羅賓遜全球物流 (CHRW) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the C. H. Robinson third quarter 2012 conference call. At this time, all participants are no 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, October 23, 2012. I would now like to turn the conference over to Angie Freeman.

Thank you. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, CFO. John and Chad will provide some prepared comments on the highlights of our third-quarter performance, and we will follow that with the question-and-answer session. We are asking that callers limit themselves to two question so that we can accommodate as many people as possible today.

Please note that there are presentation slides that accompany our call to facilitate the discussion. The slides can be accessed in the Investor Relations section of our website which is located at chrobinson.com. John and Chad will be referring to the slides in their prepared comments.

Finally, I would like to remind you that comments made by John, Chad, or others representing C.H. Robinson may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. And with that, I'll turn it over to John.

Thank you, Angie, and thanks to everybody who has taken the time to listen to our third-quarter call. I'm going to start my prepared comments on page 3 of the slide deck that Angie referenced. That slide highlights some of our overall key metrics for the quarter around our financial performance.

For the third quarter our total revenues grew 6.9%, our net revenues grew 2.3%. Total revenues grew faster than our net revenues due to our volume growth and the impact of net revenue margin compression. Our income from operations grew 1.8% and our earnings per share increased 2.9% to $0.72 per share. Chad will make some prepared comments later on about our operating expenses but, overall, the goal of our business model is that our net revenue and earnings growth should approximate each other, so we felt for the quarter that our model performed as expected.

While those are some of the key financial metrics for the quarter, I'm going to go into some of the comments by each of the various services that we offer, but before we do that I thought since many of those comments by Service Line are consistent with the last couple of quarters that I would start by highlighting some of what the overall trends and events in the environment that we feel are dominant throughout our explanations.

We've talked a lot this year and last about the change in the marketplace, especially around shippers and in a slower growth environment that in the balance of their supply chains around growth and efficiency that we have felt a lot more focused on efficiency. When we're meeting with our customers, there generally is a very aggressive approach towards trying to reduce costs and improve efficiencies in their transportation spend and supply chain, much more so the last couple of years versus a higher focus on growth or new initiatives like there would have been in previous periods.

In addition, we continue to feel significant cost pressures from the carriers in terms of the underlying commodities and wages that drive their cost pressure, which we feel is some of the overall things that are driving our margin compression. What we've talked about and will again this quarter is from a high level how we are reacting to this environment and managing our business.

We continue to look at all of the various services that we offer at Robinson, and I will finish by making some comments about some of our previous press releases and the investments that we're making in realigning our portfolio of services.

We've talked a lot and are very focused internally on our productivity. While we've always been proud of our productivity metrics, the current environment is really pushing us to continue to seek new ways to be more efficient and to pass some of those efficiencies on to our customers and carriers. We continue to invest a lot in people and technology. We'll talk about our hires and how we're continuing to invest in our team. And, as well, our technology spend continues to advance.

We're focused on scale when we talk about the portfolio of services and the things that we are investing in. We do believe that it is becoming more and more important that we have the right size to be competitive in a lot of the services that we're offering.

So, overall we are evolving our customer relationships to be more integrated with them, to respond to the environment and pressure that they are under, and to offer more value-added services within transportation and logistics. While we haven't had the type of earnings growth this year that we are striving for, we do feel good about our investments and our competitive position for the future.

Moving into the comments on our overall transportation services on slide 4. Transportation revenues were up 2.2% in the third quarter. Most all of our transportation services had volume growth offset by net revenue margin compression. I'll comment specifically on the pricing for each of those services as we go through them. Our transportation net revenue margin declined in the third quarter of 2012 compared to the third quarter of 2011. While it was at the low end of our 10-year range for third quarters, it did show some improvement sequentially during the quarter.

Moving to page 5 and our truck results. A reminder that truck net revenue includes both truckload and LTL and combined they grew 2.1% in the third quarter. We believe the volume gains for both truckload and less-than-truckload do reflect market share gains. Our truckload pricing for the quarter was flat year over year and similar to my comments about overall transportation, the truckload net revenue margins compressed year over year but similar to my comment we did see some sequential easing in that compression throughout the quarter.

Moving to slide 6 for Intermodal. We did have mid single-digit volume increase in our Intermodal shipments throughout the third quarter. Net revenue margin declined due to the changing mix of our business and increased cost pressures from the capacity providers.

Our Intermodal business is evolving, as we've discussed in past quarters, around more commitments to some owned containers and some dedicated Intermodal volumes that are helping us change the mix of the business to a more committed and longer- term relationships, but coming with some margin compression as well.

Moving to page 7 with our ocean and air or global forwarding results. Most of our experience here was fairly typical to what's happening in those industries. Our ocean volumes were down slightly. Our air net revenue decline of 9% was maybe a little bit unique compared to what's happening in the industry. While the volume overall, from our perspective, has declined significantly, in the international and domestic air services we did have some volume growth due to our small base and greater focus of certain lanes where we are trying to grow our air volumes.

