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CH Robinson Worldwide (NASDAQ:CHRW)

Q1 2011 Earnings Call

April 26, 2011 5:00 pm ET

Executives

Angela Freeman - Vice President of Investor Relations and Public Affairs

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

John Wiehoff - Chairman, Chief Executive Officer and President

Analysts

John Barnes - RBC Capital Markets, LLC

William Greene - Morgan Stanley

Justin Yagerman - Deutsche Bank AG

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

Scott Malat - Goldman Sachs Group Inc.

Benjamin Hartford - Robert W. Baird & Co. Incorporated

Christopher Ceraso - Crédit Suisse AG

Edward Wolfe - Bear Stearns

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

Scott Flower - Macquarie Research

Alexander Brand - SunTrust Robinson Humphrey, Inc.

Matthew Brooklier - Piper Jaffray Companies

Operator

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson First Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, April 26, 2011. Now I'd 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 first 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 for taking the time to listen to our first quarter conference call. I'd like to start by highlighting just a few of the key financial results on the press release that we sent out a little while ago.

For our first quarter ended March 31, 2011, our total revenues increased 14% to $2.4 billion. Our net revenues increased 17.4% to $390 million. Our operating income increased 15.2% to $157 million. Net income increased 15.5% to $97 million, and fully diluted EPS increased 18% to $0.59 per share.

In addition to these overall financial results, our press release gives more detailed growth percentages by our various service offerings.

In terms of overall highlights for the first quarter, we did achieve our long-term growth target of 15% in our key metrics. The growth of 21.9% in our truck net revenues for the quarter drove our earnings growth.

Compared to last year's first quarter, we experienced tighter Transportation markets or greater demand relative to supply versus a year ago. The tighter markets have generally led the price increases compared to a year ago in our Transportation services. We feel good overall about how we're adjusting to the changing market conditions. Our total Transportation gross margin of 17.2% was down slightly from 17.4% last year.

While our experience varies some by mode and service, overall, we were able to grow our Transportation volumes while adjusting to significant price increases and holding our gross margins relatively consistent with last year.

The last couple of years on these calls, we've discussed gross margin fluctuations quite a bit and how we accept them as part of our business model. Over the past 10 years, we've had reporting quarters with Transportation gross margins ranging from 15.4% to as high as 22.6%. All the variables driving that volatility: pricing, fuel, mix, seasonality et cetera, were still relevant but the net result for us overall was fairly constant gross margin percentages.

Our operating expenses grew faster than our net revenues. However, the drivers of that increase are our variable compensation incentive accruals and a litigation charge. The rest of our expenses are in line with our model and longer term expectations. Overall, we were happy with our execution and the results for the quarter.

Moving on to some prepared comments by mode or service offering, Truckload volume was up 7.5%. Excluding the estimated impacts of fuel, pricing was up 8% versus a year ago. When we discuss our results and the relationship between volume and price, it's important to remember that we are somewhat unique compared to many other Transportation businesses, in that our pricing and contractual commitments are made on a very decentralized, customer-specific basis for each of our 35,000-plus customer relationships. These percentages represent the aggregate decision-making of all those relationships versus any distinct single decision or company-wide practice.

The majority of our Truckload volume growth in the first quarter of 2011 came from existing customer relationships. The Truckload market has been tightening for several quarters now, and most in the industry are aware the challenges involved in adding additional capacity.

From account management standpoint, we've been working with our customers to adjust to the market and provide additional capacity to our current relationships. Our LTL volumes grew 18% in the quarter. Our approach of selling more outsourced solutions and automated process improvement has helped us to grow this mode of transportation. Our cost and customer pricing continue to both increase in this mode as the industry has reduced capacity in many areas, and is much more focused on efficiency, price increases and profit improvement.

Our Intermodal net revenues grew 13% for the quarter. However, our volume was down slightly. While we feel very good about our Intermodal service offering and our abilities to execute for our customers, we recognize that the Intermodal industry growth has exceeded our growth. We're committed to both quality service in Intermodal, as well as growing our business.

Our Intermodal activity includes a heavy focus on Western U.S. lanes that did not grow as much as some of the eastern activity. Weather did cause some of our multimodal place to go by truck, and we continue to work with our rail partners to ensure that we have adequate access to capacity and competitive pricing to grow this business.

