CH Robinson Worldwide Q2 2010 Earnings Call Transcript

| About: C.H. Robinson (CHRW)

CH Robinson Worldwide (NASDAQ:CHRW)

Q2 2010 Earnings Call

July 27, 2010 5:00 pm ET

Executives

Angela Freeman - Director of Investor Relations

Chad Lindbloom - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John Wiehoff - Chairman, Chief Executive Officer and President

Analysts

Thomas Albrecht - BB&T Capital Markets

Anthony Gallo - Wells Fargo

Justin Yagerman - Deutsche Bank AG

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

David Campbell - Thompson Davis & Co

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Edward Wolfe - Bear Stearns

Varun Gokarn

Chris Wetherbee - FBR Capital Markets & Co.

Nathan Brochmann - William Blair & Company L.L.C.

Scott Flower - Macquarie Research

Matthew Brooklier - Piper Jaffray Companies

Alexander Brand - Stephens Inc.

Adam Longson - Morgan Stanley

Operator

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson's Second 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.

Angela Freeman

Thank you. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, Senior Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our second quarter performance, and we will follow that with a question-and-answer session.

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

With that, I'll turn it over to John.

John Wiehoff

Thank you, Angie, and thanks to everybody who's listening in on the call. I'm going to start similar to past calls, by just highlighting a few of the key financial results and metrics that we think are more important. For the second quarter ended June 30, 2010, our total revenues increased 27.4% to $2.5 billion. Net revenues increased to 3.7% to $365 million.

Our income from operations increased 4.4% to $156 million and net income increased 5.4% to $97 million. Fully diluted EPS increased 9.3% to $0.59 a share.

The same numbers year-to-date results for the period ended June 30, 2009, total revenues increased 25.3% to $4.5 billion. Net revenues increased 1% to $697 million. Income from operations increased 1.8% to $292 million and net income increased 2% to $181 million. Year-to-date, fully diluted EPS increased 4.8% to $1.09 per share.

In addition to those overall financial results, the press release gives more detailed growth percentages by each of the various service offerings.

So our results for the second quarter of 2010 reflected the continuation of most of the business trends that we discussed in our first quarter conference call. We continued to experience strong overall gross revenue growth, driven primarily by significant volume increases in most all of our service offerings.

Gross margin compression compared to a year ago resulted in net revenue growth for the quarter that was much more modest. As a result, for the second quarter of 2010, while we had a 27% increase in total revenues, our net income for the quarter increased 5%.

Our Transportation revenue increase of over 32% was primarily driven by transaction volume increases in services compared to last year. Fuel and price increases also contributed to the overall revenue growth.

While our growth in transactions compared to last year was helped by the overall improvement in industry demand compared to last year's low points from the recession, we do believe that we were able to continue to take market share in most all of our service offerings, and we felt good about our sales and execution during the quarter.

With regards to gross margins, total Transportation gross margins for the second quarter of 2010 were 15.8%. Total Transportation gross margins for the second quarter last year were 20.6%. Over the past 10 years, second quarter gross margins for Transportation have ranged from a low of 15.4% to a high of 20.6%, which was last year. Our total Transportation gross margin compression of almost five percentage points resulted in net revenue and earnings growth that was much less than our total revenue growth.

As we've discussed many times over the past couple of years, we know there are many factors that contribute to the gross margin fluctuations but the primary driver of our margin fluctuations is the timing difference of price adjustments across our customers and capacity providers. The demand for Transportation services increased significantly compared to the previous year. Our total cost of purchased Transportation generally increases faster than our pricing to our customers when demand is increasing and the overall market relationship is becoming much tighter.

Gross margin fluctuations the past couple of years have had a significant impact on our results. We've tried to emphasize in our past comments, that based upon our approach to the marketplace and how we buy, sell and contract for services, that we understand and manage these margin fluctuations as part of our business model. While the margin compression this quarter compared to last year was pretty meaningful, we think our approach is consistent and that it continues to help us build and grow long-term relationships with both customers and capacity providers.

