C.H. Robinson Worldwide, Inc. (CHRW) Q3 2010 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2010 Conference Call. [Operator Instructions] I would now like to turn the conference over to Angie Freeman, C.H. Robinson Vice President of Investor Relations. Please go ahead, Ms. Freeman.

Thank you. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, Senior Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our third quarter performance and we will follow that with a question-and-answer session. I would like to remind you that comments made by John, Chad or others representing C.H. Robinson may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With that, I'll turn the call over to John.

Thank you, Angie, and thanks to everybody who's taken the time to listen to our third quarter call. About an our ago we issued a press release sharing our third quarter results for 2010. I'm going to start by highlighting just a few of the key financial results on that release. For the third quarter ended September 30 of 2010, our total revenues increased 23.8% to $2.4 billion. Net revenues increased 8.5% to $382 million. Our income from operations increased 7.4% to $166 million. And net income increased 7.5% $102.6 million and fully diluted EPS increased 8.8% to $0.62 a share. For the year-to-date results for the third quarter ended September 30, our total revenues increased 24.8% to $6.9 billion. Net revenues were up 3.5% to $1.1 billion. Income from operations increased 3.8% to $458 million. Net income up 3.9% to $283 million and fully diluted EPS up 6.2% to $1.71 per share. In addition to those overall results, our press release gives more detailed growth percentages by our various service offerings. Starting with some prepared comments, for Transportation services, during the third quarter of 2010 we were able to grow our Transportation volumes for all of our modes and services. This growth represents the combination of a marketplace that continues to recover from the recession of the year ago, as well as our successful efforts to sell our services and expand our relationships in the market place. As you'd expect, during this part of the market cycle, volume increases contributed to more challenging access to capacity, price increases and margin compression. Overall, we were relatively happy with our Transportation results for the quarter. It was very difficult to predict what the environment would be like as we started in 2010, given the strengthening volume and price increases throughout the year, when we look at our volumes and gross margins we feel like our business model and approach is working to grow our Transportation business similar to past cycles. Our Truckload Transportation volume increased by roughly 40%. Truckload pricing for the third quarter compared to the third quarter last year was up approximately 8%, excluding the estimated impact of fuel. Truckload capacity has continued to tighten throughout the third quarter of 2010. While demand increases have made the truckload marketplace much tighter than a year ago, a lot of discussion and planning the past couple quarters has been focused on how the capacity markets will respond to these demand increases. When you think about all the variables that factor into the decisions of investing in truckload equipment there's a pretty high degree of uncertainty today that makes the decisions challenging. Those issues include the ability to hire qualified drivers, anticipated rule changes such as CSA 2010 and hours of service, financing, insurance, fuel economy and emissions rules and the rising cost of new equipment. All those issues are on top of the core issue of if the freight demand and pricing will be there to generate the return on your capital investment. Supply and demand will eventually adjust over time just like most markets however, the uncertainty in the decision-making to add truckload capacity does seem to be having an impact on most companies. While every company estimates unique supply-chain decisions around these questions, one strategy that we think is relevant for most shippers to at least consider today would be to ensure flexible, variable cost access to as much truckload as possible. We think we can help with that strategy as well as anyone in the marketplace today. While the uncertainty levels maybe high in some of the industry variables, we're investing in the people, relationships and operating systems to ensure that our access to capacity is high-quality and helps to meet our customers needs. The environment is challenging in some ways for all of us and we hope to make investments that our customers and carriers can benefit from. For the LTL component of our truck revenues, our volume increased by 17%. Price comparisons are much more difficult for us to make an LTL given all the variations and tariffs. However, LTL pricing has also increased versus a year-ago. The demand and supply dynamics in LTL are obviously much different than truckload principally due to the capacity decisions being based on network investments and choices versus a single piece of equipment for truckload. Network rationalizations and differing strategies on market share versus yield have made the supply investment or LTL challenging in the past couple of years as well. We continue to focus our efforts on sales and marketing, process automation and having the right business knowledge and relationships to help both the shippers and LTL carriers to execute their strategies more effectively. That's principally how we focused on continuing to grow our LTL business. Intermodal. Our intermodal volumes for the quarter were up about 8%. The Intermodal market share that the participate in became much tighter during the quarter. The uniqueness around this Transportation mode is to limited capacity providers and pricing variables around longer-term commitments to capacity in certain instances. While we were generally proud of our result and the value we added to our customers and Intermodal, we were limited in our volume growth this quarter from limited access