Our Air, Ocean and Customs Forwarding business continues to grow and become a more relevant part of our global network of services. Ocean growth was very strong in the quarter. We continue to invest significantly in our continental leadership structures in Europe, Asia, and South America, as well as our navigator systems implementation to connect of all of our offices to 1 worldwide operating system. We feel good about the progress on these initiatives and continue to add some very good customers to our network as we grow these services. Global expansion of our network and services remains a high priority.

Our Sourcing business revenues declined 15% in the first quarter of 2011. Net revenues decreased by 5.5%. 2 primary factors in those results are the continued declines from the loss of a large customer that we've discussed in the past, as well as several significant weather events that lowered overall crop volumes and related sales activity, but increased margins on the more limited volume of product that we sourced.

Information Services from our wholly-owned subsidiary T-Chek, grew at 13% for the quarter. T-Chek continued to diversify its service offerings into other categories of transaction processing. T-Chek's revenue during the quarter also grew from increases from transactions that are based on fuel prices.

Overall, I would say it's a good start to 2011. 1 of the core relationship goals that we have is to balance longer-term strategic goals, like integrating and automating the longer-term account management practices to improve our customers supply chains, global systems investments, outsourced solutions and new services, with shorter term adjustments to market conditions that drive things like price changes, transactional solutions, additional capacity, et cetera.

Keeping that long term focus on relationships and solutions, while reacting to the short-term market forces is something that I think Robinson is uniquely good at, and our results this quarter reflect that.

Those are my prepared comments. And with that, I will turn it over to Chad.

Chad Lindbloom

Thanks, John. I'm going to give some comments on our operating expenses, income taxes, balance sheet and cash flow statements. Starting with personnel expenses. Our personnel expense increased to 44.9% of net revenues for the first quarter compared to 44.1% for the first quarter of 2010. This increase was primarily the result of an increase in our restricted stock expense.

Our total stock-based compensation expense was $4.5 million this quarter compared to $4.7 million for the first quarter of 2010. The majority of the stock-based compensation expense was driven by the vesting of our performance-based restricted stock awards. The vesting of these awards is based on our earnings growth rate.

Each year we accrue based on the year-to-date growth rate in income from operations and diluted earnings per share. This year's growth of 15% for income from operations and 18% for EPS compares to relatively flat earnings in 2010 compared to the first quarter of 2009.

Also, as John mentioned in his comments and reported in the release, the first quarter of 2011's SG&A expenses include a charge for $5.9 million for the deductible plus post judgment interest for an accident which occurred in 2004. We disagree with the verdict and the appellate court's decision, and plan to submit a petition for review to the Illinois Supreme Court.

Our effective income tax rate was 38.2% for the first quarter of 2011 compared to 38.4% in 2010. Both of these are within our current expected range of 38% to 38.5%. Our balance sheet remains strong, with cash and investments of $360 million. We had a good cash flow quarter. As in previous years, the first quarter of cash flow was impacted by the payment of accrued compensation.

Moving on to our CapEx. Our CapEx for the quarter including software, was $9.6 million. This includes continued investments in our IT systems to support continued growth and efficiency improvements. We expect our CapEx, including capitalized software, to be approximately $40 million during 2011.

We have discussed in the past our strategy for using share repurchases as a variable way to return excess capital to our shareholders. During the first quarter of 2011, we repurchased 623,215 shares at an average price of $73.01.

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

Question-and-Answer Session

Operator

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

Benjamin Hartford - Robert W. Baird & Co. Incorporated

Ben Hartford in for John. Good afternoon. I'm sorry, if we could talk about on the Truck side, gross profit margin trend on the transactional business versus the contractual business, could you talk a little bit about the trends whether there was a divergence in the trends. I suspect the transactional gross profit was better than contractual trends in the quarter. But could you talk a little bit about that dynamic in the first quarter?