While we know that we'll continue to have challenging gross margin comparisons going into the third quarter, we do believe that our approach to pricing is working and adjusting to the market very similar to past economic cycles, with the magnitude of some fluctuations increasing due to uniquely large variations in freight demand and volatility in fuel prices.

Moving on to our Sourcing business. Sourcing business revenues grew 11.5%, primarily from the acquisition of Rosemont Farms. Sourcing gross margins expanded compared to a year ago, primarily due to the mix of products sold.

T-Chek, our Information Services business were our primary source of revenues driven by refueling transactions, showed strong revenue growth of 22% again this quarter. The increased level of shipment activity in the market drove more transactions for the T-Chek's customers. T-Chek's revenue growth was driven by increased transactions and an increase in the average transaction fee. Many transaction fees are based in part upon the price of fuel which increased compared to last year.

Moving on to operating expenses then. Our total number of employees at the end of the second quarter was 7,466. That represents an increase of 116 employees during the second quarter. The increased volume and freight activity that we experienced did drive the need for us to begin more aggressive hiring during the second quarter of 2010.

Based upon our internal scorecards and metrics, our productivity levels are pretty high across our network. We have a lot of good things in the pipeline that we believe will help us sustain productivity improvement as a competitive advantage. However, if we are successful in continuing to grow our volumes, we will likely need to continue to grow our workforce to service our customers.

In summary, we were very busy during the second quarter of 2010. The Transportation markets were much tighter than a year ago. We continue to take what we think is a healthy, longer-term approach to building relationships and adjusting pricing to market conditions based upon each of those unique relationship commitments that are managed by our decentralized network.

This approach to the market does result in gross margin fluctuations. We do continue to experience meaningful gross margin fluctuation, but believe that our business model and approach is as relevant as ever in the market, and we continue to believe that our long-term growth target to average 15% growth in our revenue and earnings is achievable.

Our people and network are working hard. We feel good about our team and the current service levels, as well as our ability to hire and train additional team members on a variable approach as our growth and activity levels require.

That concludes my prepared comments. And with that, I will turn it over to Chad, who has some as well.

Chad Lindbloom

Thanks, John. I'm going to give some comments on our SG&A expenses, balance sheet and cash flows. Our total SG&A expenses increased by 8% to $54 million compared to the second quarter of 2009. The bulk of this increase was driven by the expenses of acquired companies, including Walker, which closed during June of 2009, and the acquisitions of ITC and Rosemont, which closed during the second half of 2009.

In addition to those, operating expenses at our other categories of expenses had increased or decreased given things that happened during the respective quarters. Our balance sheet remains strong with cash and investments of $215 million.

Our investment in working capital increased as is normal in times of increasing volumes and rates. We had an increase in accounts receivable of $152 million during the quarter, offset partially by an increase in accounts payable of $54 million.

Our accounts payable didn't increase at the same rate as our accounts receivable, primarily due to increased usage of our Quick Pay and advanced programs for carriers.

Moving on to CapEx. Our CapEx for the quarter including software was $8.4 million. In addition to our continued investment in our international forwarding system, we have begun to develop a new transaction processing system for T-Chek and other development projects to support the long-term growth of our business. We now believe our total CapEx, including software will be approximately $30 million for 2010.

We have discussed our strategy in the past for share repurchases as a variable way to return excess capital to our shareholders. Our capital strategy has remained consistent. With the increased investment in working capital, we reduced our share repurchase activity during the quarter. We repurchased 358,800 shares at an average price of $58.36.

This concludes our prepared remarks, and we will begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jon Langenfeld with Robert W. Baird.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

When you think about to how stretched the local offices are in terms of personnel, can you talk a little bit about that? Your volumes are way up 6% and 20%, your growth product per employee measured booked the -- still be very high and yet you've only had it at about 2% of the employee base. So can you talk a little bit about how you're adjusting all of that volume growth in what is a more challenging environment?