Because of the overall industry declines and the significant price declines in the market while we had that volume increase and some net revenue margin improvement, it still led to a net revenue decrease for the quarter of 9%. I will come back to this at the end of the prepared comments, but obviously one of the most significant announcements we had was the investment in the company Phoenix International to help grow and strengthen our global forwarding service in both the ocean and air categories.

Moving to page 8, our other logistic services continues to be one of the bright spots in terms of higher net revenue growth for us this year. Net revenue growth was 16.6% in the quarter. As a reminder, the primary services included in this category include our transportation management services and our customs brokerage business. We do continue to see the long-term trend of growth with outsource and transportation management relationships and including more value-added services as a result of the overall environment that I discussed in my opening comments.

Moving to slide 9 around our sourcing services. Sourcing net revenues grew 2% in the third quarter. Similar to our transportation services, we did have some volume growth offset by net revenue margin compression. We do source a variety of fresh fruits and vegetable commodities and those commodities fluctuate from quarter to quarter. Probably the most significant highlight from a commodity perspective was the continued strength of our melon activity, primarily from the Timco acquisition that had some pot of growth in the quarter.

Last, on page 10 our payment services were up 4.2% for the quarter. This reflects our subsidiary T-Chek systems of which we announced last week that we sold effective October 16. In that call we talked about the components of the services and how the industry is consolidating and changing, so I'm not going to repeat a lot of that conversation, but in that previously recorded call we did outlay the reasons why we felt scale and industry consolidation was changing things to make it so that we would be less competitive in this service offering and chose to divest.

So, those are the prepared comments by Service line. I will turn it over to Chad for comments on our summarized income statement, and then I will wrap it up with some overall thoughts about our alignment of strategy.

Thank you, John. Slide 11 is our summarized income statement. I'd like to highlight a few things for the quarter. We are pleased that we continue to operate very efficiently. In the third quarter, our operating income as a percentage of net revenue was slightly lower than the third quarter of 2011, but at 43.3% was still at the high end of our historic range.

In the third quarter of 2012 our headcount ended the quarter 8.5% higher than last year's third quarter, but our personnel expenses increased less than 1%. Increases in salaries and other expenses related to the increased headcount were largely offset by reductions in some of our incentive compensation and equity compensation programs that are based on the growth and earnings.

Our stock-based compensation expense for the quarter was approximately $4.5 million, compared to $9.5 million in the third quarter of 2011. Growth and other operating expenses was driven by increases in many different areas including travel, provision for [doubtful] accounts, and approximately $1.5 million of acquisition and divestiture, legal fees and due diligence fees both from a legal and accounting perspective.

Talking about travel, our people have continued to focus on long-term growth. Our people are out working on sales and account development, which has led to this increased travel. Phoenix due diligence also increased our travel expenses during the quarter.

Moving on to slide 12. We continue to have a strong balance sheet with cash and cash equivalents at the end of the quarter of approximately $273 million. Since the end of the quarter we have also received $302.5 million for the sale of T-Chek and expect to use $571.5 million for the cash portion of the purchase price of Phoenix by the end of the year. We expect to enter into a $500 million revolving credit facility by the end of this month to in part finance the acquisition of Phoenix.

Moving on to our capital expenditure activity, our net CapEx, including investments in software, was approximately $13.9 million for the quarter. As we mentioned last quarter, we took delivery of 500 additional Intermodal containers, bringing our fleet to a total of 1,000. The cost of these incremental 500 containers was approximately $6.6 million; $2.2 million of that was paid in Q3 of 2012. And, as we mentioned, $2.8 million of that was included in our second quarter's capital expenditures.

During the third quarter of 2012 we repurchased 1,079,674 shares at an average price of $54.99. These share repurchases happened in the first half of the quarter. During the second half of the quarter we ceased repurchasing shares because the Company was in possession of material non-public information. Now, I will turn it back to John for some closing prepared comments regarding our strategic alignment.

As I mentioned earlier, since we've had several press releases since our last earnings release we thought maybe we would just share some prepared comments to tie together some of our activities and plans for the future. We announced an acquisition of Apreo in Poland towards the beginning of the quarter. We also announced the acquisition of Phoenix International, which I referenced earlier.

When we look at our plans for the future and our portfolio of services, one of the conclusions that we reached is that both in the European continent and in our global forwarding services we feel that there are opportunities to improve our growth prospects and our competitiveness but being larger and investing in some scale.