John Wiehoff

Yes. I would say the prepared comment around reemphasizing the decentralized nature of the network was really sort of a setup for that. We have a wide variety of customers and where we have ongoing price commitments and longer-term price relationships during a tightening market like this, we will generally see some price compression in those longer-term price commitments. And transactional activity by definition, the margins stay a little bit more consistent because by nature, they sort of adjust to the current market conditions. So there always is a little bit of a variance, but because the market has been tightening for several quarters now and because the marketplace is generally aware, both customers and carriers of how things are changing, we feel like both types of relationships evolve pretty well in the quarter for us, and that there was no real great disparity across our network from a margin standpoint.

Benjamin Hartford - Robert W. Baird & Co. Incorporated

And I guess to that end, when you noted that pricing growth to customers x fuel out grew the cost, the capacity growth in the quarter, is there something unique about this cycle in that divisibility to capacity constraints is high, and therefore, you could experience outside gross profit growth over the next several quarters because your momentum pricing to customers is possibly above trend here?

John Wiehoff

It's really hard to predict what's going to happen going forward. But we do think this cycle consistent with past ones that when the market begins to tighten and demands starts to rise, normally, we'll see some relative margin compression for a while, until the industry as a whole kind of understands and starts to tolerate price increases and adjusting to the market conditions. And we do feel that coming into 2011 with all the discussion last year around capacity shortages and the markets tightening for the majority of the second half of 2010 for sure that we've reached that turning point, where there generally have been price increases across all the modes and particularly on the Truckload side. So the market does feel like it's turned, and it's understanding of the tightness, and the price increases, but where they go from here, again, it's always a relative supply and demand thing. It really depends upon how that demand, that spot market compares to the supply going forward.

Benjamin Hartford - Robert W. Baird & Co. Incorporated

And then 1 more if I could, on the Sourcing side you talked about some of the disruptions in the first quarter, now that the weather is out of the way, what is the outlook year into April into the second quarter as it relates to the produce market and refrigerated capacity in particular?

John Wiehoff

We've talked for the past few quarters about the trend of Wal-Mart's changes in the way that they are Sourcing some of their product, which includes more in-sourcing and less use of C.H. Robinson. We expect to continue to see declines with Wal-Mart in the third quarter compared to last year's third quarter. So that will definitely be a headwind. But feel pretty good about the growth of the nonWal-Mart business within Sourcing.

Benjamin Hartford - Robert W. Baird & Co. Incorporated

Thank you.

Operator

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

William Greene - Morgan Stanley

I know in the past you've mentioned that CSA doesn't really change the sort of that liability that you think you face relative to face that. But have you seen any change from shippers in how they're thinking about this, whether they're using brokers more or whether they're migrating toward carriers with decent grades or have you seen any change there?

Angela Freeman

This is Angie, Bill. I don't know. I think it's premature to say that there's been a significant change in the way that people are selecting their providers. But there's definitely a lot of discussions going on in our part with our customers about their processes, our processes, the need to make sure that you have good carrier qualification, processes and data in place both today and under our new system. And until we have more details about the new system, I think for a lot of people they are in wait and see mode to see what that might look like.

William Greene - Morgan Stanley

And then we've noticed, and I think John you've been mentioning in the past conference calls about the greater volatility in the rates and changes in capacity, do you think that through this process, the model's proven itself? Or do you need to sort of address how many longer-term contracts you're willing to enter into or how do you think about kind of the volatility we've seen in adjusting the model?

John Wiehoff

No, I think the model has generally proven itself. I feel like we're operating today under the same values and principles that we were 10 years ago. Whenever things get more volatile, especially when they get as volatile as they have the last couple of years, we need to be very cautious about long term contractual commitments to make sure that we've got the shipper and supply-side aligned with expectations. And there's just more room for error when you've got greater volatility in it. But I would say our business model and our approach to the marketplace in managing that supply and demand volatility is consistent with what it's been in the past. And like I said, if anything that maybe feels a little bit unique about right now compared to the past is there's been so much industry-wide discussion about supply shortages and all the things that may cause it and the expected price increases that may be there's a little bit broader awareness and acceptance of what's going on in the market conditions than in past cycles. But I think our business is reacting to it very similar to what we would've done in the past.

William Greene - Morgan Stanley

Okay. That's great. Thanks for the time.