John Wiehoff

Yes. So I guess a couple of upfront reminders when we talk about this, is we have the close to 250 offices, and the productivity and staffing levels vary quite a bit across the offices. So while we talk about the company as a whole, just remember that they are the averages and there's quite a bit of variance across it. When you turn the clock back a year and a half ago to the beginning of 2009 and the freight demand had dropped off so significantly, we talked at that point in time about while we did make some staffing corrections and tightened up the network a little bit, that we still had plenty of people and plenty of capacity because we had been staffing up in expectation of continued growth. So as we went through 2009 and into the first part of 2010, a lot of the growth has just been absorbed by the current levels of staffing becoming more productive. As we've moved into this year, we have seen a lot of the different productivity metrics move up to the high end of the range. And that's why during the second quarter, we began hiring. So the message I guess, that we're trying to convey is that, it's not like the places bursting at the seams, or that we can't, so don't believe that we can't sustain the levels that we're at. But as we go forward, we're going to need to add people to grow the business.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then Chad, can you remind us, on the restricted stock program, are we vesting to factor the benefits of the '06 from the '09 plan and does '06 plan laps at the end of this year regardless of whether or not you reach 100%?

Chad Lindbloom

Yes, the plan that started vesting in '06, this would be its last year. But we do, do an annual restricted stock plan or grants. It's just that there was a larger grant in '06 and in '09. So there are also 2007, '08 and 2010 grants that are also vesting.

Operator

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

Varun Gokarn

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

John Wiehoff

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

Varun Gokarn

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

John Wiehoff

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

Operator

Our next question is from the line of Ed Wolfe with Wolfe Trahan.

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

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

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

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

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

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

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

Rates were down 3%?

John Wiehoff

It varies for full quarter.

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

We had hit an inflection point and rates were starting to grow is what we said on the last call.

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

Are you just asking what our total truck loads rates were to our customers during the full quarter or the last?

Edward Wolfe - Bear Stearns

Yes, during the second quarter.

Chad Lindbloom

I'm sorry, that's on the release.

Edward Wolfe - Bear Stearns

What's that number?

Chad Lindbloom

5%.

Edward Wolfe - Bear Stearns

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

Chad Lindbloom

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

Operator

Our next question is from the line of Scott Flower with Macquarie Securities. [Macquarie Research]

Scott Flower - Macquarie Research

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

John Wiehoff

Sure. So most of the productivity initiatives are intertwined with the technology in the operating system, and it really kind of comes down to how we share freight across our network and how many transactions per day an individual can reasonably accomplish. There would be pricing tools and other things that would support those initiatives that would allow us to figure out pricing pass-through and make commitment sooner. There is a lot of EDI and Internet connectivity things that would hopefully change manual processes into automated process. So the big picture is, that we would be, we have a pipeline or a roadmap of ideas and initiatives to try to make it, so that hopefully, all of our employees can be more proactive, serve their customers faster and do all the rest of that. And I guess the relevance of that, is when we look at sort of the productivity measures being at the high end of the range, we hope to keep redefining the range to the high side, but we know over time that at some point, you just have to add support and add people to the team in order to get through the next couple of quarters, and that's where we're at.

Scott Flower - Macquarie Research

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

John Wiehoff

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

Scott Flower - Macquarie Research

What percentage is LTL of your Truck or Transportation business currently?

Chad Lindbloom

It's about 14% to 15% of total truck...

Chad Lindbloom

Net to second quarter, net revenue...

John Wiehoff

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

Operator

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

Adam Longson - Morgan Stanley

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

John Wiehoff

The reduction in branches had to do with, I think, in two different cases, two branches consolidating and becoming one branch. [indiscernible] headcount, our branch size varies from two people to 600, so you can't really read into the branch number and headcount. The headcount adds are just branches who are busy adding having that adds to their people, more so than the fact that there is a different number of branches.