While we've been talking about expanding our global forwarding network and looking for strategic investments for quite some time, we've also talked about the fact that we were going to have a very high filter on the cultural fit and making certain that we thought there was a good synergy to the types of organizations that we would combine with. We did feel that Phoenix was a very unique opportunity for us in that it's a great cultural fit and it will allow us to really change the scale that we operate within the global forwarding business.

So, in reviewing our portfolio, because supply chains are more global and many of our services are connecting with our customers on a more global basis, and because scale matters in the effectiveness of those services, we felt it was an easy decision to move forward with making an investment like that.

Similarly, as my comments earlier around T-Chek, when we looked at the consolidation and the payment services industry and the card services that T-Chek operates in, there's a comparable movement towards consolidation and competitors focusing in on scale that we did not think had the good synergies to connect to the rest of our services and that it made sense for us to divest rather than growing our scale in that service.

When we look at the other services in our portfolio, we feel like the remaining services that we offer today do all fit in our long-term strategy. We will also continue to look to invest in scale and growth opportunities in the other services that we offer. We will be very focused on integration with Phoenix International for the next year or two, so it's unlikely that we would make material investments along that service line, but there are other services that we offer we believe we could continue to look for opportunities to grow those more aggressively.

I'll close on the bottom half of page 13. I know that this realignment of our business and the financing for the Phoenix acquisition has raised questions about our capital structure and our expectations going forward. First and foremost, we need to close the Phoenix transaction and close our financing facility that we expect to over the next couple of weeks.

But what we did want to share is that while we are going to continue to look at the capital structure and make decisions around for dividends and share repurchase activity going forward, we do not expect to modify our dividend policy at this time. We will be having discussions with our Board around the level of share repurchase activity, but we do expect to continue to repurchase shares and as we get a clearer focus on what debt levels will be at and what philosophy we think makes sense going forward, we will share that with you in future periods.

But we do expect to continue share repurchases to some degree as well. Those are our prepared comments. Thank you for listing and at this point we will open it up for any other questions that you may have.

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

Good evening, everyone. John, just want to talk a little bit -- obviously, there's a lot going on with your business and I definitely applaud you for looking at the other areas of growth and see how things are changing. As supply chains kind of evolve and become more flexible, do you feel that you're now in a great position to kind of take advantage of that or are there still more pieces of the puzzle that you think you need to add over time or other places that you'd like to be?

We are proud of what we think we can do from an integrated services standpoint to help a shipper with broader supply chain needs, everything from network analysis and modeling to all the various types of transportation or logistic needs that they might have. When you get into the specifics of our customer relationships and all the various needs that they have, it would be unrealistic to say that we have everything or that we feel that we can do anything that any of our customers would need. There's a lot of incremental permission and analytical components of the supply chain that we really want to continue to strengthen.

There's a number of inventory management and consolidation-type things that we know we can get a lot better at, even within the transportation offerings there are certain lanes or niches around hazardous materials or other things that we are working to invest more aggressively on, so we feel good about our footprint and the broader capabilities that we have, but we know there's also a lot of opportunity to continue to strengthen and expand the service menu.

Just how fast do you think that that changes and continuously evolves. Obviously you've seen a lot of change over the last couple years as you alluded to. Does that change even more rapidly in terms of the adoption of kind of more complete solutions or do you think that it is just evolutionary kind of track? Thanks.

It's actually been going on for quite some time. If you look at really over the last 10 years around some of our transportation management services and our global forwarding investments, I would say the macroeconomic environment and the change in what we see as our customers' focus on efficiency and cost savings over the last couple years has clearly accelerated it. Whether it will stay that way probably has to do with a combination of how our customers and how the industries continue to change and if they stay focused on efficiency and less focused on growth or if we get back to an economic growth scenario, as well as how we interpret the investment opportunities in the marketplace and whether or not from a price and cultural fit standpoint we find the right sort of thing to invest more aggressively in.

Okay. Makes sense. Thank you very much.

Thank you. Our next question comes from the line of Ben Hartford with Robert W. Baird. Please go ahead.

Good afternoon, guys. Chad, you had mentioned the $1.5 million in legal and accounting fees and due diligence and the additional expenses associated with increased travel. The bad debt expense, did you quantify that? I guess I'm interested if we can just get -- if we can quantify this quarter in the other expense line item how much is truly one-time versus recurring?

Sure. When you talk about the provision for our doubtful accounts, you can actually see that amount on the cash flow statement. I guess for the quarter you'd have to back into it because we only give a year-to-date cash flow statement, but the provision for doubtful accounts this year's third quarter was $4.5 million versus last year's third quarter was $2.9 million.

As far as the one-time nature of the expenses, there is $1.5 million approximately of specific deal-related legal and outside accounting services related to primarily the acquisition, but there was also some legal fees associated with the divestiture of T-Chek in there as well. Those are definitely more of a one-time nature. We are not done with deal-related expenses on the acquisition because the deal isn't closed yet and there is an investment banking fee that's contingent upon closing that is close to $8 million. To get up to the estimated total amount of $8 million, there's also some additional tax and legal due diligence ongoing between the signing and the closing.