to container capacity. One specific action we took during this quarter to adjust to the market conditions was to add box capacity from the BNSF system to our network. We entered into a two-year lease of 353-foot containers that run excessively on the BNSF network. The 300 containers amount to about 10% of our virtual fleet or anticipated capacity needs. We're working hard to improve asset management of all containers in our network but this commitment reflects an adjustment to the market for a portion of our business. The market conditions include both high shipper demand and the BNSF requirements for effective access to their network. Our global forwarding business. Both our international air and ocean volumes increased 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 continue to invest in our people, technology and business practices as we build out our global network. The global network will be the key to integrating our services and enhancing our global supply chain capabilities. We're committed to it and believe that our investments will continue to drive growth in international freight. Gross margins. Our Transportation gross margins in the third quarter were 16.6% compared to 19.8% in the third quarter last year. While our comparisons to last year remains somewhat challenging, this was the first quarter of sequential improvement in Transportation gross margins since the first quarter of 2009. Over the past several quarters we've discussed our pricing approach and how gross margins will naturally fluctuate for many reasons, including supply and demand fluctuation, fuel prices, mode mix and timing lags and price adjustments to customers and carriers. We view the fluctuations in gross margins as a normal part of our business model and we continue to feel confident in our approach towards adjusting to the market conditions. Our other logistic 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 for those customers that want that type of relationship. Transportation logistics and supply-chain opportunities, challenges and volatility all seem to be continuing to increase in one way or another and we continue to feel good about our investments in long-term growth opportunities of those services. Our Sourcing business. As discussed in our press release, our Sourcing revenues for the quarter were flat. However, the current year revenues continue benefit from the inclusion of acquired revenues from Rosemont Farms and our organic revenue declined for the quarter. While we did grow organically with many of our Sourcing customers during the quarter, that growth was more than offset by lost revenue from other customers, including lost revenues from traditionally committed programs with a large customer that made Sourcing decisions that resulted in lost volume for us. We've discussed on past calls that our largest Sourcing customer, Wal-Mart, has a very comprehensive global Sourcing initiative in process that is impacting our relationship. Their global Sourcing realignment has resulted in decisions for them to self manage several commodities that we were previously involved with. We continue to help them implement their new strategy and while we believe our relationship is strong and that we'll continue to benefit from new transactional opportunities with them, this past quarter, it has become clear more likely that our volume and net revenue declines will exceed the new opportunities for at least the next couple of quarters. While we remain confident in our longer-term growth opportunities including those with Wal-Mart, we could experience continued declines in revenues until their reorganization is complete. Our Information Services. Our Information Services revenues consist entirely of our income related to our wholly owned subsidiary T-Chek. T-Chek provides transaction processing services for fuel and other purchases to truck companies and shippers. T-Chek continues to have strong growth based on shipment volume increases, as well as expanding its menu of services for its customers. We continue to invest in the technology to support T-Chek's broader application of transaction processing for fuel and other expense management services. Our operating expenses. Our operating expenses increased 9.3% and consists primarily of personnel costs. We do continue to hire and add to our team with a net edition of 123 new employees during the quarter. Our performance-based pay system also result in increased compensation for many employees that are contributing to the growth of the business. I'll finish my prepared thoughts with some comments about October and what we're currently experiencing in the fourth quarter. As a reminder, last year during the fourth quarter of 2009, we began to see stronger volume increases in Transportation along with gross margin compression. As we move into this year's fourth quarter, our volume comparisons will get more difficult but our margin comparisons will get easier. So far in October, what we have seen is a slight slowdown in the growth rate of our Transportation volume but improved margins versus a year ago. Our overall net revenue growth for all services per business day this October shows double-digit growth in the mid-teens. It's probably a good reminder that mid-month numbers for the first month of a quarter can sometimes be a little misleading due to variance in business days, month end activity changes, holiday timing, et cetera. In many ways, freight demand seems as volatile and as tough to predict as ever. One way to summarize our approach to the market is that we continually market and sell our services to increase our volume and we manage through and accept pricing and margin fluctuations based on current market conditions. We continue to believe that improved Transportation logistics and supply-chain services have a lot of good growth opportunity and plan to continue investing in our network of people and systems to go after that volume growth and expand our services and market share. Those are my prepared comments and I'll turn it over to Chad for some more.