Adam Longson - Morgan Stanley

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

John Wiehoff

That gets really tough to assess, because we price on such a account specific decentralized basis. In many accounts, even during more stable times, we may have lots of lanes that we make money on and other lanes that we don't make money on, and the shipper understands that. And in aggregate, it's a healthy relationship for both of us. So it would be hard or misleading I think to give a percentage of the business that was underpriced. The way we think about it more is that, for each of our 30-some-thousand accounts, there are increasing cost in almost every source of capacity that we get. Some of that cost increase can flow through pretty quickly through transactional pricing where you'll just quote the load each day and you'll be able to pass it along. Wherever there is any sort of contractual or a longer-term price commitment, we generally see margins squeezed before we go in and reprice. And when that margin squeeze starts to happen, it will generally happen a lot more severe in one lane versus the next, and we'll start repricing it lane by lane or region by region. So again, I think it's probably frustrating to hear that answer from an analytical standpoint, but we actually think that's a real strength of our business model, that those pricing assessments and how the routing is done is handled on a very decentralized basis.

Adam Longson - Morgan Stanley

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

John Wiehoff

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

Operator

Our next question is from the line of Nate Brochmann with William Blair & Co.

Nathan Brochmann - William Blair & Company L.L.C.

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

John Wiehoff

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

Nathan Brochmann - William Blair & Company L.L.C.

In terms of numbers that you're seeing though from the existing versus the new?

John Wiehoff

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

Nathan Brochmann - William Blair & Company L.L.C.

And then second question is related to some of the other businesses. In other modes of Transportation you saw kind of a nice pick up across the board in Intermodal, Air and Ocean. Obviously, part of that is the industry, but was wondering if there was anything different that you saw in those markets from your perspective?

John Wiehoff

Each of them probably has some of their own nuances that you're probably familiar with. The Intermodal business, we felt very good for the last several years about our momentum and our service capability in that. We've just had some margin compression that is still challenging because the capacity constraints are very severe, at least, in the Intermodal lanes and portions that we play in, because we appear third-party and rely on pool, or publicly available equipment, we do have capacity constraints there that do continue to put pressures on our margin but we feel very good about our service capabilities and our salesmanship in that we can execute on Intermodal freight, as well as anybody else. Our Ocean business got hit pretty hard a year ago. That industry was probably down, greater than any other Transportation mode or service. So we feel good momentum again there, but there's some pretty easy comparisons from a growth standpoint. Our outsourcing-management-fee-type business has been strong for the last couple of years as shippers continue to look pretty aggressively for cost saving and outsourcing and variable cost-type ideas, so that miscellaneous category of miscellaneous revenues and management fees continues to show nice growth for us as well. I would say that kind of aggregate message of all of that is, we have been selling a broader Transportation, account management, outsourced solution to try to help our customers with whatever mode or approach to services that works for them, and it continues to feel real good to us that we can help in a variety of ways. And whether it's truck and rail trade-offs or managing different routing things, or helping consolidate or build loads differently, it feels like there is more and more ways that we can use our people and our processes to try to add value.

Operator

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

Thomas Wadewitz - JP Morgan Chase & Co

I apologize if I'm overlapping with something you've already covered here, there was just, I guess an overlapping with another conference call. Anyways, in terms of gross margin in the Transportation segment, do you think you're pretty close to a bottom here? It seems like your comments on July net revenue would indicate that, that might be the case? Or do you actually think gross margin improves a little bit in third quarter versus second?

John Wiehoff

No, from a margin percentage standpoint, it gets so hard to predict just because of fuel prices and mix and fluctuation and all the rest of that. I guess the statement that we made in the prepared comments is that we went from, in the last 10 years, the high end of the range in Transportation to very near the low end of the range. So we know that comparison from the third quarter a year ago was back up towards that high end of the range. Where we go from here? There are so many variables in it. It's hard to predict. But what we shared through July is basically that the business trends that we're talking about have continued. We've continued to see high demand and volume growth, and we've continued to see margin compression compared to a year ago that results in more modest net revenue growth, but that the net revenue growth compared to the previous years is improving a little bit.