Okay, good. And then I guess, John, when we think about productivity if you look at gross profit for employee it appears we are at an inflection point at least as it relates to the year-over-year declines. Can we separate how much is environmental versus how much is associated with the new hiring and the drag that that's created on a gross profit per employee basis? I'm just trying to get a sense for how much of it is associated to the pressures that we are facing on a gross profit per unit basis as opposed to what might be related to the on boarding and the growth of the employee base? Thanks.

This is Chad. It's really difficult to isolate the two impacts because definitely when we have tighter margin percentages it takes more work or more transactions to generate the same amount of net revenue. That compounded with the fact that we are up 8% or 9% in head count and in addition to that have replaced turnover, we are in the 20%-plus range, 20% to 25% range of new people new within the last year, so definitely those people also generate less net revenue per person, but it's really difficult to precisely quantify the impact of the two.

Okay, that's fair. Thanks.

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

Yes, hi there, good evening. John, can I ask you for a little bit more clarification on your comments about the repurchases? I understand it's a Board decision, but is it management's view that a good use of capital now is to actually buy the shares when they are at a valuation that we've not seen for a very long time if at all since IPO? So, I would think a more aggressive capital structure would make sense, but I'm curious as to what management would suggest the Board due?

Part of the reason for the way I phrased my comments was that for quite some time now what we've said around our share repurchase philosophy is that we would use what we determined to be excess cash amounts to repurchase shares and that it was more of a capital distribution philosophy than a valuation play. But we had also always said that if we ever felt like the valuation parameters got to the low end or below our range for executing that philosophy that we would reconsider.

So, given the fact that through these acquisitions we will have some level of debt going into 2013 and because we do believe that the valuation is at a level that's lower than any time in the last 10 years from a multiple standpoint when we were looking at our purchase price activity, we do feel like a different philosophy probably makes sense. We need to spend some time with our Board to be precise around exactly what our new targets will be or exactly what parameters will execute those share repurchases under but, yes, we do feel like a different capital structure will be in place and is appropriate given a low interest rate environment, the low valuation of the stock, and some of the growth opportunities that we think we have.

Okay.

For much of the period since we went public it was only slightly accretive if accretive at all to repurchase shares based on a combination of where interest rates were as well as where our P/E was. Both of those have changed in the direction that obviously make share repurchases more accretive.

Yes. No, exactly. Lastly, can you talk at all about the October trends? I arrived late to the call, so if you said that I apologize, but I don't think I caught that.

Okay. We do not comment on the October trends. Part of the impact of the transactions that are happening is it makes the numbers less comparable or less indicative of what a whole quarter would be even though the first three weeks of the quarter never tells the whole story. But just so you realize that until we have a systems integration on the Phoenix acquisition starting with this quarter, we are not going to have daily net revenue information available like we do today. So, for sure beginning next quarter we could not provide you with the first month or first three weeks or four weeks of a month were, so we're going to have to discontinue the process going forward.

We will give you that through October 22 truckload volume per day was up 6.5%. And that if you exclude the T-Chek revenues from both quarters that our net revenue growth was up approximately 5% in that same period in October. And, again, this is probably likely the last time we will be able to give you a number like that for the foreseeable future because of the systems integration or the lack of availability of comparable numbers on a daily basis. And then even once we do have a system integration, it will take another year to have comparable numbers.

But Phoenix -- they don't do truckload, do they?

They do not do truckload. We would have -- or they do not a significant amount of truckload.

Right. So, you would still have truckload, you just wouldn't have the total for the corporation?

Yes, we will not be able to give net revenue numbers the same way that we have been giving them in the past.

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

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

Great. Good afternoon. Chad, just to clarify that. You would still be able to get the truckload volumes on a per day basis, right? Leaving off the total Company net revenues, right?

With slightly less precision for the acquisition in Poland until it gets on our system as well as any truckload activity that is -- and again it's very small, that is booked by Phoenix. So, we won't have the same level or precision for the next year or so on those numbers.

Got it. Good afternoon. I just wanted to follow up. John, you said on your opening slide you aim to grow truck gross and net at the same pace, but you did 2% versus 7%, a little bit smaller gap than last quarter's 0% and 9%, obviously that's the sequential boost of the net margins, but away from the first quarter where both were up 7%, so what does it take to get back to the equilibrium and how do you get there?

