the year increased 9.4% to $2.33 per share.

In addition to these overall financial metrics, our press release gives more detailed growth percentages by our various service offerings. As Angie said, consistent with the past we'll share some prepared comments and then open up for questions. So, the fourth quarter of 2010 was the first time in a couple years where we were able to achieve our long-term growth target of 15% in most of our key metrics. I think it's very helpful to summarize the past couple years in our performance throughout the recession to better understand our current performance and our outlook going forward. Two years ago at this time in early 2009, we were in the peak of the freight recession and experiencing meaningful volume declines in most all of our service offerings.

Throughout 2009, volume growth was extremely challenging for us. We were able to grind through 2009 with a modest earnings increase. The things we highlighted throughout 2009 that enabled us to grow our earnings despite a really difficult market condition were the following; aggressively selling and going after market share, using our strong balance sheet to absorb increased working capital needs on both the shipper and carrier side, benefiting from meaningful gross margin expansion due to the typical fluctuations in our business model, our variable costs compensation structure that keeps our operating costs flexible, and right sizing our network where appropriate to adjust to the market conditions.

So, then a year ago at this time, in early 2010, while we were feeling better about improving market conditions we knew that, throughout 2010, we would be comparing to the very high gross margins of 2009 and that achieving our long-term growth targets would remain more challenging. Throughout 2010, we were able to grow our volumes in virtually all of our services as we continued selling and market conditions continued to recover. Gross margin comparison did make earnings growth more challenging this year but we were able to finish with a strong fourth quarter and 9% EPS growth for the year. The past couple of years we've discussed a lot about how our gross margins fluctuate for a variety of reasons and how we accept that as part of our business model.

Overall, we're happy with our results for 2010. The recession was challenging for all of us and the past two years have tested our business model in new ways. We're very proud that we were able to manage through the recession with an earnings increase in each of the past two years. We think that's a pretty visible statement about our business model and our execution discipline. When we analyzed our results for 2010, we would highlight the following things as key contributors to our continued success; the continued acceptance and growth of third party logistics in our business model, our expansion of services and strengthening our global network of resources, having the best people in a variable performance-based compensation system, and significant focus on automating our processes and driving productivity improvements.

Those are some of the thoughts on our overall performance and results and now I'll transition to some more specific comments on some of our service offerings. Starting with transportation services, for the fourth quarter of 2010, our truckload transportation volume increased by roughly 9%. Truckload pricing for the fourth quarter compared to the fourth quarter last year was up approximately 8% versus a year ago excluding the estimated impact of fuel. Our truckload pricing stayed relatively flat sequentially from the third quarter to the fourth this year. The economic recovery and increase in truckload demand relative to a year ago resulted in higher prices this year.

Within our truckload services, the primary topics of discussion with our customers continues to be the uncertainty of impacts going forward around regulations like CSA, hours of service, and others and how the capacity side adjusts if demand continues to grow during 2011. Determining pricing strategies for 2011 is as challenging as ever given the increased volatility in demand and uncertainty in the supply of trucks. We continue to promote our quality control procedures and flexible broad access to capacity as being more relevant to our customers.

For the LTL component of our truck revenues, our volume increased by 11%. Pricing comparison are more difficult to quantify, given that all the variations in the tariffs that we use, however, LTL pricing has generally increased versus a year ago, as well. The significant changes in the LTL landscape the past couple years have also created a pretty high degree of change, as we head into 2011. Network rationalizations and changes by the industry leaders along with the lack of industry-wide profitability in recent years is also driving the potential for meaningful price increases heading into 2011.

Intermodal. Intermodal net revenues for the quarter grew 9%. Our intermodal volumes for the quarter were roughly flat. Capacity constraints did continue to limit our ability to grow intermodal volumes during the fourth quarter. We discussed last quarter that we had made a two-year commitment for 300 containers to expand our access to boxes. We did expand that commitment by 50 more containers during the fourth quarter of 2010.

Our longer-term strategy remains focused on being the best intermodal marketing company and servicing our customers, but we do continue to look for ways to ensure that we can meet the growing demand for intermodal services in the marketplace and ensure capacity access while retaining a mode-neutral balance that we believe helps us to better provide our customer service. Global forwarding. Both our international, air, and ocean volumes increased significantly during the quarter. While much of this growth was driven by the overall recovery in the global freight markets, we do believe that our global network and service capabilities continue to strengthen and improve our participation in these markets. We will continue to invest in expanding our network and improving our global capabilities.

Gross margins. I discussed earlier the significant gross margin fluctuations the past couple years. Our transportation gross margins in the fourth quarter were 17.6%, compared to 18.3% in the fourth quarter last year. Over the past several years, we've discussed our pricing approach and how gross margins will naturally fluctuate for many reasons, including supply and demand fluctuations, fuel prices, mode mix, and timing lags and price adjustments to customers and carriers.

We view the fluctuations in gross margin as a normal part of our business model and we continue to feel confident in our approach towards adjusting to the market conditions. I think it's important to note that while we cycle through the challenging comparisons from the gross margins at the high end of the range, the current quarter gross margin of 17.6% is in the middle of the range for gross margins for the past five years. Our other logistics services, net revenues includes our transportation management fees, customs brokerage fees, as well as other fee-based revenue from expanding our service offerings. We continue to focus on account management practices and integrating services.