Thomas Wadewitz - JP Morgan Chase & Co

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

Chad Lindbloom

Compared to a year ago?

Thomas Wadewitz - JP Morgan Chase & Co

Yes, on a year-over-year basis.

Chad Lindbloom

10%, 11%, 16%.

John Wiehoff

And this would just be for Truckload. Correct, Chad?

Chad Lindbloom

Yes, this is North American Truckload, which is the same comparable it was for the rates of the customer. Again, that's how you get to the number for the full quarter that was given in the earnings release.

Thomas Wadewitz - JP Morgan Chase & Co

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

John Wiehoff

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

Thomas Wadewitz - JP Morgan Chase & Co

A quick thought on gross margin and Sourcing, that seems to show some nice improvement, and then I'll pass it along.

John Wiehoff

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

Operator

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

Chris Wetherbee - FBR Capital Markets & Co.

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

John Wiehoff

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

Chad Lindbloom

But we track net revenue day by day. We do not track pricing day by day.

Chris Wetherbee - FBR Capital Markets & Co.

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

Chad Lindbloom

Total net revenues, correct.

John Wiehoff

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

Chris Wetherbee - FBR Capital Markets & Co.

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

Chad Lindbloom

I think we're going to stick with the total net revenues up 7%, and that's on a per-day basis. The number of business days are different in July, but they're the same for the full quarter.

Chris Wetherbee - FBR Capital Markets & Co.

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

John Wiehoff

Yes, and there would always be. So I think we've talked about this on past calls, but at least from our vantage point into the marketplace, the larger carriers typically have the more significant dedicated head haul arrangements with larger shippers. So it's common to have trailer pools. And they have, in general, a little bit different business model where the need to return the equipment and service the head haul freight for the more dedicated customers is more important. So their pricing on a lot of the capacity of theirs that we would have access to would be the traditional backhaul capacity, and that's where you'll see the greater fluctuations in pricing in the market based upon what's available or what's not. Because if that capacity is committed to going, running round trips and it has to return, and it's going to return today whether it's empty or not, they're going to be much more aggressive on pricing when freight is loose in the market. When it tightens up like this, the probability of finding their own freight or being able to do other things would go up quite a bit. A lot of the medium and small carriers that we work with that have much less of a fixed route guide or lanes that they're going to run into, they'll adapt to the market quite a bit more with the absence of that head haul freight. So we do see a much greater swing or a much greater variation in price and capacity availability between big and small carriers when market conditions change like this.

Chris Wetherbee - FBR Capital Markets & Co.

One last one on the Ocean side, clearly, and I think they're coming up from a bit of a low number last year. When you think about capacity in general from an Ocean perspective, does it seem fairly tight at this point? Or just a little bit of color if you could on that segment.

John Wiehoff

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

Operator

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

Ken Hoexter - BofA Merrill Lynch

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

John Wiehoff

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

Ken Hoexter - BofA Merrill Lynch

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

John Wiehoff

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

Operator

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

Justin Yagerman - Deutsche Bank AG

It sounds like spreads began to come in a bit sequentially as you move through the quarter. I was hoping you could give some color, I guess, as to the actual gross margin by month movement, maybe what it's tracking at in July, and then how you would incorporate peak season surcharges into any kind of pricing discussions that you guys are having as you look out to third quarter and fourth quarter.

Chad Lindbloom

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

Justin Yagerman - Deutsche Bank AG

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

Chad Lindbloom

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

Justin Yagerman - Deutsche Bank AG

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

Chad Lindbloom

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

John Wiehoff

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

Operator

Our next question is from the line of Alex Brand with Stephens Inc.

Alexander Brand - Stephens Inc.