Well, just to clarify what I intended to say at least in my opening comments is that our business model goal is that our net revenues of growth of 2.3% and our earnings growth, earnings per share growth of 2.9%, would reflect the variable nature of our cost structure. Over time, the gross revenue and net revenue would hopefully grow similarly as well, too. When we go through a period of time of margin compression like we have for the last several years, net revenue is obviously going to grow slower. So, what we need in order to get back to more comparable net revenue and gross revenue or total revenue growth is a period of time where we have flat or expanding margins. So, as we've been saying for the last couple of years, we really need to find bottom on the gross margin comparisons or the net revenue margin comparisons and then continue to grow our volumes and both total revenues and net revenue should grow at a more comparable rate going forward.

So, when you talk about pricing being flat and truck cost being up, are you indicating then you are still seeing that compression going on or given the net was up sequentially that you feel that you've turned the corner on expanding those margins?

So, with flat pricing to shippers and a small increase in the cost to carriers for the quarter we did, for the quarter, continue to see that compression. As I said in my comments, it did begin to ease during the quarter and ended the quarter at fairly comparable margin percentages from the previous year. So, we don't know what the fourth quarter will look like because there was some improvement versus a year ago, so depending upon the supply and demand relationship in this fourth quarter, we could be hitting bottom or turning that corner, but it's been difficult enough the last couple of years that I really can't make that prediction.

Okay. What's that?

I said but hopefully it is.

All right, wonderful. Thanks for the time. Appreciate it.

Thanks.

Our next question comes from Scott Group with Wolff Trahan. Please go ahead.

Hi. It's Ed in for Scott. Just to further up on Ken's question. Is there a way, Chad, to look at how the quarter progressed kind of on a year-over-year margin on the transportation yields? You said by the end of the quarter they were basically flat. How did they start and how did they progress through the first couple weeks of October, if you don't mind?

When you look at the two quarter -- the 2012 quarter compared to the 2011 quarter, total transportation net revenue margin was increasing in 2012 and it was decreasing in 2011, so there was a relatively large spread at the beginning of the quarter but by the end of the quarter for the month of September the numbers were very comparable to each other. So far in October, those net revenue margins on transportation are relatively flat with last year's October, maybe slightly lower if I remember correctly. That's a very tough number to get intra quarter because there are intra company -- or intra month because there is a little less precision on the margin percentage, but we believe that they are very close to each other for the month of October.

Can you give the net revenue year over year growth numbers for transportation? I think it was 1% in July last time you had commented through three weeks and you said 5% so far in October. Can you give what July was for the full month and then August, September?

July -- no. We are not going to disclose that.

Okay. In terms of the -- you talked about the $1.5 million of legal expenses for the divestiture and acquisition and there is going to be some more. Is there any way to break out what some of those costs will look like in fourth quarter?

Yes. John mentioned them I think in his prepared remarks on that last slide, or at least the number was highlighted that we expect on Phoenix to have approximately $8 million more of transaction-related expenses. The biggest portion of that is the investment banking fees.

That all includes the legal in the quarter as well?

The legal and the tax due diligence will be -- it might drive it slightly over $8 million. The investment banking fee is a little bit under $8 million, so I think $8 million overall is a relatively good estimate.

Last one as part of that. It seems like there wasn't, despite strong cash generation in the quarter and $240 million of cash going into the quarter, you didn't generate any interest income in the quarter. Was there something -- did you put some cash for Phoenix aside somewhere or do something that curtailed the income in the quarter? Is there something else?

No, yields are just extremely low and not all the cash on the balance sheet is invested. A lot of it is spread around the world in operating accounts.

Last quarter it was $700.000 and this quarter there was less than $100,000.

Last quarter we had an unusual item. We talked about it of a passive investment that we have made many years ago that we got a distribution from.

Okay. Thank you.

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

Hi, good afternoon. I guess today on one of the truckload carrier's calls they indicated that basically pricing was not as firm as the quarter progressed and that their customers were less concerned about capacity availability in the marketplace. Just kind of curious, while your margin compression obviously was there on a year-over-year basis it was -- you had sequential pickup. I heard what you said about it improving through the quarter, but can you give us a feel for where you felt capacity was at the end of the quarter and do you think -- can you just give us a little bit more color as to do volumes tighten up enough or firm up enough in the fourth quarter that you think that tightens back up or do you think that we are in a looser capacity situation given that macro environment kind of over weighing whatever we see on a peak basis?

I think the comments that you just shared are consistent with what we saw or would feel. Market tightness is always relative, but from our perspective the market did loosen as the quarter went on which is what allowed that easing of some of the margin compression. And what most of us have been talking about this year is there really hasn't been any measurable peak season or tightening in the fall like there had been in some previous years. So, it feels overall to us like a fairly soft or consistent demand environment and not a lot of tightness or fairly loose market finishing the quarter and going into the fourth quarter.

Okay.

Some of that has to be taken in context though too that there's been periods of time where the market was much more volatile and the relative ranges of a tight market or a loose market were much greater than what we're seeing today. So when we look at our route guide depth and some of the other metrics that we would look at to try to assess the market tightness, while it loosened a little bit near the end of the quarter, it was nothing like the first half of 2009 or other periods of time where that supply and demand fluctuation would be much more greater than what we've seen for the last couple years.