Thanks, John. I'm going to give some comments on our SG&A expenses, balance sheet, and cash flow statement. Our total SG&A expenses, excluding personnel increased by 11% to $54 million compared to the third quarter of 2009. The bulk of this increase was driven by the expenses of Rosemont Farms, which was acquired during September of 2009. We also had increased expenses related to Travel and Entertainment, freight claims and provision for doubtful accounts. In the third quarter of 2010, our provision for doubtful accounts was $4.4 million compared to $3.7 million in the third quarter of 2009. Moving on to our balance sheet and cash flow statement, our balance sheet remains strong with cash and investments of $284 million. Our investment in working capital increased during the quarter primarily due to increased activity in our Quick Pay program. This increase was driven both by our increased volume and Transportation rates, as well as increased usage as a percentage of the total payments. While growth in this program has reduced cash flow so far this year, we believe that it is a good use of our financial strength and flexibility while we continue to grow our business. 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. With the increased investment in working capital, we have lower share repurchase activity during the quarter compared to last year. We repurchased 355,800 shares at an average price of $58.78 during the third quarter of 2010. That concludes our prepared remarks and we will begin our question-and-answer portion of the call.

[Operator Instructions] And our first question comes from the line of John Barnes with RBC Capital Markets.

Number one, in terms of the lost business with Wal-Mart on the Sourcing side, is that having any impact with your relationship with them on the Transportation side?

No, and I think we've talked about before that a lot of their procurement strategies are changing including Transportation and we feel that we have as good a growth opportunity as ever with them on the Transportation side. There is produce related freight but that's managed separately and really isn't being impacted by this.

Can you talk a little bit about the progression of your net revenue margin, your Transportation net revenue margin, through the quarter? We've heard from some of the carriers just talking about the deceleration in volumes that happened in September now into October, would you have seen that improvement in net revenue margin kind of progress with the deceleration in volumes?

Our volume growth and margin activity throughout the quarter was fairly consistent.

And our next question comes from the line of Tom Wadewitz with JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: I wanted to ask you a little bit about the Intermodal, it sounds like this is something new that I don't recall you doing in the past in terms of the committing to the 300 containers with BN. Is that something that you think you would look to do more of going forward? And how do you think that would impact your dynamics in terms of growth and I guess attractiveness of the business that you realized in Intermodal?

We actually do have some history in our past going way back around 10 years where we did have some committed programs, those were temperature controlled containers and we didn't have real positive experience with it. We do understand this and we have explored situations like this on and off over the last 10 years. We are familiar with it. These are more run-of-the-mill, dry 53-foot containers that are much more universal. It's a smaller portion of our Intermodal activity. And I think we've talked about before and it's pretty well known throughout the industry that of the major railroads, the BNSF has by far the most preference to kind of the dedicated boxes to get the right sort of pricing access to their network. So it is something that we do remain open to growing and using that as a way to enhance our growth experiences but we're also going to continue to rely very heavily on the free running equipment and balancing the two of those in our approach. Thomas Wadewitz - JP Morgan Chase & Co: And then on a different topic, you saw some, I think bottoming in the gross transition gross margin in second quarter and some sequential improvement, I think about 80 basis points in third. Would you expect that trend to continue in fourth quarter or do you think you're kind of, I guess, looking at the September, October results. You think you're at kind of stable level relative to third quarter gross margin in transport?

It's really hard to predict that. The variables that I rattled off in the prepared comments around fuel and supply and demand can obviously impact it. Sharing the October results so far was indicating that we have seen some continued improvement but the last couple of years during the fourth quarter, there's been some pretty radical movement on the demand side with things dropping off and then coming back last year. So when we look at our forecast and trends, it gets really difficult to try to predict that. All we know with certainty is that our comparison gets a little bit easier than the last couple of quarters.

And our next question comes from the line of Bill Greene with Morgan Stanley.

It's Adam Longson in for Bill Greene. A question here when you talk about the sort of softer dynamics you're seeing in truckload. Obviously, there's still some contracts out there where you need to still pickup rates. How do you position yourself in those contract negotiations where shippers also see the truckload market getting softer?

It really varies. Again, we've talked in the past about our decentralized approach to pricing and how we customize our pricing and our customer commitments based upon the relationship that we have with that shipper. And the related capacity commitments that we're making in the marketplace. A lot of customers have a longer, year-long cycle with Committed pricing and those rates would obviously stay in place during any kind of fluctuations in the market side of it. On the more transactional side of it, again, it depends upon everybody's going to adjust that a little different pace. So as the market softens or tightens, the transactional pricing is going to adjust in days and weeks but at a little bit different pace for everybody else and on the longer-term contracts, it can be a much longer portion of the cycle. So we adjust to all of those variables in a very decentralized, customized approach based on the specific agreement with the customers and the carriers that we interact with.

I know we talked about gross margin a lot and we can talk about that all day, but I'm curious when you look at truckload and LTL on more of a gross profit per shipment basis, sort of how do you feel about where you are in your progress and how that compares to history?

The gross margin percentages and the profit per load shipments do correlate reasonably close. They're going to vary for a couple of different reasons, but we don't like to talk about profit per load for competitive reasons, but when you think about kind of where we are in the cycles and how are looking we think the gross margin percentages probably give you a pretty good feel for where we're at, at the cycles.

And our next question comes from the line of Scott Malat with Goldman Sachs.

I wanted to get a thought on how we should be thinking about ramping up hiring considering an 18% turnover, and the growth that we want to see over the next cycle. I'm thinking you need to add around 2,000 or so new sales people a year. Is that the right way to think about it and when you come up a period of time where you haven't been hiring as much and you go into a period where you're hiring more, how do you think about ramping that up?