The growth in these services continues to be strong and is reflective of our strategy to expand services and our relationships with shippers, as well as the demand in the marketplace to improve processes and analytics. Sourcing. As discussed in our press release, our sourcing net revenues for the quarter decreased by 4%. We've discussed on past calls that our largest sourcing customer, Walmart, has a very comprehensive global sourcing initiative in process that's impacting our relationship. Their global sourcing realignment has resulted in lost business for us. There's really not anything new for us to add to our past comments.

We continue to work through the transition with them and look for new ways to grow with them but we do expect to continue to experience declines in volume and net revenue until the transition is complete later this year. There is some new and exciting growth in our sourcing division that's also driving new revenues for our transportation services and we remain very positive about the longer-term opportunities to create value with our sourcing services.

Information Services. Our information services revenue consists entirely of our income related to our wholly owned subsidiary T-Chek. T-Chek finished its strong year with a good fourth quarter. Volume growth, increased fuel prices and expanding services were the growth drivers. Moving to our operating expenses. Our operating expense increase of 14.1% for the fourth quarter consists primarily of personnel cost increases. While we did add to our team and headcount versus a year ago, the largest portion of the increase is driven by the improvements in earnings and how our performance-based compensation plans work.

Chad will comment more on that in his remarks. Our employees have worked hard the past few years and the increase in rewards for the strong quarter are a very positive thing for our culture and future growth. Our year-to-date personnel costs reflect the variable discipline of the business. I'll finish my prepared thoughts with some comments about 2011 and our longer-term outlook for the future. To start, we continue to believe that logistics, third party logistics and our business model have good momentum and increasing relevance in the marketplace. The recession has been tough but one of the good outcomes for us is an even greater focus on things like productivity, competitive logistics, low inventories, cost savings, et cetera, that are helping to drive opportunities in our industry.

While the increased opportunity is driving increased expectations and competition, we think we have a good long-term growth opportunity in our long range plans continue to validate our long-term growth goal of 15%. We obviously need to continue to execute at a high level to achieve it, but we believe the opportunity is there and we're well positioned to go after it. Our long-term growth goals are basically in three categories, to take market share, to innovate and add new services, and lastly, to expand globally. We're confident of good growth opportunities in each of those categories.

Some shorter-term thoughts with regards to 2011 that I'll share. All of the reasons we haven't given quantified short-term guidance in the past are more true than ever. The demands in supply variables are more volatile in most of our services, forecasting is tough and everybody is adjusting quicker to the changing market conditions. Transportation gross margins for the year of 2010 were around the middle of the range for the past five years. While we don't know how market conditions will change, we do know we don't have the high end comparisons to go up like we did for most of 2010.

We know, heading into 2011, that our productivity metrics are generally at the high end of our ranges. We do expect to add people as we grow. We also know that costs associated with our variable incentive plans will increase if we are successful in growing our earnings. We also know that we have better net revenue growth momentum starting 2011 that we've had the past couple years. January is generally the slowest month of the year and our markets, especially the truckload market, can change quickly as demand increases in the Spring, especially with the uncertainties towards capacity additions.

I would sum up my comments by saying that we're proud of 2010 and especially proud that we made it through the past two years without breaking our streak of annual earnings increases. We continue to have confidence in our long-term growth goals and we have good momentum starting 2011 but market uncertainty is high. Thank you, those are my prepared comments and I'll turn it over to Chad for his.

Thanks, John. I'm going to give some comments on our personnel expenses, income taxes, balance sheet and cash flow statement. Our personnel expense increased to 43.6% of net revenues in the fourth quarter of 2010, compared to 42.4% last year's fourth quarter. This increase was primarily the result of an increase in our restricted stock expense. Our stock-based compensation expense was $14.5 million for the quarter, compared to $4.1 million for the fourth quarter of 2009. The majority of our stock-based compensation expense was driven by the vesting of our performance-based restricted stock awards.

The vesting of these awards is based on our earnings growth rate. Each quarter, we accrue, based on the year-to-date growth in earnings. When the earnings growth rate increases throughout the year as it did in 2010, the expense accelerates throughout the year, as well. For the year, our stock-based compensation expense was $37.1 million, compared to $21.3 million in 2009. This increase was driven primarily by a 13% vesting of our performance-based restricted stock in 2010 compared to 7% in 2009.

Moving on to our income taxes, our effective income tax rate was 37.2% for the fourth quarter of 2010, compared to 38.8% in 2009. This unusually low rate was driven by reversing reserves for two uncertain foreign tax positions. The needs for these reserves were eliminated by a favorable audit outcome and the expiration of a statute of limitation. We expect our tax rates to fluctuate in the future between 38% and 38.5% excluding unusual items such as these.

Moving on to our balance sheet. Our balance sheet remains strong with cash and investments of $408 million. We had a very strong cash flow quarter, as we usually do in the fourth quarter. Our investment and working capital decreased compared to the end of the third quarter which is normal, as volumes drop off late in the year. It's important to remember that approximately $85 million of cash will be used early in the first quarter to pay our accrued bonuses and profit-sharing.