Okay. All right. That makes sense. Just a question on obviously you made the comment about how may times we've heard from you guys since your last earnings call. This is -- obviously, you've had a lot going on with acquisitions and divestitures. I'm just curious, are you concerned at all about taking your eye off the ball at all on the core business, and I know you've got this big centralized -- when you put network in you put a lot of responsibility into your branch manager's hands. Does that protect you from maybe the risk of taking your eye off the ball on the core business as you kind of go through what's going to be a big acquisition and a large divestiture?

I think when you break it down first off, while we have had a lot of activity I do feel like in many ways it's coincidental around some things that we've been working on for a long time that finally just came to fruition in the last quarter. So, I don't feel like this is a new environment for us where we are going to be so much more aggressive that we change the culture or start driving our growth in a different way but, first off, while the divestiture of T-Chek was a lot of effort, hopefully that will give us a more narrow focus going forward.

Expanding our global forwarding network has been something that we put a lot of energy into over the last 10 plus years. One of the things that we got with the Phoenix acquisition is a new leadership team that is going to help us really in a different way than what we've had before. We needed leadership and we needed expertise in that service line, and we're pretty excited about the team that we got and the success that they were having. So, a lot of the integration effort will be lead and absorbed by new people to Robinson who came with that acquisition. We certainly had some talent that will be an important part of that team as well, too, but when we think about 2013 and looking forward, integrating Phoenix with our global forwarding business is clearly at the top of the list of things that we will stay focused on. It is a dedicated team that is separate from the North American transportation business and should be able to operate largely on their own.

The other acquisition in Europe, we have a separate leadership team over there as well, too, so we don't feel too stretched or spread out at this point going into 2013. But it is a fair point that whenever you have this kind of activity or change going on we need to make certain we don't dilute our focus or our cultural consistency across all of our services and we're very locked in on making sure that doesn't happen.

Okay. Very good. Nice quarter, thanks for your time. Thank you.

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

Yes, good afternoon. Let's see. I wanted to see if you could I guess give a sense here on the head count and volume relationship that you expect and how you expect those things to look the next couple quarters. Are you planning to slow down the head count additions or do you think you will kind of keep it the same, and how would you think about volume growth in what seems to be a fairly weak economy in general?

Yes, so first off just with acquisition transactions that we expect, there will be a pretty significant change in head count going into the fourth quarter, so for modeling don't forget that Phoenix has about 2,000 employees, but if you cleanse the transactions and the normal productivity level over the last several years as we started to reach the high end of our productivity levels and probably around a year or so ago started to staff up more aggressively, I think for the last year or so we've averaged about 8% or 9% head count increase in our reportings. While you have to break it down to really understand it precisely, probably the most visible metric that those head counts should correlate to over the long term would be truckload volume growth because that's our biggest portion of our business.

So, while we had 8% volume growth in the quarter and 8% or 9% head count growth, if volume growth continues to slow, we're pretty quick at adjusting that spigot and slowing down the hiring. So, from a North American truckload standpoint we feel like hopefully those two would stay pretty well in sync going forward and that we're going to continue to look at trying to aggressively take market share because we think that's the best answer in the long term. Each office will make that decision on their own around what their sales pipeline looks like and where they think they can gain share with reasonable margins but over time that's how we would think about headcount growth.

Okay. And what do you think about I guess the impact of weak freight versus competition? I know it's hard, it's a big market, it's kind of hard to tell what hurts you or helps you, but do you think the bigger issue here in terms of your slower pace of net revenue growth and earnings growth and so forth, is it just really a demand issue? We just need a stronger economy, that's really the biggest thing, and stronger freight market, or do think that it's really -- there is some impact from some of the private brokers that are pretty focused on growing at a fast pace and maybe just willing to take it at a lower gross margin than what you guys have had historically?

That's a good question and as we've been asked this and have thought about it and analyzed it for the last couple of years, there's definitely a lot of factors at play. I believe that perhaps the largest factor is that when you think about a third party model and a business like ours taking market share that the easiest way for us to grow and take market share is when a customer is growing and has new and different needs that they need help with that weren't planned for at the beginning of the year.

And when I look back at our history and kind of compare it to the last couple of years, when you get into a more -- a slower growth, more static environment with a lot of consistency in the freight and shippers start bidding higher percentages of their freight more aggressively, and are looking more aggressively for cost savings, it is frankly just a lot more difficult for a business like us to take market share than it is in a high growth environment where there's just a lot of new and fresh opportunities to go after. So, when the growth plateaus a little bit, if we are trying to aggressively take share and certainly there probably are some competitors as well, too, you start looking towards each other's current base of freight to try to get that market share and things tighten up and just get a lot more competitive.