So if I'm following your math, if we were to plan for 15% growth next year and adding 15% onto our current staffing levels of 7,500, 8,000 and then allowing for turnover, that yes, we would have to higher in the vicinity of a couple of thousand people to end up with a net sort of growth that we want. And that's precisely what we did in kind of the 2008 timeframe. So we have a recruiting process, and relationships as we've talked before we hire most of our people right out of school and we feel like we have the relationships and the processes to ramp up to that level of growth. Again, we do our hiring and staffing decisions on a decentralized basis across our 200-plus offices. So while that may seem like a large number of when you break it down, kind of office by office to the relative sizes, we feel very comfortable that each of the offices can kind of grow proportionately and customize to what their outlook is to do that. So we don't make annual hiring decisions, we plan. But we obviously have processes in place to ramp up or ramp down based upon our shorter-term experience of if the freight volumes are coming or not coming and what were doing in the marketplace. So we take a fairly flexibility approach to it and if next year the market conditions allows us to get back to our targeted long-term growth rate, we feel very comfortable that we have the recruiting and hiring processes in place to get good quality people on board to accomplish that.

Just a question on Europe, I was just thinking about if you could help us with the recent dynamics here. What are the differences in recruiting? And are you having success there? And then just on the differences in the market, I know you've talked before about length of haul and if lengthening given easter Europe, and just talk about how that affects your outlook there?

From a long-term perspective, we continue to believe that the opportunities are very similar and that is a very fragmented capacity base, and a shipping community that continues to focus a lot more on Transportation and supply chain improvements that we think we can be a part of. So we're generally trying to take the same approach to adding people, we have a similar operating system and we're approaching our growth in a similar manner. Some of the differences are that, from what we see at least, is that the European unification is probably a little bit later in its cycle of companies across Europe, thinking about their Transportation and supply chain holistically across all of Europe. So what that means is yes, the freight that we are involved in is more common that it's a longer length of haul where people are trying to take advantage of lower-cost manufacturing in Eastern European countries and shipping them long distances back to more expensive countries, but we see the evolution of it being fairly similar to what we've experienced in North America. As we grow our business, some of the bigger differences that we've talked about in Europe are language challenges, that it's very important to make sure that in the decentralized network that we're building across Europe that we have the right communication capabilities and the people requirements and languages. It's more of a variable on the United States than you might think it to be, but it's also even more important in Europe were a lot of the local trucking businesses are more language specific and a lot of multinational corporations are driven by English across selling and communicating with them. But even more fragmented on the capacity side, so building carrier relationships is at least as challenging as it is here. We've got approaching 10,000 under contract today but it's very challenging to build out a stable, good, healthy following of carriers across Europe and getting our name and reputation out there to the small carriers and medium-sized carriers, is at least as challenging as it is here because we don't have the same kind of operating history out there. So I would say those are some of the key differences that we'd highlight but the overall opportunity seems to be comparable and we continue to be very positive about our long-term outlook for it.

And our next question comes from the line of Jon Langenfeld with Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Can you give us some sense on the Sourcing side, of the produce classes maybe that the customer has chosen to do direct? Was most of that run rated through the quarter or did it happen more later in the quarter? Any sort of color there would be helpful.

We've tried hard to analyze it for ourselves and to share with you and part of what makes it hard is that the volume levels in all these different categories fluctuates from year to year and the programs move around. And so there's not a real stable base to compare from to throw some of these percentages. But in general, when they have initiated their the global Sourcing programs what they're going after is the very high-volume, more stable commodities like an apple or a carrot or a potato, where there are larger suppliers and larger growing areas that they can make global commitments to from a procurement standpoint manage those high volumes within their new procurement approach. The categories that we continue to stay very engaged in and expect to have even more growth opportunities with these more seasonal and regional commodities like vegetables or some of the fruits that are more difficult to manage from a longer length of haul or are more seasonal or more weather sensitive, don't store very well, those types of things. Jon Langenfeld - Robert W. Baird & Co. Incorporated: So the other part of that was just most of that, decisions that were made, where they made throughout the quarter or were they made early in the quarter late in the quarter? From Wal-Mart's perspective?

The decisions were made throughout the quarter. Some of them -- some of the programs were absent for the majority of the quarter. Some of them will begin to phase out in the next quarter or two. And again, none of this is in stone. We've got some pretty good ideas as to which programs they're probably going to go after, but as they continue to roll it out, we don't know exactly what the timing is of some of the transitions. And as I mentioned earlier, as they go into these global procurements, there's other programs that they're initiating as well on a regional or local basis that we expect to have new opportunities in. So we have lots of growth, hopes for it, but like we said, it became clear this quarter when we looked down the relationship category by category, and what we believe is going to happen. This quarter, it started to feel like we're probably going to lose more than we gained for the next couple of quarters. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Chad, what would be the circumstances by which the personal expenses would grow faster than the net revenue growth? And I'm not talking quarter to quarter, I just mean more of an annualized basis because historically that has not been case. I'm just wondering if there's a scenario out there where that could happen.