Our net CapEx for the quarter including capitalized software was $7 million. This includes continued investments in our international forwarding and T-Chek systems. We expect our cash -- our CapEx, including our continued increased investment in capitalized software, to be approximately $40 million during 2011. We have discussed in the past our strategy of using share repurchases as a variable way to return excess capital to our shareholders. Our capital strategy has remained consistent.

During the fourth quarter, we repurchased 544,580 shares at an average price of $75.29. That concludes our prepared remarks and we will now begin the question-and-answer portion of the call.

Thank you, Mr. Lindbloom. Ladies and gentlemen, at this time we'll begin the question-and-answer session.(Operator Instructions)A moment, please, for our first question. Our first question comes from Ed Wolfe with Wolfe Trahan & Co. Please go ahead.

Good afternoon, guys, Angie.

Hi.

John, you did a great job and thank you for taking us through kind of the last couple of years. Would you mind taking us through from a gross yield perspective on the truck side, the last couple of quarters? If I look at the 17.6% transportation yield in the fourth quarter, it's up from 16.6% in the third quarter and 15.8% second quarter. What's driving that change and as we get to what should be a seasonally slower first quarter, fuel is up but there should be more capacity, how should we think about it?

You know, the challenging part of that, Ed, is I rattled off the four or five key variables that impact it. Some of it is typical seasonal fluctuation where different times of the year the margins will trend. I have in front of me a schedule from the last ten years which is all public information around the margins and how they vary from quarter-to-quarter and it's really challenging to find patterns from it, when you look at the supply and demand variations as well as looking at it quarterly, it's difficult, it's really difficult to predict where it's going to go.

Not so much predict, but for instance you said pricing was up 8% pretty steady with third quarter and fourth quarter but the gross yield expanded 100 basis points. Can you talk to why that would happen in this fourth quarter relative to third quarter?

Well, from an overall standpoint, what we talked about last year and throughout 2009 as the market was soft, we were getting a lot of volume challenges but the pricing was going down. So this year throughout 2010, with each quarter you see more favorable price increases compared to a year ago but the volume comparisons got more challenging as the year wore on. So throughout 2010, those gross yields crept up a little bit. I think it's just a combination of pricing comparing more favorably to the previous year and our longer-term contracts having a more stable cost of hire for these last couple of quarters than when it was jumping around last year.

And just as my second question, where are you versus a year ago in terms of commitment to your rates with your customers? In other words, how much of your business is going to be put out for bid over the next couple quarters relative to where you were a year ago at this point?

I would say it's fairly consistent. Again at least how we look at the marketplace is that there's no real set annual cycle to it but there's generally more activity in the beginning of the year, so a lot of shippers are in the middle of some sort of bid process. What I would say in general what happened throughout 2010 is that many shippers ended up having more volume than they planned to at the beginning of the year, so that we had a lot of customer relationships where we ended up with incremental volume relative to what was awarded during a bid at the beginning of 2010.

So what a lot of shippers are sorting through now and what we're in the middle of with a lot of our customers is looking at who performed on the freight and what the metrics were throughout 2010 and what our appropriate bid allocations for 2011, depending upon how the market condition works. To us the bid allocations or the bid awards are one interesting step in the process, but then it's almost more relevant to us as to how the market compares to what everybody was anticipating and whether the freight is generally being routed along those bid awards or if there's a lot more freight or a lot less freight. So we're in the midst of it right now, just like we always are this time of the year.

Thank you. I'll get back online. I appreciate it.

Thank you.

Thank you. Our next question comes from Scott Flower with Macquarie Securities. Please go ahead.

Yes, good afternoon, all. Wondered if you could give us some flavor for what impact you've seen in terms of your carrier base with CSA 2010 and the scoring, it may not be realtime in terms of people dropping drivers out, but I'm just wondering what you preliminarily seen in how this has impacted, how you see your carrier development efforts in the next year?

So, okay, so in our press release, a couple of key metrics that we disclosed and update once a year are the active customer IDs and the active carrier IDs and those disclosed in our press release were 36,000 customer IDs and 49,000 transport providers. I believe the customer number is up 1,000 from a year ago and the carrier number is up 2,000 from a year ago. And the way we've always approached it is that each quarter we're signing up. There's a little bit of churn in each of those and each quarter we're signing up thousands of new on each side and there's unfortunately some that drop off for a variety of reasons.

Throughout 2010 we were able to grow our active carrier base. There's certainly been some element of all of the carriers understanding the new rules and preparing for compliance and looking at the stuff and I'm sure there will be some continued transition throughout 2011 as the rules become effective and everybody works to comply with them. The way we look at it, I guess, is that could have some degree of accentuated churn or a little bit of contraction on that universe of carriers that are out there, but we don't see it as being a unique variable that we're really going to ever be able to isolate or believe that it will ever have a sort of uniquely material impact on what we do.

Okay, and then I guess the other question and obviously, you've added some commitment to boxes but obviously if you look over the last several years, intermodal hasn't grown on a net revenue basis as the other modes have and its got some unique characteristics. I'm just wondering how do you see intermodal prospectively as a part of your portfolio? Do you want it to be sort of an alternative but not necessarily something you want to be too big in? Is it something that as the world gets a little bit tighter in capacity overall and shippers are perhaps looking at intermodal more, that you want to be a bit bigger than you have in the past? Help me how you think about intermodal prospectively?