Operator

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

Scott Flower - Macquarie Research

Just a couple of quick questions. I know that John, you just talked about how there's more acceptance on the part of the shippers having heard all the verbiage about what's going on in the Truckload market. Are you seeing any difference or change in your carrier development activity in terms of your capacity development?

John Wiehoff

Not really. We continue to sign up new carriers and have some falloff just like we have during any other part of the cycle. So, no, I would say nothing significant to our change. There's been a lot of very public discussion, especially with some of the larger carriers, how some are adding equipment and some are not. So within any given relationship, there might be a differing attitude about who's looking for growth or who's looking for keeping things. But in terms of us, overall developing the marketplace in the supply-side. It feels fairly consistent with past period periods.

Scott Flower - Macquarie Research

Even with all the impact or possible impact of CSA or et cetera, that really hasn't changed anything as you see it?

John Wiehoff

It has not yet, I think very similar to what Angie said earlier, there's certainly been a lot of discussion and planning for what the impact of it is going to be. And I know that within some carriers they are working their drivers differently and preparing for how they want to operate under the new rules. So within any given motor carrier, there could be some differences in practices that we're not really exposed to. But from our standpoint, in terms of qualifying carriers and gathering information around their equipment capabilities and preferences, we continue to sign up new ones and lose some old ones and kind of manage that process every similar to what we've done in past periods.

Scott Flower - Macquarie Research

And then the other quick follow-up is could you give me some sense in the Truckload and the LTL side? Was there any sort of trend change within the first quarter in terms of volume? Did it pickup toward the end of quarter? Was it more even? I'm just trying to get a sense and I know there is obviously some weather in there, but I'm just trying to get a sense within first quarter how the volume trends might have behaved within the month in the quarter?

John Wiehoff

There was -- I think the quarter is representative of what happened in and of itself, there were no discernable trends.

Scott Flower - Macquarie Research

Great. Thank you.

Operator

Our next question comes from the line of Chris Ceraso with Crédit Suisse.

Christopher Ceraso - Crédit Suisse AG

Thank you. Good evening. Kind of a strategic question on the composition of your growth and maybe you can put it in the context of the quarter that you just finished. And then also in the outlook. And I'm thinking about how much of your growth is coming from growth and outsourced Transportation as a market. How much is coming from just economic growth and freight volume growth? And how much is coming from share gains? And has that changed over time?

John Wiehoff

So our growth strategy would definitely include everything you just listed around account penetration and developing new services and tying them together in kind of more comprehensive outsourced solutions. The last several years we have had greater emphasis on marketing what we have labeled outsourced solutions. So everything from a single source Transportation product in 1 mode to more complicated multimodal programs. And that would include our technology driven freight management services, our TMC model, that is a fee-based business where it's very much solutions and process driven. All of those services in that outsourced solution category have continued to grow a little bit faster the last several years compared to just some of our general growth in each of the services. We have put greater emphasis on that, and I think we've talked in the past during the depths of the recession, when customers were probably more reluctant to hire or to spend money on a technology solution, and then and now continue to look for more aggressive solutions to drive out costs and make things more competitive. That's probably the marketplace conditions that have been beating some of our growth in that outsourced solutions category and causing us to continue to emphasize it and make sure that we're talking to the customers who may have a need for it.

Christopher Ceraso - Crédit Suisse AG

So are these customers that have already been using outsourced transportation, but you're taking them to the next level?

John Wiehoff

It's all across the board. In some cases, it's that. In many cases, our marketing strategy will be to build a transactional relationship, and then eventually get more involved in routine bids and more consistent levels of freight. And then when we have somewhat of an automated and working relationship and a trusting relationship with that customer, we can talk to them about relying on us on a more holistic way in 1 of many outsourced solution type things. So that's our normal marketing approach. Kind of a bottoms up thing where we would start with a more limited relationship, and then tie in. But occasionally, we get the request for proposal from somebody who's currently outsourced and evaluating it or somebody who has never been outsourced in the past but is just looking to jump in.

Christopher Ceraso - Crédit Suisse AG

Thank you.

Operator

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

Matthew Brooklier - Piper Jaffray Companies

Thanks. Good afternoon. I'm wondering if you could walk us through your Truck gross yields in the quarter per month or to provide or if you can just talk to them directionally?