It could have been with a sudden ramp up in earnings growth because there are so many different programs including the restricted equity being the main one, where the expense is based on the growth in earnings. So I guess it would be the most likely scenario that I could think of would be when we went from low growth to high growth in a very short period of time.

And our next question comes from the line of Alex Brand with Stephens Inc.

In response to John's question about volume and price, I think you said volume was consistent. Can you give us actually how much pricing changed by month during the quarter and maybe what that is so far in October?

Throughout the quarter, the change was relatively consistent as we've said. So the quarter-over-quarter, year-over-year, it really wasn't anything useful on a month by month basis that we think is worth sharing. And as we come into the month of October, we don't really have the pricing part of it analyzed until we get to the end of the month. So the most relevant metric that we have within the month is kind of the aggregated net revenue where we can track the volume piece of it but until we get a chance to kind of sort out all the different fuel and price components of it, we don't have anything that we can share.

How about some color then in terms of, as your volume is slowing a little bit, do you have a feel for whether that's just the tougher comps or are you hearing from customers some thoughts on peak, not being very strong or maybe it was pulled forward or something like that?

We've tried to analyze that for our ourselves and it does feel in October like overall, demand is maybe slipping a little bit. But when we've looked at the last four or five years it's not uncommon for that to happen. The September, October peak season has moved around a lot and so while demand does appear to be softening a little bit in the beginning part of October, I think the interesting question right now is does it continue to drop or does it stabilize or does it rebound? So yes it does feel like the demand side of things are softening a little bit and comparisons are becoming tougher as well from a volume standpoint.

And our next question comes from the line of the Scott Flower with Macquarie Securities.

Just the couple of things, one is, I was wondering when you look at the implementation of CSA 2010, has that changed, how you do things operationally and how you go to the marketplace, I guess. One of the things I asked that for is there seems like there are some risks in the liability side depending on your processes both for the shipper as well as you as a broker and I'm just trying to get a sense of do you see that as a risk or opportunity in terms of how you're running your business?

And the answer to your question is yes, we see it as both. It's been a topic of conversation in almost every meeting that I've been a part of at least this year and I think with most of our business reviews. And part of the challenge is that there's still a lot of uncertainty around what it will look like but the general thought or expectation is it made might remove some capacity from the marketplace and that it might make kind of the quality control or oversight of making sure that your driver and your carrier are qualified to do business, that there would be some new rules in place. So we are preparing to make certain that we have the right oversight and data collection process to make sure that we're qualifying our capacity to do business and making sure that we're ready to implement whatever sort of rule changes around that, that comes along. Our shippers, our customers are all concerned about what will these final rules look like and what if any impact will it have on the availability of capacity and pricing. And so we're talking with them about what we know about it so far and kind of what we think the likely outcomes of it will be. So while we're all a bit concerned about having new opportunities to be concerned about utilizing a carrier that isn't qualified or isn't properly licensed because of the new rules that come along, the opportunity for us is to be out ahead of that and to use it as an opportunity to provide more services for our customers because we feel like we've got the right platform and the right knowledge to invest in making sure that we're managing capacity the best way possible.

I'm just curious, some of the additional products beyond your core trucking product obviously continued to grow quite smartly and I'm just trying to get a sense of -- is some of that, the idiosyncrasies in specific markets, like your international air freight market or do you think you're actually just getting more of a network effect attraction of those products with your customers as they do build, as you get more capabilities and more reach. I'm just trying to get a sense of a gradation between, is it just some of the market idiosyncrasies this year, is it some benefit to building out that product overtime that you're actually getting incremental market share.

We believe that we're taking market share in all of the Transportation services that we're offering. Maybe not so much with Intermodal, but we're at least holding our own and hopefully over time, we've taken a little share as well but truckload, LTL and international services, for sure. On the international side, what's a little bit challenging is we've made some acquisitions that have now kind of cycled through but the markets declined so radically and now you've got the combination of kind of a healthy rebound in the market and it's the first time we're sort of in a healthy market with the same sort of comparable scale and network of all the businesses that we've purchased or where we've opened offices. So longer-term, yes, we feel like we're gaining traction and we're gaining traction by getting bigger, by getting more capable, by account management and cross-selling practices where we're kind of leveraging our relationships and integrating services, doing those sorts of things that we think are helping us get traction. But if you look at the absolute growth rates on some of the services, probably the majority of that growth this year would be market recoveries as opposed to taking market share.

And our next question comes from the line of Anthony Gallo with Wells Fargo.

My question is around scale. John, it seems like in each of your businesses, scale is an important factor and I guess I'm thinking specifically about Air and Intermodal. Do you think you have the right scale now and maybe could you comment on that on the context of how you think about acquisitions, if you can tie those two together for me?