I would say there's two lenses into that. One is us being an intermodal marketing Company and providing intermodal transportation services to our customers, as the transport provider working with the railroads in the traditional IMC role. That's where our growth in volume has been limited some the last couple of years because of the access to capacity piece of it. And we're going to continue as an IMC to meet with all of the railroads and talk about capacity alignment and make sure that we're making good business decisions about where we can profitably grow as a transport provider in intermodal and align with the railroad business plans in a way that we think makes sense.

Another lens into it, though, is that we are more and more providing outsourced solutions and process management solutions for a lot of the customers that we work with, and the most important thing in that area is that all of our customers get efficient access to intermodal services if that's what's right for their freight.

And we do believe that through a variety of methods and partnerships with other intermodal providers or asset-based solutions that we can develop more and more solutions and are doing that now as part of our management services. So a growing part of our management fees and other services are involved in relationships where intermodal is part of the solution. So when we talk about recognizing that it's a very important part of our portfolio and that we're going to make sure that we're bringing it to the right customers at the right point in time and making sure that we're optimizing their supply chain and transportation as good as possible, and then executing on that intermodal freight as an IMC wherever we can most effectively do that.

Great. Thanks, all.

Thank you. Our next question comes from the line of Jason Seidl with Dahlman Rose. Please go ahead.

Evening, guys. I wanted to concentrate a little bit on the capacity outlook because one of your competitors had a conference call earlier and it sounded like they had a little bit of doubts that truckload capacity would tighten significantly in 2011. They were really targeting more for 2012. I'd love to hear your thoughts on that comment?

It's so hard to predict and we sort of consciously stay out of that. I would say when we've looked at it and when we talk to our customers and or talk in the industry, if you look at all of the variables and all of the factors that are involved on whether or not the supply side is going to add capacity, there is a lot of uncertainty. There's significant rule changes that are coming or possibly coming. There's still lots of challenges around financing and equipment orders.

There's the driver shortage issue which has come and gone and is still there statistically in terms of what needs to happen. And it's really just more a question of what happens with freight demand this year, and if the demand accelerates significantly during the year, we do believe that the supply side will have a more challenging time of adding capacity quickly and there probably will be meaningful price increases and tight markets.

But the more meaningful or volatile variable in that equation is the freight demand and what's going to happen on the truckload side. So depending upon your view and prediction of the economy and what overall freight demand will look like throughout 2011, I think that would drive your belief on how tight the market will be.

Okay, if I could just switch to the LTL. Obviously, you mentioned a meaningful price increases there as well, and as you talk to your customers out there, are they preparing themselves for significant LTL price increases here in 2011, as these carriers try to start making profits again?

Yes, I would say nobody really wants to use the word "significant" because everybody's freight is a little bit different, and all of us are working on process improvements and other things to try to minimize what cost increases there might be. But I would say at the same time, there is pretty widespread recognition that there has been a lot of chasing of market share and a lot of very aggressive pricing in the depth of the recession and that the industry has been losing money and that the outlook for 2011 is quite a bit different.

So I would say as a general rule, yes, customers understand that prices are probably moving up, but that everybody is working to try to minimize what those will be, what those increases will be.

Okay, I'll get to the back of the line now, guys. I appreciate the time.

Thank you.

Thank you. Our next question is coming from the line of Bill Greene with Morgan Stanley. Please go ahead.

Yes, hi. Good afternoon. In the past, I think you've had claims against you when there was an accident on the road and I think you fended those off pretty well. Would the new CSA regulations and given that it will give a lot of the drivers and the carriers specific grades, does that suggest to you that it will make it easier to go after brokers, or for that matter maybe shippers that use a carrier with a poor CSA ranking? How do you think about that?

Bill, this is Angie. So I think the short answer to that is we don't know yet and a big reason that we don't know any of that yet is because we're still in the early stages of CSA being rolled out, so they have released more information around what's called the basic scores. I won't get into the (inaudible) on that. But how the basic scores ultimately compute to be -- to roll up into safety/fitness determinations, which is the ultimate safety rating of the carrier, has not been determined and won't be from what we hear until at least this summer.

So until that time, I think it's premature to speculate how that might impact at all the liability rules around this, but in as much as we've been encouraging and hopeful that the FMCSA would provide some clarity around the bright line of what is a safe carrier and an unsafe carrier, that would be very helpful for that.

Okay, got it. And then as a follow-up, John, in your comments you mentioned competition as something that you're thinking about. Were you being sort of just -- is that a generic comment, was there something specific where you've actually seen competition in a segment rise in a material way?

I would say it's a general comment that we've been making over the last several years. And I guess the way we look at it is the data that we have and the stuff that we read would suggest that logistics and third party logistics are growing and taking market share disproportionately.

So the basic idea would be that as companies have taken advantage of lower cost labor and complicated their supply chains that the spend has increased disproportion to GDP, and that third party logistics has probably grown within the logistics spend, and that we're not the only ones who understand that and see that. So that just in general, there are more companies and more dollars being invested in the space, so that competition in general is increasing. But it was nothing referencing anything specific or different in terms of how competition has been increasing as our opportunity has been.

Okay, great. Thank you for the time.

Thank you. Our next question comes from Matt Brooklier with Piper Jaffray. Please go ahead.