John Wiehoff

Similar to the volume trend in the previous question we got about the progression throughout the quarter, there was no discernible trends that we're going to comment on.

Matthew Brooklier - Piper Jaffray Companies

Can you comment a little bit in terms of how April feels thus far, capacity, tightness what have you?

John Wiehoff

We're not going to quantify the results thus far in April. The year-over-year growth trends are similar to what we saw in the first quarter. Really, when we start commenting on the first month of the quarter is when there was directional things that were causing it to either increase or decrease significantly during the quarter. So now that we're not going up and down, we're just not going to necessarily comment on April.

Matthew Brooklier - Piper Jaffray Companies

On the Sourcing side, your gross yields, good improvement year-over-year. You spoke to, I guess, 2 abnormalities in the quarter, the Wal-Mart business going away and also some weather impact. Just curious as to what's enabling you to improve the gross yield within the sourcing side of the business. Is it the Wal-Mart volume pealing off? Or was it your ability to maybe charge a little bit more during first quarter just given what happened on the weather side of things?

John Wiehoff

The primary driver of it is the weather. Each freeze or each crop is different, but it's generally the case that when there's a freeze, there's a lot less product, but customers are willing to pay for it because the market is so tight for it. So the primary driver of that margin expansion was tomatoes, lettuce, couple other crops that had some pretty significant freeze activity where there was a lot less volume, but it was at higher margins.

Matthew Brooklier - Piper Jaffray Companies

So would you expect that to get maybe back on to a more normalized level moving out?

John Wiehoff

Yes. Assuming the weather normalizes, yes, we would expect that to return as well.

Matthew Brooklier - Piper Jaffray Companies

Okay. We we'll see about the weather normalizing. Thank you.

Operator

Thank you. Our next question comes from the line of Tom Wadewitz with JP Morgan.

Thomas Wadewitz - JP Morgan Chase & Co

I wanted to ask you about the volume trends in Truckload. I guess, if you look back over the past, 4 quarters or so, you had very strong growth in first quarter '10. And it's still been good but it's decelerated, and then you see a little bit further deceleration first quarter to 7%. How do you think that would develop looking forward, assuming that the market, the economy's okay and you see some further tightening in the market? Does that accelerate when you need the help to find capacity or are there any kind of directional comments you could make on how Truckload volume might develop?

John Wiehoff

I think it's some the prepared comments around that price volume relationship, I think are relevant to bring into it Tom, because when the demand tightens like it did during the fourth quarter, it really wouldn't have been that hard to have higher volume growth. It's all a question of what margin it's going to come at. And like you said, we did have pretty high volume growth in the first half of last year. And as the year wears on, what we're going to be doing on a customer by customer basis and adapting to the market is just seeing how tight it gets and seeing what pricing behavior is doing in the marketplace and what's the right blend of volume and price in order to balance, keeping our customers happy and serving them with protecting our profitability and managing the business. So I think it has a lot to do with kind of what happens in the marketplace and what's the right reaction for each customer based upon how much more capacity they need and what price it's going to take to make it happen.

Thomas Wadewitz - JP Morgan Chase & Co

So if the market tightens considerably, you would be less inclined to grow volume, or you don't necessarily read it that way?

John Wiehoff

It depends upon. I mean it depends upon what our customers want of us. And I think what you can read into the first quarter is that most of our existing customers were willing to pay additional to get access to that capacity in the marketplace. And when we look at our network in aggregate, that's how we see it reacted, is that maybe a little less volume growth than we could have had under other circumstances, but our margins held fairly constant with the year ago despite tightening market conditions. So if that's the way the marketplace, and our customers, and our networks react in the future, you could see similar results. If the market gets really tight, and the transactional market gets a lot crazier than it is today, you could see a lot difference in volume growth.

Thomas Wadewitz - JP Morgan Chase & Co

And then as a follow-up, and then I'll pass it along. On the fourth quarter, you mentioned that you had really gotten to a high level of productivity and then 2011, you probably have to begin to hire more aggressively. Is the increase in headcount in first quarter, I think up about almost 5%, is that the right run rate to think about for headcount going forward? Or is that a number which could accelerate further?