So, I feel like in any industry it's probably easier to grow your business when there's overall growth, but because third party logistics has a lot to do with transforming the landscape and the industry around flexibility and different types of service levels, I think it's probably maybe even a disproportionate impact to the growth opportunity for somebody like us. So we're going to continue to sell and evolve our services to adapt to this environment but, yes, some economic growth and overall improvement in the freight demand would certainly make a big difference.

Right. Okay. Thanks for the time.

Thank you.

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

Thanks, good afternoon. Maybe just a question on going back to the net revenue of productivity on a per-employee basis. When you think about the mix that's occurring in the business with the acquisitions with the new stuff coming in, Phoenix and losing T-Chek, does still kind of the old rules of thumb apply to the productivity upon a per-employee basis when you think about seasoning the workforce? Obviously you mentioned that you still have a bunch of folks who are still going to be kind of relatively new to the business, but as those people mature, is there any reason to think that there should be any material change, the ability of how productive they can be going forward?

T-Chek net revenue per person is not going to have a major impact. It was only 200 people or 190 people out of the total 8,000 plus before the Phoenix acquisition. When you look at Phoenix, they have 2,000 people and if you do the calculation based on the net revenues that we disclosed earlier for those 2,000 people, you will see that their average net revenue per person is lower than ours. So, we've always talked about how our freight forwarding business had a lower net revenue per person, so as we continue to grow that international freight forwarding business I think you will see some deterioration in our consolidated net revenue per person.

That business is much more administrative intensive even with the investments in technology we've made. There's a lot more clerical, administrative-type work involved in freight forwarding than there is in truck brokerage because of the complex documentation requirements. So, there will be a shift. It's very difficult at this time to quantify it, but as we continue to go forward we will try to add some clarity to that.

About half of those 2,000 employees are in Asia, so the average cost per employee will adjust as well when those metrics come into our productivity cards.

Okay, that's very helpful. Thank you. And then maybe switching gears back to the capital structure discussion earlier in the call. When you think about some of the changes that are going on and where you think about yourself from a multiple perspective in allocating capital to share repurchase and otherwise, how do the discussions about your long-term growth rate targets play into that? Any thoughts about how that might evolve as the business continues to evolve through acquisitions and just kind of maturity of the business going forward?

Yes. Every time we've talked about capital structure in the past, what we've said and what we continue to believe with Phoenix being an example, is that if there is opportunities to grow our business, the highest return is organic growth, the next highest return is probably the right acquisition from an inorganic growth standpoint, and then we also feel like at the right time we can create value by repurchasing our own shares. So, what we're going to continue to look at is where are there opportunities for acquisition? Where are there opportunities to use our capital to grow service lines and create value.

We always give the right freedom to grow organically and use working capital to grow any existing offices or open offices and fund that organic growth, but historically we've had plenty of capital left for acquisitions and then some remaining capital that we've used for share repurchases. Because we think the value proposition is better around the current pricing, what that's going to do is really cause us to look probably more specifically at what we think our acquisition activity and demands for capital might be and what levels of debt, if any, that we're comfortable with continuing to carry just simply because of the value opportunity and share repurchases. So, it gets to be a loop of all that, how much do we think we need for organic growth, what type of acquisition opportunities do we expect, and then what level of capital structure are we comfortable with to execute share repurchases.

Okay. That's very helpful. Thanks very much for this time. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Thom Albrecht with BB&T Capital Markets. Please go ahead.

Hi, guys. It does feel in some ways like things are beginning to bottom a little bit. But I wanted to just get a little more clarity on the volumes. I was reviewing my notes from the late July conference call. At that point TL volumes were up about 11% and we know that for the quarter they grew about 8%. We obviously know net revenues trended better, but it feels like volumes did get softer. How soft were they during the month of September?

As far as the -- first to cover the 11% versus 8%, this year's third quarter did have one less business day than last year's third quarter. Now, we don't know that that necessarily means there's one less business day's worth of freight that moved in the market, but if you make that assumption that it is true, that is about a 1.7% impact. So, the number that we gave you in late July was on a per business day basis and we had one less business day than we did last year's third quarter.

Okay. So, the 8% that's the total volumes and the 11% was a per day reference?

Correct.

Okay. Okay. That' s all I had, I just wanted to think about that. Thank you.

You're welcome.

Thank you. And our next question comes from the line of Bascome Majors with Susquehanna. Please go ahead.

Hi, guys. Bascome Majors in for Matt Troy here. The cost creep at TL Carriers has certainly been a thing for a long time, but it seems to have gotten much tougher as far as their margin compression as pricing has fallen over the last few months. I'm curious as to what you're seeing from your small and mid size carrier base as to any response from that yet with respect to how they deal with you as an intermediary?