Hi, thanks, good afternoon. Wanted to touch on the sourcing business in the quarter, gross revenue down, it was kind of [flattish] in third quarter. You'd indicated that one of your larger customers taking more of their sourcing business in-house. Maybe you could just provide a little bit more color on kind of the where they are in that process, if you will, and expectations for sourcing revenue going forward.

You're right, we were down in the fourth quarter and the third quarter is still up slightly. The difference is that they've gotten farther along in their plans on what they are going to in-source and outsource. We still are (inaudible) what business are going to take away from us. We still don't know the exact timing of when this will all play out but we expect to continue to lose items in certain DCs throughout the remainder of 2011. As far as being able to quantify the impact, we do not have that information available and they are continually changing as well as the timing.

Okay. And, John, you talked to CHP and kind of in growth mode at this point in time. You're at the high end in terms of employee utilization, if you will. Do you have a sense for how many heads you want to add in 2011 and kind of the timing of those employee additions?

So what we have always said from a longer-term perspective, that if our long-term growth goal is 15%, that with our productivity initiatives and perpetual cost improvement ideas that we would try to grow our heads at something less than that but realistically, it would need to be double-digit growth.

So when we look at 2011, again, it's very difficult to predict and we will add people as the volume and freight activities justify it. So we will add them monthly throughout the year and the network will adjust as the volume warrants it. But we do expect that unlike the last couple of years where we started with some excess capacity and then really focused on automation and process improvement that going forward, if we do have double-digit volume growth that we're probably going to be adding closer to double-digit headcount increases.

Okay, that's helpful, thank you.

Thank you. Our next question comes from Alex Brand with SunTrust Robinson Humphrey. Please go ahead.

Hi, guys, and Angie. I guess, John, I just wanted to try to get some color, I think Ed went down this road and didn't get far but I'm going to try again. If we think about your 7% volume growth in January, and your trend is improving on the gross margin side, is the rest of the net revenue growth, is there a trend in gross profit per load and truckload that accounts for most of that, or is there something else that gets you to the mid-teens?

With truckload being such a big percentage of it, it would be a safe conclusion to draw that if our truckload volume is up, but a significantly low number than our total net revenues then our profit per load is up.

Okay. And as I think about, you guys are clearly more optimistic than I think I've heard you in a while, and as your cycle turns here in your business and you're finally past the really tough gross margin comps, how do we think about operating leverage in 2011? Does the vesting of restricted stock hurt us again too much to get leverage in 2011 or do you feel like there is some upside to the operating margins?

The vesting of restricted stock can have -- varying growth rates have a drag. I think when we went into 2010 we said if our growth rate accelerates to near 15% we could see 1.5%, or 1% to 2% drag on operating income as a percent of net revenue. Well, we didn't get that high of a growth rate in 2010 but we did experience about a 1% drag on personnel expense as a percent of net revenue. So, yes, if our earnings grow faster, that could create more expense as a percent of net revenues.

But at the same time, even within personnel during 2010, if you back out the restricted stock expenses or the stock-based compensation expenses you will see that our personnel expense as a percent of net revenue did decline. So I think we constantly strive for ways to leverage the business model and become more productive including those productivity initiatives that John mentioned earlier in the call and the investments that we're making in technology and processes. So we do hope to gain future leverage but the primary driver of future earnings growth will definitely be net revenues and volumes.

Fair enough. Thanks for the time.

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

Hi. Just building on that question, Chad, are there any plans to issue another tranche of restricted stock?

This year, well, during 2010, one of those what we called to call three-year awards is now completed its five years of being available to vest. We did do another three-year award that has still got some time on it, but since then we have shifted to more of an annual restricted stock award program. So as of right now we don't expect another one of those large three-year awards, if that's what you're asking.

That's exactly it, thank you. And then on the CapEx side, can you just talk about the needs for CapEx over the next three to five years, how you're thinking about that, more on a general basis than anything specific in terms of numbers? Thanks.

Sure. When you look at CapEx over the last couple years or at least last year, you'll see that we did continue to invest in technology hardware, is one of the biggest pieces of that, and we've often talked about our maintenance CapEx being in the neighborhood of $6 million which is primarily technology equipment. Beginning last year, we started having significant dollars of capitalized software. In 2010, it was about $11 million and that was split between T-Chek and the transportation system, primarily last year was focused on international forwarding.

Going forward in 2011, when I mentioned that we expect our total CapEx to be in the neighborhood of $40 million, somewhere around $13 million or $15 million of that will be or is expected to be in future technology development in software. So split both between T-Chek as well as further improvements of our transportation technology to drive some of those productivity initiatives that we talked about earlier.

So when you look in the previous years to 2010, a lot of our technology spend was spent on enhancements and maintenance. We're definitely shifting towards building more functionality and vastly improving our systems going forward. I would expect in the next three to five years that we will continue to make some significant investments in improving our overall platform, so we could continue to see that spend in that neighborhood of capitalized software going forward.

Great, thank you.

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

Hey, thank you, everybody. Typically you guys talk about your business being, with your customers at least, being 50% contractual, 50% transactional, and with demand tightening or expected to tighten as we move through the year, what's the swing there? As capacity tightens, the demographics work against the truckload industry for adding more capacity, how much of your business can swing to transactional in that type of a market? And then when that business is coming on at full speed what usually is the relative gross margin premium that you guys are able to earn to kind of the average in a quarter?