John Wiehoff

No. It could accelerate a little bit. Most of the offices are pretty actively looking based on a pretty tight market and a lot happening. The headcount generally grows kind of closer to volume than to net revenues. So it will depend again upon the market conditions. But we do expect it to grow. We are looking at same outlook as we had at the beginning of the year that we have pretty tight staffing for a while. And now that the market is turning and volume is growing, we do feel like we're going to have to continue to add people into the network this year.

Thomas Wadewitz - JP Morgan Chase & Co

Great. Thanks for the time.

Operator

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

Edward Wolfe - Bear Stearns

Thanks. Just a follow up to Tom's question on headcount. If headcount is going to grow give or take over time similar with volume, then I would think in a period where your net revenue is growing much faster than your volume, there should be some leverage. We didn't see all of that leverage. You talked about rising comp costs and some of the incentive shares around that. Can you talk about how that looks going forward? Is there anything unusual in the quarter in terms of compensation and personnel cost that wouldn't go forward if you had similar earnings going forward?

John Wiehoff

Well, Chad highlighted in his comments the variant solely attributable to the restricted stock vesting. But remember that in all of our core cash compensation variable pay programs that those are based on profitability as well too. So our core bonuses as well as our growth pools, whenever our profitability grows faster like it did this quarter compared to last year, you're going to see higher personnel costs. So in addition to the restricted stock numbers that Chad gave, there is just a typical variance of increased personnel costs when we grow at a faster rate. We talked in the third and fourth quarter of last year that as our growth rate and earnings started to accelerate, we did have much more meaningful restricted stock and compensation charges for growth pools and others in those periods. So as 2011 wears on, if our earnings growth stays constant, we will have quite a bit different comparisons from a growth standpoint.

Edward Wolfe - Bear Stearns

So the restricted stock impact, I get the profitability changes the amount that you pay out in compensation. But what I'm trying to understand is would the restricted grants be similar in second and third quarter assuming similar growth rate of earnings?

John Wiehoff

Yes, the charge would be consistent and it would compare to different charges from last year.

Chad Lindbloom

Right. If our growth rates stayed exactly the same in each quarter, the expense would be very similar. There's others fluctuations that happen. There's stuff in equity expense things like employee stock purchase programs and we have some time-based vesting, and we have some fully vested awards. But when you look at the core driver of the expense, the expense would be identical. If nobody quit, too. And on the leverage question, Ed, if you look at our restricted stock or our total stock-based compensation expense as a percent of net revenue, it's 3.2% this year, and it was only 1.4% last year, so even excluding those other plans that accelerate when earnings growth rate accelerates, the cash plans and the profit-sharing plans and things like that, even excluding the impact of those, our personnel expenses as a percentage of net revenue, did show leverage, excluding the things that are purely driven by volume.

Edward Wolfe - Bear Stearns

That's fair. How about branches? I see you're down 3 year-over-year. Is there any plans to increase those, or is that a pretty set number for a while?

John Wiehoff

We do have plans to continue to open offices and to grow. The down 3 year-over-year was from some consolidation of branches in previous quarters. We actually added 1 during the quarter. We added an office in Sweden, in Gutenberg, Sweden, that will be part of the European team. So we do you plan to continue to open more offices as this year progresses, and we did add 1 during the current quarter.

Edward Wolfe - Bear Stearns

And directionally relative to a year ago, would you say you have more business that's transactional relative to contractual, or less?

John Wiehoff

That's a tough question because it gets into that fuzzy definition between the 2. We focus a lot on the pricing elements of what's contractual and what's transactional. And because we're doing a lot of business with our existing customers, a decent percentage of the volume is prepriced. However, as you can imagine there's a lot fewer bids in the marketplace today than there was over the last couple of years because of market conditions and pricing. So it feels like -- because we're doing more business with existing customers, and we have relationships in place that are a portion of contractual or prepriced business is still fairly high.

Edward Wolfe - Bear Stearns

I'm not sure what I just heard, or are you -- it sounds like you're saying it's similar depending on how you define it?