So we definitely would agree that scale is an advantage for a lot of reasons. It gives you greater market presence. It gives you greater access to utilization. There's just a lot of good things that come with scale. Frankly, one of the core reasons why we've been a growth company for a long time now, and as we aspire to be more and more global all the time, scale becomes more relevant in our technology and some of the international services as well. So it is one of the reasons why we push hard for growth. It's one of the reasons why we're making small acquisitions and building out our network is because we think good things will continue to come with that. We also know from our experience in the industry though that just being big doesn't ensure success. There are lots of companies, lots of rollout, lots of big failures, even when you have a lot of market share, if your operating systems and your data management out of control, you have even bigger, more complicated problems. Size alone does not ensure good service, it helps with price negotiations and it helps with kind of lane density and consolidation and a few other things that are good. So we're going to continue to push for growth and push for scale and we think those are competitive advantages that will continue to become hopefully better and better competitive advantages. But you really have to remain balanced in your discipline and your execution and all those advantages can become disadvantages in a real quick hurry.

And then second question, sourcing gross margin, obviously more stable than Transportation gross margin but can you remind us of that and should that change as this Wal-Mart business changes?

I don't think it will change significantly with any of the business that's rolling out. It does vary quite a bit commodity by commodity based upon seasonality and fluctuations, but I don't believe that the mix of what's leading will be significantly different than what's coming in or how we grow.

But that's not as much driven by refrigerated procurement as it is by what's happening with how you're buying and selling volume.

A lot of the Sourcing services are enabled by and bundled with refrigerated Transportation services but the Sourcing line item is solely the buy/sell margin on that part of the commodity which tends to remain a little bit more consistent. In the Wal-Mart relationship, the Sourcing and the Transportation have been unbundled for quite some time now. So that's why even though we're growing and changing on the Transportation side, as well as the Sourcing side, that the impacts of those will be separate in the financials.

And our next question comes from the line of Nate Brochmann with William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C.: I kind of wanted to follow-up on the previous question, John, if you could talk a little bit more on the headcount. I understand it from the gross standpoint and historical relationships. Obviously, this quarter tends to be a little bit of a higher quarter with a lot of the college grads coming in, but are you kind of where you want to in terms of the overall network right now or is there still a little bit of catch up to just catch up on headcount to hold up service levels where they are?

When we've talked about it before, obviously, we kind of laid out throughout 2009 how we were overstaffed at times because the recession probably surprised all of us. And then throughout late 2009 and throughout 2010, as we sort of grown back into our capabilities, we've mentioned before and still today, that we're sort of towards the high end of the range of a lot of our productivity metrics around shipments per-person and net revenue per person and all the rest of that. But we do feel that where we're at today sustainable. It's not like we're bursting at the seams or that we can't keep up with what we're doing. What's different today than a year ago, though, is that if we grow 15% in the next 12 months, we are going to need to add resources much more proportionally to our growth than we've had to over the last year, just based upon how the network is there. So I would describe our current situation as while we're towards the high end of the ranges, we're pretty comfortable with sustainably of our performance metrics and kind of where the network is at today, but if we do -- if we are able to continue to have double-digit volume growth, we're going to need to add people much more proportionate to that rate than we did throughout 2010. Nathan Brochmann - William Blair & Company L.L.C.: Where you feel the general industry capacity is right now in terms of the environment and kind of where you see that heading here going into the end of the year?

In my prepared comments, we sort of emphasized anxiety around the ability and the willingness for the supply-side to add capacity. And while that's a very real topic, even though the market has tightened, our metrics would say that it's not at the very end of the range of tightness that while it's a lot tighter than it was a year ago, if you look at route guide depth and order cycles and freight moving over another day and some of the other things that might give you kind of a longer range sense of kind of where we are in that tightness. While it got a lot tighter this year, it's not what we would describe as all-time tight capacity or even really towards the high end of that range. The concern really is more around everybody looking at the variables around adding additional capacity and if we all, if the industry and the demand is able to continue to grow, how that's going to play itself out over the next year or two. So in terms of the current environment, the freight is moving, overall service metric seemed kind of more middle-of-the-road or pretty reasonable in terms of some of the other metrics I referenced earlier.

And our next question comes from the line of Ed Wolfe with Wolfe Trahan.

John, it's a long time ago already and you are speaking quick, but did I hear you correctly about through October, thus far, you said -- I thought you said net revenues for Transportation were up mid double digits and gross yields were up year-over-year, did I hear that correctly?

It was a prepared remark, Ed, and what it was is that what we're seeing in Transportation is a slightly slower growth rate in our volume but our margin comparisons are getting easier and our margins are improved versus a year ago. So that was specific to the Transportation business. The net revenue comment was overall. So for our companywide or enterprise net revenue activity, for all services per business day, there is business day variance in October as well. But that we're showing double-digit growth in the mid-teens on that metric through October.

And did I hear it right also on the Transportation yields that year-over-year, they're positive?

Margins are slightly improved versus a year ago thus far through October, yes.

And what's the day discrepancy, you said to operating day?

Was it one more or one less?

There is one less in October and one less for the quarter as a whole.