Well, I started to explain before, I guess our definition of contractual versus transactional is primarily driven by where we have some sort of longer-term pre-agreed price arrangement versus where the price is negotiated more in the current spot market. And for instance, in 2010, while we may have started the year with close to that sort of 50/50 meaning that maybe half of the truckload volume that we moved, we were allocated through some kind of bid or annual price arrangement.

Throughout the year with a lot of the customers that we interacted with we ended up getting more freight because they had higher volumes than they planned for at the beginning of the year. When that incremental freight comes in, in the beginning of a tightening market it can actually be at tighter margins than was originally planned.

So if we're getting incremental volume and the market is tightening up and our cost of hire is increasing, but we have not made a price adjustment upwards with the shipper and we're honoring incremental volume at current pricing it can actually have a negative impact on our margins.

When the market gets very tight and we implement incremental pricing or start to handle incremental volumes on a purely transactional basis where we're adjusting pricing daily based upon market conditions, that freight is generally at normal or sometimes even better margins. So it really depends upon customer specific, lane specific, how and when we choose to adjust pricing based upon the commitments and the relationship as to whether that incremental volume will hurt our margins or improve our margins.

I guess the last time we saw that really happen in a big way was probably the second quarter, it was June, the market heated up in a big way. What are the ingredients for that type of an environment in your mind and how will we know it when we're in it?

For all the reasons that we talked about with uncertainty and reluctance to add capacity, I guess our general outlook has been that if we have sustained economic growth and there's increases in the absolute demands for freight throughout 2011, you're going to start to see the peak shipping period in the spring and summer where you're going to have a pretty tight market. And we will see it.

I mean, one of the things that we get pretty good visibility to is that day-to-day supply and demand relationship just based upon how many trucks are available and how many shipments we're moving in the marketplace. So it literally for us is a day-by-day thing of just adjusting to the supply and demand relationship and if those freight volumes stay high, we do believe that capacity will react slowly this year for all the reasons we've discussed previously and we'll probably feel it pretty quickly.

Got it. And then the last question, if I could, would just be on the intermodal boxes that you guys are managing. Can you talk a little bit about how you got those managed and what networks they're running on and how you kind of balance those to make sure that you've got some swing capacity for your customers?

So all 350 boxes are on the Burlington Northern and, again, that is driven primarily through their philosophy or business preference of asset ownership and kind of aligned commitments on their network. So we're managing that on their network and the program is going very well and so we've expanded it a little bit.

The free operating equipment, the intermodal pools and the other railroads that we work with, there is a different philosophy and a longer-term commitment towards providing some level of capacity in the marketplace. So really, our strategy or approach with the other rails is to understand their longer-term goals and expectations and what we do expect is that there will be in general more equipment available as some of the other rails do invest or some of the other pools invest in incremental equipment.

So what we're looking at, as I described earlier, is for all of the major relationships, all of the major railroads that we do business with is to make sure that our approach and philosophy is aligned with their's so that we can access equipment and service on all of them on a cost competitive basis and provide that to the marketplace. So for now, that equipment that we have a longer-term commitment to is all on the BNSF, and then the other rails we continue to function as a traditional IMC.

Okay, thanks so much for your time.

Thank you. Our next question is from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Thank you, good evening. Just a couple of questions. Back to the comment before about CSA and the incremental risk that you might bear, is this something that would show up in the form of an increased reserve or some sort of an ongoing expense that you might have to carry to protect yourself?

The only increased ongoing expense that I could think of that may come into place is if the insurance companies look at us as being a higher risk, because the accidents where we get sued for liability are so infrequent that those are dealt with on a case-by-case basis.

Okay, that makes sense. And then just back to the comment about gross margin being in the middle of the range and thinking about the various inputs whether it's mix or capacity or price. As you go forward into 2011, is your general expectation that you go back up or that you go back down, or that you stay here and where are we headed on gross margin?

The general expectation is we don't know. It really depends upon fuel prices and it depends upon the supply and demand relationship that will change daily as we talked before, and what we pride ourselves on is being able to react under either of the circumstances.

If you told me that we were going to have tremendous GDP growth this year and that freight demand would be very strong, I would tell you that the market would most likely tighten up in 2011 and we would probably expect that margins would compress and maybe go to the low end of the range. If the demand really softens and we end up with very accessible capacity throughout the year, we would probably have less volume growth and expanded margins, especially in comparison to 2010.

So we don't make a forecast. We don't make it internally and we don't publish one externally and we really more are working more with our capacity providers and our shippers to try to match whatever each of the individual strategies is and then we adjust to the market depending upon what happens.

Okay, that is helpful, thanks.

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

Thanks. On branches, I know it's know where near as important as the number of employees, but it's also a way that you've kind of traditionally been able to give it seems like some of your top performing employees a platform or upward mobility. Can we think about how your branches are expected to maybe ramp up this year? Does it move up with employee growth? Does that stay more flat or how do we think about that?