John Wiehoff

Yes. As we've always talked, Ed, transactional to contractual is a continuum of relationships. We have bids, we have route guides and pricing in place with our existing customers, and we have anticipated volumes with those current customers. For many of them, we're taking more volume than was originally planned, and a lot of that would probably be at the prepriced rates so that a higher percentage of the freight would be moving around bid prices or set Route guides or contractual type pricing arrangements as opposed to pure daily quoting or transactional pricing.

Edward Wolfe - Bear Stearns

Last question. Fuel, when fuel is rising as fast as it was, it can be a benefit for your business. It can also be a negative. How was it for you in the quarter as you see it?

John Wiehoff

I think on the Truckload piece, it's probably pretty neutral on the biggest category, because it adjusts pretty fluidly. In the Intermodal, Air, Ocean, LTL, where pricing is a little bit more steady, we probably benefit a little bit on the way up because just the timing of when the surcharges would correct or adjust. So since Truckload is such a big portion of our business, we feel like that passes through fairly timely and fairly clean.

Edward Wolfe - Bear Stearns

Thanks for all the time. I appreciate it.

Operator

Our next question comes from the line of Nate Brochmann with William Blair & Company.

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

I just kind of wanted to talk a little bit on the strategic side, John, if you could maybe share with us a little bit of your discussions with some of your customers as certainly Intermodal and moving brow [ph] And trying to save money as fuel prices rise. It would seem to me that you're in a great position to provide those multimodal solutions for customers. I know access to containers have been an issue in the past. But could you talk a little bit about the discussions with customers and kind of where that business is going or opportunities?

Chad Lindbloom

Yes. I think you summed it up well, Nate. We do feel like 1 of our unique capabilities is multimodal solutions where we can help a customer take advantage of savings when they're available, but have the safety net of Truck capability for anything that needs to be done. As you have mentioned over the last couple of years, there's been some times where access to boxes and access to capacity has been a limiter as to how much we could take advantage of that and offer it up as a cost-saving alternative and some of that multimodal freight. We do feel pretty good that in our relationships with our carriers that there is more equipment coming into the marketplace that we're going to have access to, and that customers will want to continue to take advantage of some of the cost savings and efficiency opportunities that can happen with Intermodal. So while our volumes haven't grown a lot in the last couple of years, it is definitely our long-term strategy to grow those volumes. And we're having discussions selling, working with our customers and planning with our providers to make sure that we've got incremental access to grow the business.

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

Thank you for that. And then another kind of strategic idea, Europe's been something that seems to have been an opportunity for a long time, but hasn't really necessarily picked up. In talking to some relationships over there, it seems like some larger companies are now beginning to outsource. It seems like the network is starting to get to be there to kind of come your way a little bit more rapidly than in history. I was wondering if you could talk a little bit about what you're seeing there and if you're seeing some more opportunities?

Chad Lindbloom

Yes, so I talked earlier about the outsourced solutions approach, where we're talking to customers about different types of solutions that involve kind of more dependency, more automation, generally multimodal type stuff. And we are definitely pursuing those across Europe as well too. We've been doing business in Europe for about 20 years. I think in 1 of the messages that we've continued to emphasize is that we're growing our business, mostly organic, and we're trying to build it from the bottom-up with long term relationships and adding capacity and adding things very deliberately to make sure that we have high-quality service and we can build on that foundation. So we've continued to feel good about the rate of expansion and the adding of services. Europe has, to us, has always felt like it's been reasonably conducive to customers looking at outsource activities, at least as much as those in the U.S. would. It's been maybe more that we didn't have the network or the breadth of capabilities to offer them the way we are today. But we've got some nice new accounts in the last couple of years around our TMC model in Europe, where we're selling process-oriented solutions and focusing in on the outsourced type stuff. So it's a two-pronged strategy of growing our service capabilities and growing our network of offices, along with just like what we're doing in North America, to tie those together in aggregate solutions into kind of more comprehensive value-added programs for the customers that want to go in that direction with us.

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

Great. Thank you.

Operator

Our next question comes from the line of John Barnes with RBC Capital Markets.

John Barnes - RBC Capital Markets, LLC

Could you talk a little bit about -- are you seeing any pressure on your carrier group with the rising fuel costs and the like? I know the rates have gotten better, volumes have gotten better since the last time we saw a spike in fuel, but have you noticed any uptick in carriers taking advantage of any Quick Pay programs that you may offer or something like that versus what they might've done in the last year when fuel prices were a little bit more benign?