So that can be as much as a 5% variance within the month and we talk a lot about does it -- what's the most relevant measurement around business days or not and it depends upon how many Mondays and Fridays there are in the month. And that's why it kind of cautions around, this is sort of a preliminary number. It looks better than the third quarter but it's early and there's a lot of things that can affect it.

Chad, can you talk a little bit about your compensation plans? About a year ago, you started talking about the 2006 and the 2009 plan and that they kind of both vest at the same time and it's a drag on earnings. Can you talk about how much of that is now been expensed, in terms of the 2006 plan, what's left and what the drag has been this year in earnings and how that looks in 2011?

The 2006 grant, which actually happened at the end of 2005, started vesting in 2006. This is the last year it can vest. So it'll be -- it probably won't vest 100% of the award but it'll probably be close to that, just based on our last five years earnings growth so that is baked into this. So that was -- I'm trying to think of what it is as the total percentage of the shares that are available to vest right now and I don't know how much of that would go away. But that will definitely be a reduction in the number of shares available to vest based on that. In addition to that though, we also have annual grants that happened so we've been adding shares since the 2009 grants as well.

Am I thinking it wrong that there's less drag on the compensation from the grants next year relative to this year?

There will be less next year relative to this year, yes. It might not be as drastic as you're thinking because you have to remember annual grants that happen, those three year grant rotation did cause some variances in the past.

I don't think it was drastic this year either. I mean it's not massive anyway you look at it.

This year is similar to last year where two of those larger grants were available to vest. And that will end this year.

Contractual rates versus spot markets, when you look at your truckload rates averaging up 8% in the quarter, how much of that is contractual and how much of that is spot and directionally how are those two markets moving in terms of where rates are going from here?

That's a question that we struggled with over the years because of the definitions, meaning different things to different people. But I think the best metrics that we have around that as we have about half of our business that are more integrated relationships with the larger top, four, 500 customers that generally have more of a year-long pricing commitment and more of a contractual relationship. The other 30,000 plus customers that tend to be smaller, more traction, although pricing is much more fluid on it. Now the volumes can vary across those but we generally sort of say it starts off kind of balanced around half and half and then based upon market conditions, we may be getting more volume under contracted rates or more volumes through the spot rates depending upon what market conditions are and what choices the shippers are making. So the challenge is, just by definition, obviously, the spot rates are moving quicker than the contracted rates. And so when you look at year-over-year comparisons, the spot rates are moving throughout the third quarter whereas most of the contracted rates that apply during the third quarter were in place from kind of the beginning of the year for most of them. So it's a mixture of literally tens of thousands of different pricing changes that it's hard to generalize about.

But when you say a new customer today, who just comes off contract, say, versus a new spot customer, are the contractual rates directionally going up more from where they were a year ago or the spot rates from a year-ago?

Generally the spot markets would be moving up. however the contractual pricing has a lot to do with how the shipper handles the year-ago and the depth of the recession. If they went very low on their pricing and we're experiencing service failures early in the year, it might take, in some instances, for some lanes, for some shippers, a double-digit contractual price increase to get the capacity commitment up to where you want it to be. So it varies a lot lane by lane but in general, obviously, the contractual stuff probably didn't drop quite as much as the spot and now it's probably not going up quite as much as the spot.

And our next question comes from the line of Justin Yagerman with Deutsche Bank.

It's Rob Salmon on for Justin. When I'm thinking about the pricing to the customers on the contractual piece of the business, you guys indicated some longer-term concerns about capacity looking out to the CSA 2010, how do you think about pricing that business to your customers right now?

Because of the uncertainties around when it will finalize and what the impact if any will actually be on the capacity, it's really been more of kind of contingency planning, trying to make our shippers aware of the fact that this is out there and it could have a significant impact. I would say it's sort of one of all the variables that we would look out in any longer-term contractual pricing arrangement, when we're factoring in what we think the appropriate price would be for the next six months or 12 months. We're going to be talking with the carriers, talking what the type of freight it is, how predictable it is. Whether they're going to be -- what their longer range expectations are and it kind of comes down to more in the capacity that we're planning to use to fulfill those services is already trying to price it in or expecting that it's going to have a negative impact on them, so it really would come down to more has the carrier community already baked in some expectation of price increase in their pricing decisions for that. My guess would be no, not a lot but it's a lot of awareness and expectation raising that if it does come through with fairly strict requirements and take-out 5% or 6% of the capacity that probably the whole marketplace is going to react pretty quickly.

Is that the type of thing where you're putting clauses in contracts? Or you would just revisit that contract and give it kind of the 45-day typical out if it did come to fruition where you lose 45 or 10% of the overall capacity?