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

John Wiehoff

A big part of it is more of a comparison thing, that we're comparing to a year ago. Our gross margin for the quarter did not fluctuate out of the 10-year range. So a lot of it is just the comparison standpoint from a year ago, where we had the recession hitting us hard with the volume declines. So the way we think about it is you have this range of margin or you have this range of activity and you're going to fluctuate within it based upon the market conditions. And there are certainly parts of the freight that we're moving today that need to be repriced that we're working on. And at some point, hopefully, the market will allow us to catch up on that. But probably, the more relevant thing is just comparison stabilizing as we get further through the economic cycle.

Alexander Brand - Stephens Inc.

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

John Wiehoff

Yes, I think that's...

Chad Lindbloom

That's true in the industry as a whole, not just us.

John Wiehoff

Right.

Alexander Brand - Stephens Inc.

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

John Wiehoff

No. We don't get great visibility to shipment expectations for the second half of the year. I would sort of second, what has been widely publicized in a lot of the media, there seems to be lots of anxiety and lots of uncertainty as to where it sorts out. Everybody is certainly aware, the larger customers that we interact with, everybody is certainly aware that there could be some real capacity shortages if there's a peak season. And because of all the industry things that we've talked about earlier and lots of planning and making certain that if market conditions get really nasty that they're in line for equipment and that we're ready to service them in the fall. And then in the next discussion, it's all about double dip. And will things gets soft again? And will it fall apart? And so it feels like kind of a more polarized perspective. And to us, the way we've always tried to approach it is to be flexible and be ready for whatever the market place is going to give to us. So we're certainly planning for the customers that we know we need to take care of, but also talking about tiered rate structures and flexibility and trying to make sure that we're all ready for whatever the market might deal to us in the second half of the year.

Operator

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

Anthony Gallo - Wells Fargo

John, since you kind of touched on it, would you mind putting this period in perspective, looking back over the last 10 years. We know that '08, '09 to '10, we've seen some pretty wild swings in volume. But could you just put some perspective on how tight things are now versus prior periods and just a little color?

John Wiehoff

Sure. So I think we commented several times at the end of '08 and early '09 that the industry demand drop-off was greater than anything that we had probably seen since deregulation. That 15%, 18% drops in industry demand, and the market was unbelievably loose. And so for the first half of last year, that's when we were generating these gross margin percentages, that we're at the high end of the range for the last 10 years. I'm guessing maybe even much longer than that if we went back further. I don't have that in front of me, but it might be for the last 20 years or 25 years. So right now we're comparing to the high end of the range, and the market is tightening very aggressively. We've talked internally about over the last several months, it is tightening at a pretty fast pace compared to what we've seen in the past. But if you look at other metrics today around kind of route guide depth or kind of looking at our load boards around supply and demand, I think what most of our Transportation people would tell you is that the market today is not as tight as it's ever been in the last 10 or 20 years. It's getting there. It's tightening up very fast. But that if you look at service failures and route guide depth and some of those other things, it sure could get a lot tighter going forward. So it feels tight. It is tightening fast. It's a lot tighter than last year. But from a 10-, 20-year perspective, not at an all-time high.

Anthony Gallo - Wells Fargo

Just a little housekeeping around the Sourcing business. Would there be anything unique about seasonality in the second half? I know you've got some acquisitions that are lapping, just a little help on that, please.

John Wiehoff

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

Operator

Our next question is from the line of David Campbell with Thompson, Davis & Company.

David Campbell - Thompson Davis & Co

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

Chad Lindbloom

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

David Campbell - Thompson Davis & Co

So really hard for you to tell how the trends differ between the two services...

Chad Lindbloom

Yes, because we...

David Campbell - Thompson Davis & Co

In terms of bottom line?

Chad Lindbloom

At least with our systems, it's impossible to scrub down to a comparable number in the two periods.