I think it's a good question and for those of you who didn't notice, one of the metrics in our press release is that at the end of 2010, we did have 231 branch locations versus 235 a year ago and that is unusual for us, that we would have a reduction in locations throughout the year. The philosophy that you described around investing in new locations and expanding our network and making that part of the career path for a lot of our people, that philosophy is still alive and we will continue to pursue that going forward. Even in good years in the past we've always had a more modest number of new locations.

I think we've said five to seven, and a much lower percentage increase in the number of locations than we would be hoping to grow overall, but it is an important part of the growth strategy. When we look at the last couple of years and I've made statements like new tests to our business model and kind of new focuses on productivity and automation, one of the things that we've lived through the last couple of years is just making sure that as we were at times right sizing our network and really focusing in on automation and account management practices more aggressively than we have in the past, we also cleaned up a few offices.

Most of those were combined locations where we thought two offices would work better as one and get more density to it, and we've also put a pause on opening new locations while we streamline the productivity of all of the current locations. Our hope would be that throughout 2011 that we would get back to some sort of a growth strategy, but, again, it would be a much more modest number relative to what our longer-term growth expectations would be.

Thanks, that's helpful. Can you guys give us the number of salespeople at the end of the year? Usually give that in the K, but wondering if you have that now?

I don't have it.

Sorry, we don't have it yet.

The other thing, just lastly, just on January growing at mid-teens, just help us think about the comparisons were like for February and March of last year, so just does it get tougher or easier on a comparison basis? Thanks so much.

I don't think we gave out sequential information during the last quarter and we're not going to, we don't plan on giving that out now.

So January at mid-teens, okay. So you're not saying from 2010, you won't give out February and March is what you're saying?

Yes.

Okay, thanks.

Thank you.

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

Great, thanks, good evening, guys. Maybe back on the CSA side, as you have conversations with your customers, is there any discussion or have you had any discussion particularly with maybe some of your larger customers about your approach to dealing with carriers that may have lower safety scores as you go forward? Have there been any preliminary discussions as of yet?

There's been lots of discussions, as I mentioned, its been a primary topic of conversation throughout the year. And on the positive side for us, it's really been an avenue for us to highlight and remind all of our customers of all of the quality control investments and processes that we've had in place for dozens of years around qualifying carriers and making sure that they have the proper operating authority. I think most people seem to have forgotten that there has been a safety process in place for quite some time now.

This is just an improved one, so all of the things around making sure that your operating authority is effective and that your safety rating is acceptable, those are procedures that we've had in place for quite some time. These enhanced safety rules, the CSA that are going to come out, there's some things that we've been changing in our operating system and preparing for to be ready to implement and manage whatever new rules there are just like we have been in the past.

But as Angie suggested earlier, one of the key pieces of information that we and others are waiting for is just sort of that final translation of how do you apply all of these new safety triggers and guidelines into an assessment of whether a carrier gets to keep their operating authority or not, and whether or not they're on probation or fit to drive or how that works. So there's some final pieces to the puzzle that we'll be ready to implement as aggressively as we have any other change in the past, and it has been a very relevant topic of conversation with all of our customers in the planning process this year.

That's helpful. I appreciate that and switching gears on to the sourcing side. As you look at the gross margin progression kind of as Walmart is getting further along in their realignment, have you noticed any kind of trends coming out of that? Has there been anything positive or particularly negative relative to the gross margin sourcing as a result of that change?

No, I would say it's fairly typical and one of the primary reasons why we can't quantify, we would love to better understand ourselves some of the questions around exactly what impact there will be and how it will phase out, but even in the past with the more dedicated programs that we've had, the volume would fluctuate pretty meaningfully from year-to-year based on price and market conditions and the timing of their programs or promotions. So we know that certain categories of dedicated activity that were there a year ago won't be there going forward but there still will be fluctuations from year-to-year.

There may be transactional or different types of opportunities within those same categories this year even though the higher volume dedicated activity is not there. So from year-to-year, season-to-season, there is lots of normal fluctuation, and the challenging part for us now is that we know certain committed activities where we were automatically replenishing and managing a category will not be there, but we've got to do our best to try to stay involved in the activity and sell product and stay involved in those categories. But we know that, just looking at the last couple of quarters and looking going forward, the likely outcome is that we'll have declines for at least the next couple of quarters.

Okay, great. Well, that's helpful. I appreciate the time, guys, thank you.

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

Yes, good afternoon. I wanted to ask you a little bit, Chad, on some of your comments that you provided on restricted stock expense, they were helpful to give a framework. If you're in 2011 and kind of normal framework or expected growth is 15%, net revenue growth, would that imply that you'd see a further significant step-up in your restricted stock expense or would that type of scenario imply that the -- versus the $37 million in 2010 that you'd be reasonably stable?

It's really difficult to predict but -- because it's more about earnings. But I would say, if we grew exactly 15% restricted stock as a percentage of net revenue it would probably go up slightly compared to where it was in 2010. Part of that reason is one of those three, there's only one of those three-year grants which was granted in 2008 and started vesting in 2009 and will finish vesting in 2013.

There was two of those large three-year grants last year, so that will provide a little bit of tailwind but the increased earnings growth will also provide a little bit of a headwind. So my guess is at exactly 15% earnings growth, it would be a slight increase in net revenue for restricted stock expense as a percentage of net revenue, but not as major as we experienced in 2010 from a growth perspective.