We would probably handle that like any other radical market condition and just address it when it comes. At this point, there's really not too much specific that I think would be meaningful to write in there. It's really more of -- we talk a lot about how at the end of day so much of this is relationship oriented and if it does come through and cause a significant price ripple through the industry that your large relationships if you're forced to take a look at pricing in them that they're not upset with you for that because it's surprising or disappointing to them. Like any fuel surcharge or any other weather thing or whatever, it's never simple, it's never easy but the more everybody's prepared for it and understands it, the better off we're all going to be

On the capacity side, what are you hearing from your smaller and medium-sized carriers that you're transacting and doing business with? And can you also give us a sense of what the volume growth in quick pay was throughout the quarter?

The way we look at quick pay is in addition to growing with the volume of the business, the frequency of quick pay went from the mid-30s to close to 40% of the total truckload payables going out, so there was a significant increase in the frequency as well.

And how much of the overall truck net revenue does quick pay currently make up?

A very small percentage.

And our next question comes from the line of Matt Brooklier with Piper Jaffray.

I wanted to focus a little bit more on these Intermodal containers that you guys have started to lease. I guess my question is for C.H. to grow its Intermodal business going forward, will you have to continuously ramp up leases on your Intermodal containers or do you think that, and granted capacity very tight and volumes growing in a very strong rate, do you think that as Intermodal market volume moderates, more capacity will become available and you won't necessarily need to get into kind of a locked capacity type situation within the Intermodal business?

I don't think it's anything we'll have to do to grow our business as an IMC, as a true Intermodal Marketing Company that is working with the available capacity in the marketplace and the shippers that have those needs. We can continue to grow our business and take advantage of investments that are being made in free running pool and playing in the markets just like we have for the majority of the last 30 years. It's really more around, is it an opportunity to add new dimension than a new growth capability. If you think about it, imagine that there are several free running pools of equipment out there where you're free to take equipment out and pay a daily per diem as long as you're using that equipment and then you have to return it to one of those trailer pools. When equipment gets very tight and those free running trailer pools are empty, you can't ship any more incremental Intermodal freight for your shippers. If you take the two-year commitment on it, the advantage is that you know you're going to have access to that equipment. The risk is that you're going to pay for all the repositioning and that you're going to pay for it at any point during the cycle that you don't have freight uses for that equipment, you're still paying the daily per diem under the long-term lease rate. So really what it kind of comes down to is looking at your Intermodal participation and what sort of dedicated commitments do you have and where do you feel comfortable to have a high enough expected usage for the box that you can commit to it for a year or in this case, two years for 300 of them and what we'll continue to do is look at our business, look at our growth opportunities, talk to our customers and balance those to where we see appropriate. So the only other variable in that is the preferences in pricing across the different railroads. And as I mentioned earlier, it's been more than a decade now that the BNSF has had more of a preference for dedicated boxes to run on their railroads from a pricing standpoint. And so part of the other variables in the equations if we choose to do more of this will be how the railroads offer you pricing and how they make equipment and pricing capacity access to their network available to you.

Does this strategically change how C.H. looks at potential acquisitions? I mean in the past, you guys have been, or past acquisitions with Transportation business has been all non-asset if I'm remembering correctly. On a go forward basis does this new dimension, as you put it, open up the doors to doing different types of transport acquisitions going forward.

I don't think it would really change our acquisition filter. And really, what probably drives it is volume. The bigger you get, and somebody asked about scale earlier that the bigger we get, we can make contractual commitments to truckload today that we couldn't make 10 or 15 years ago because we have enough volume that we're comfortable that we can execute on that. As we get bigger in international and as we get bigger in all of our services, we can make commitments that we couldn't make when we were smaller. So part of the scale advantage is that the larger you are, the easier it is to make a commitment like this on a smaller portion of your business. So we want to grow in Intermodal we've always been committed to it and we will continue to grow in it. And as we get larger, it will change the proportion of capacity that you could make a long-term commitment to without risking the fluctuations in the market, causing a lot of economic sway in your numbers. So that's just true in all of our services and I don't think it would necessarily impact how we would evaluate an acquisition.

And our final question comes from the line of David Campbell with Thompson, Davis & Company. David Campbell - Thompson Davis & Co: Sea freight business is really strong in the quarter, anything unusual there? Was it just new accounts and how did all that happen? Do you have any ideas on your growth there?

I would say that a lot of it is just the fact that sea freight was really hit hard a year ago. That those volumes were really, really depressed and we have felt like we've been growing our capabilities there and building good relationships with the steamship lines. So as the market recovered, we felt like we were in a good position to take advantage of the opportunities in the marketplace. We do have some nice new accounts that we're proud of, but a lot of the growth came from increased volume with existing customers just from a rebound in market conditions.

Unfortunately, we ran out of time so that will have to be our last question. We're sorry we couldn't get to all of you today. Thank you for participating in our Third Quarter 2010 Conference Call. I want to remind you that 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 4371919#. The replay will be available at approximately 7:00 p.m. Eastern Time today. If you have additional questions, please call me, Angie Freeman, at (952) 937-7847. Thank you.