Well, I don't think there's anything that we can say universally. When we talk about the metrics around the market and our earlier comments about the market softening, one of the things that we will see in our business is those larger carriers typically get much more aggressive about looking for back haul capacity and expanding their available capacity in a broader way in the market. And when they do that it tends to conflict more with kind of the medium and small carriers that don't have such fixed networks out there around how they run their equipment. So, what typically happens when the market begins to soften like this is you will see a little bit more tension around the competitive pricing between the big carriers and the small carriers, and we did see some of that activity towards the end of the quarter.

All right, that's all I've got, guys.

Thank you. Our next question comes from the line of Jeff Kauffman with Sterne, Agee. Please go ahead.

Thank you very much and congratulations on all your transactions.

Thank you.

Chad, a quick one on the tax rate. You're at 37.7% year-to-date. Are you trued up year to date and we should expect the fourth quarter pre-Phoenix to be at that rate? And then when you bring in Phoenix, they do have operations around the world, how is that going to change the tax rate we should be modeling going forward?

We expect the core tax rate of C.H. Robinson, excluding Phoenix, to remain relatively consistent. We've talked about a 37.5% to 38.5% effective tax rate. When we look at Phoenix's operation, we would expect that tax rate, the core operational tax rate, to stay consistent with what C.H. Robinson's tax rate is. We do pre book our tax expense assuming that eventually accumulated cash across the globe will be repatriated.

So, the fact that they are earning some of their earnings in lower tax jurisdiction given that we have a cash generative business, when you look at the eventual use of those cashes and you run out of eventual re-investments without repatriation, US GAAP says you should accrue the tax expense as if you were going to repatriate in the future which is the practice that C.H. Robinson has always followed and expects to follow.

Maintained in other words.

Well, there will be an impact to the overall tax rate based on -- and it's a number that we don't know precisely how much acquisition amortization we will have related to identifiable intangible assets as we have begun but do not have our purchase price allocation done. But any amortization expense which could be -- it's very difficult to know the precise number, but it could be relatively significant. I wouldn't be surprised if there was a number in the $20 million per year range. That amortization will not be tax deductible, so that could have an impact of a half percent or three quarters of a percent to C.H. Robinson's overall effective tax rate. So, while the operational tax rate is staying the same, we could see a creep up in our overall effective rate because of that nondeductible amortization in the initial years of the acquisition.

Okay. And in terms of looking at the expenses below the net revenue line. At this point in time are you comfortable telling us outside of the amortization how some of those are going to change if Phoenix is integrated?

Yes, I think once we have closed the transaction and post that we will file some financial -- quarterly financial information for historic Phoenix activity that you could use as a base. But initially we would expect the results of Phoenix that were disclosed in the Phoenix announcement to basically be added to C.H. Robinson initially. I think we're going to experience some revenue synergies and things going forward and there may be some operating cost synergies going forward, but in the initial period much of that potential will be absorbed by some short-term incremental integration cost.

Okay. It's been a long call. Thank you very much.

Thanks.

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

Thanks. Good evening. Just one question on the gross margins. I know you spent some time on that, but how much of the compression that you felt is just the market and the balance in the market that you've talked about on previous calls versus your own efforts to go out and gain share like you've talked about and maybe the types of contracts that you've had to enter into to be able to gain share? Has that also contributed to some of the compression that you felt?

It is difficult to know precisely where that line would split, but one of the things that I guess we feel good about is that when we look at our entire book of business, the incremental freight that we've been able to get over the last year or two we do have fairly consistent margins across our customers and our verticals and our regions, so it is not like we have a static book of freight from the year before and then an incremental amount of freight that we don't make much money on or is at much lower margins. That margin compression comes pretty much across the board in all of our different services and all of our different truckload regions.

So, what that means to us as we feel like the real tradeoff of going after the incremental market share is the personnel costs or the people that we have to add in order to do that. We don't really think it affects pricing per se in terms of how we have to price to go get that incremental market share because the market is so fragmented we really can't control it. So, when we think about going after that incremental market share and what impact there might be to our business by being more aggressive, we focus primarily on head count and operating expenses as the tradeoff to make sure can we are making good choices in doing that.

Okay, interesting. So, the object of trying to go out and get share maybe hasn't been as big an issue on your gross margin, but it has contributed to the fact that your head count keeps growing a lot faster than your revenue has?

Correct, that's the way we think of it.

Okay, that makes sense. Thank you.

Thank you.

Unfortunately, we're out of time, so that will have to be our last question. We apologize we couldn't get to everybody today. Thank you for participating in our third quarter 2012 conference call. 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 passcode 456-8762#. The replay will be available at approximately 7 PM Eastern time today. If you have additional questions, please call me, Angie Freeman, at 952-937-7847. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.