Okay, and how do we think about -- you said you've kind of gone from three-year programs to one-year programs, so I guess you don't have two three-year programs vesting at once but you do have two programs, right, you got the three-year but then also a one-year program that would be vesting?

Yes, but we made one of those one-year grants in 2009 that began vesting this year and we made another one at the end of 2010 that will begin vesting in 2011. So the impacts of moving to one year is already baked in.

Okay. All right, thank you for the time. I appreciate it.

Thank you. Our next question comes from the line of Peter Nesvold with Jefferies & Company. Please go ahead.

Good afternoon, guys. Its been a couple of years since I read the case, but I think it was the Schramm case back in 2004 which is where you were held liable for an accident for negligent hiring, and if I remember back to the legal theory behind that, the agency theory, it would seem like that theory applies directly to a shipper as well now under CSA. And I know this question came up a little bit earlier, but I'm curious in your conversations with your shippers so far from CSA, is that dialogue coming up at all and do shippers see maybe more of a value of hiring a broker to have the intermediary there to maybe buffer that legal liability?

I wouldn't go that far but it's accurate to say that the theory of what's called negligent hire, that you hired a carrier that you should have known was not safe, does that risk does apply to anybody who hires a carrier whether it's a third party broker or a shipper.

So that does inform some of those conversations that we're having with customers about how under the new CSA environment when there's a lot more data and information to manage and potentially the choices you make have more weight, there's good reason to think about working with somebody whose got good quality controls in place and processes to make sure that they are staying up to date on all of the information that's relevant.

Okay, and as a follow-up on the Landstar call about an hour and a half ago or so, they ran through some numbers which I thought was interesting, and I know we've talked a lot about CSA already in this call, but I think it's going to be something that people ask about a lot for the next few months. They said they went through their carrier base, they're eliminating about 10% of total carriers. In terms of the percentage of trucks, it was only a few percentage of trucks because they tend to be the really small guys and even of those a couple percentage points of trucks they are eliminating only half had actually moved a load for them in the last 90 days.

Is there any kind of comparable analysis that you could walk us through or is there anything that you could provide the market perhaps in the future to help us understand exactly how all this impacts your business and your ability to source capacity at attractive rates?

I think, again, as the CSA rules evolve and we have more clarity, when we know, we don't have any clarity today around how the basic scores translate into the safety/fitness determinations, then we'll know which of the carriers we might currently work with today will no longer be viable choices for us. But because today we don't know what that impact might be and, in fact, I don't believe the FMCSA has provided any color on what percentage of the total carrier base in the country they think will fall under the new categories we simply don't know.

But it's a good point that as more information becomes available, we know everybody is very interested, we'll be doing more analysis to try to determine which if any of the carriers we work with we won't be working within the future.

Is there any timeframe in which you're anticipating you might get more guidance on that?

The published information around that is currently stating, I believe, that it's some time this summer when the -- what they call the safety/fitness determination rules will come out.

Great. Thank you.

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

Great. Thanks for taking my question this afternoon, or good evening. Back, if I look at your acquisition history there were only two years out of the past 13 that you didn't make any acquisitions, back in 2001 and 2010. Now that you've got this $408 million in cash, I just wonder, Chad, now that the market is off the bottom do you see the discussions picking up pace? How are you thinking about it in terms of using that cash?

One of the things that we talked about over the last couple years is that we did slow down the amount of acquisition or amount of effort we were putting into international forwarding acquisitions when we rolled out our system. Now, so we would have a worldwide platform that would make integration efforts a lot easier than they currently are. So I think we're still kind of sticking to that path where we probably don't expect a significant amount of activity prospecting our international forwarding acquisitions during 2011. But as far as the market heating up or coming off the bottom, through the downturn we continued to look for acquisitions.

We just didn't find the right ones that met our criteria. So we are actively looking for acquisitions and we'll also continue to return cash to shareholders if we don't find ways to deploy the cash that's on the balance sheet.

Great. Thanks, Chad. And then just a follow-up, on the 7% volume growth you chalked about in the first quarter versus last quarter, I think, you posted a 9% volume growth. Should we look at that as a slowing on a year-over-year basis or are you looking at it as comps are getting tougher? I just want to understand how you're looking at that 7% growth in terms of pace of business?

I would say both things that you said are shared by a lot of us internally, that comps are definitely getting more difficult but that January doesn't feel like demand has been real strong but part of the challenge is that January is always the slowest month of the year from an absolute demand standpoint, so it's tough to get a gauge on it. When you get out into the March/April timeframe you get a lot better sense, we do at least, in terms of how fragile that supply/demand relationship is and if demand is going to tighten up fast enough that there's going to be meaningful price adjustments. So tougher comps, maybe a little bit of a so-so start but it's January.

Got it. Thank you very much. Appreciate the time.

Unfortunately, we're out of time, so that will have to be our last question. We're sorry we couldn't get to all of the questions today. Thank you for participating in our fourth quarter 2010 conference call. We want to remind you that this call will be available for replay in the Investor Relations section of the C.H.Robinson website at www.chrobinson.com.

It will also be available by dialing 800-406-7325 and entering the passcode 4399530, pound. The replay will be available at approximately 7.00 PM Eastern Time today. If you have any additional questions, please call me, Angie Freeman, at 952-937-7847. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and you may now disconnect.