John Wiehoff

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

Operator

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

Matthew Brooklier - Piper Jaffray Companies

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

John Wiehoff

I think it varies a little bit mode by mode. In Intermodal, for example, where capacity is very tight, there are things -- you manage equipment differently, and you keep it under your control. And we may be doing other things to try to make certain that we gain access to as much capacity as we need in a real tight condition. On the Truckload side, we're always attempting to match our capacity commitments with the customers. So that would translate into more business reviews and more communications with customers to make sure that we do understand what the volume commitments might be going forward and trying to make sure that we have good matches there. Similarly, on the Ocean side, it comes down to talking about space in the fall with the providers and kind of blocking it out. So yes, when capacity gets tight, our carrier relationship conversations will change, and the data we put in there will be different. But it's hard to generalize as to exactly what we would do differently because the market is tight.

Matthew Brooklier - Piper Jaffray Companies

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

John Wiehoff

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

Matthew Brooklier - Piper Jaffray Companies

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

John Wiehoff

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

Operator

Our final question is from the line of Tom Albrecht with BB&T.

Thomas Albrecht - BB&T Capital Markets

Can you provide some commentary on Flatbed, whether that's volumes or rates? Because that seems to be the one space that is backed off from volumes we saw in April and early May. And then secondly, can you just address whether it's more competitive today to get loads from the shipping community, or if you've seen any change relative to your experience in the business?

Chad Lindbloom

Okay, on the Flatbed questions, we are seeing an increase in gross revenue per transaction. So we are, on average, charging significantly more to our customers. But our gross margin percentage like the rest of Truck is down, so our cost to capacity is increasing even faster. We are experiencing some modest -- or actually, our total volumes in Flatbed are roughly flat compared to last year's second quarter.

John Wiehoff

I do think the Flatbed portion of the Truckload industry has not seen quite the same aggressive tightening that the dry van or refrigerated part has. But we're relatively small in that compared to the other numbers.

Thomas Albrecht - BB&T Capital Markets

I was thinking it was about 6% of your shipments, but -- so flat year-over-year. And then what about just in terms of the other question, the competitive element in getting business from the shipping community. There's a number of midsized brokers compared to five or 10 years ago, but they don't have everything that you have, and I'm just wondering if you could address that.

John Wiehoff

Yes. When we talk about kind of competitiveness and ultimately, I guess, that would translate into either more difficult getting volume growth or margin compression. And because our margins fluctuate for so many other reasons and because during this period of time there is lots of volume available in the marketplace, it gets really hard to assess the competitive impact on a quarter-by-quarter basis. What we have felt in the past and would generally feel to be true today is that there is more competition. There is more people taking a third-party approach. A lot of the carriers are pursuing it more aggressively. But we also believe that there's a lot of customers and a lot of people in the industry who understand the service capability and the value of the approach, such that the total portion of Transportation, especially on the Truckload side that is going through a third party or a broker is probably increasing pretty significantly. So relatively, if the third-party model is taking share and we're doing a better job as an industry of proving that our model is valid, while there may be more brokers, that doesn't necessarily mean that it's more competitive from a relative standpoint. So we do feel like what we are as an industry as more accepted and more prevalent today, and there are more of them. And it certainly will continue to get more competitive. But it has been a very competitive industry for the last couple of decades. Pretty much every shipment that we do is subject to multiple bids or lots of different things that have always been very competitive. So it's certainly a factor, but to us, that's more of a longer-term issue that we've just got to continue to monitor and make sure that our productivity and people training and systems and all the rest of that stays ahead as an industry leader.

Thomas Albrecht - BB&T Capital Markets

And on the Flatbed, one more time. So flat year-over-year. But I mean sequentially, did you see a leveling off over the last three, four months even if you look back into the first quarter?

Chad Lindbloom

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

John Wiehoff

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

Angela Freeman

Unfortunately, we're out of time, so that will have to be our last question. We apologize if we couldn't get to all of your questions today. Thank you for participating in our second quarter 2010 conference call. I want to remind 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 4325612#. The replay will be available at approximately 7:00 p.m. Eastern Time tonight. If you have additional questions, please call me, Angie Freeman, at (952) 937-7847. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!