Chad Lindbloom

We really this quarter haven't seen any significant pick up in the percentage of loads that are paid through Quick Pay. So I haven't really seen it yet. Again, but they never really came back down from when they spiked in 2008. And overall, on the capacity side, it feels like maybe some of the really difficult times around bankruptcies and profitability are starting to distance a little bit on the motor carrier side. But the difficult question still is who has the confidence to add capacity or order new equipment. And those answers seem to still be pretty mixed, that there are some who are investing and how much of it is replacement equipment and how much of it is truly incremental equipment, and there are still quite a number of carriers who say they're not adding, that they want to really improve yields and profitability first. So the overall environment, the price increases are obviously a positive thing. Many of the carriers have talked about how the fuel surcharges in the short-term really don't cover their incremental fuel costs because of the empty miles that they're only collecting fuel surcharges on the loaded miles, so that they have to kind of work through a cycle in order to adjust their rates and stuff to correct that. So maybe some of the price increases in fuel stuff doesn't come through quite as quickly. But overall, probably a little less financial churn and a little more financial health in the carrier community than a year or 2 ago.

John Barnes - RBC Capital Markets, LLC

Thanks for that color. And then 1 other question on -- just a follow up on your comments earlier about the customer base seemed to be more accepting of rate increases and understanding of how tight capacity has gotten. Have you seen any change and maybe some other type of potential shipper behavior, where maybe they're more accepting of a company offering your services more than a non-asset based company coming in and bidding on their business that maybe weren't doing business with a broker before? Or have you really not seen any change in that kind of behavior?

John Wiehoff

We do feel like there's a longer-term trend. I wouldn't say there's anything radical in this quarter or the last couple of quarters. But if you look back compared to 10 years ago, we do feel like there's a very clear longer-term trend of shippers across the board, understanding our business model better, understanding third-party logistics better. All the different hybrids of business models and how you control quality and how you commit to things. We definitely feel like third-party industry and our business model has been gaining share and gaining confidence for quite some period of time. We do feel like the recession in general probably accelerated some of those trends a little bit over the last couple of years. So that's a longer-term trend for us. In the short-term. What we've always talked about is that when the market starts to move 1 way or the other, it really takes service failures or kind of stress in the market wherein really in order to move pricing and in the last half of last year, there was freight that didn't move on the day that it was planned to, and you saw route guide depths start to go a little bit deeper and a lot of discussion in the industry about rule changes and OEMs and ordering new trucks and all the rest of that stuff that I think combined, brought most shippers into 2011 fairly aware of the market conditions and fairly open-minded about what they needed to do to get the right access to capacity.

John Barnes - RBC Capital Markets, LLC

Thanks for the color, guys. I appreciate it.

Operator

Our next question comes from the line of Alex Brand with SunTrust Robinson Humphrey.

Alexander Brand - SunTrust Robinson Humphrey, Inc.

I want to follow up on Ed's question on the margin. With respect to other G&A, which I think if I back out the litigation, it was down about 100 basis points year-over-year. Is that something that is sustainable that you can create some leverage off of as well?

Chad Lindbloom

Yes. There's really nothing else unusual in there. There are expenses that do fluctuate. Things like bad debt expense and others that are very hard to predict. But there is nothing significantly unusual within the quarter. So if the growth rates stay where they are, yes, that's possible that, that leverage could sustain itself.

Alexander Brand - SunTrust Robinson Humphrey, Inc.

And I'm going to try this again, Chad, even though it sounds like you don't want to answer this question. But there was no acceleration in the volume growth late in the quarter. And I feel like in the past, you guys have talked about how that volume growth trend looks into the current quarter first few weeks. No color on that?

Chad Lindbloom

There is no further color on that other than what was in previous questions, which is yes, that is true that a few quarters ago and previous to that, when there was extreme volatility month-to-month within the quarter, we felt that was important to let you know. We don't see extreme volatility. We're probably going to go back to the way we used to be and just talk about the current quarter and its entirety and reduce the amount that we talk about the first month of the quarter, the first part of the first month of the quarter.

Alexander Brand - SunTrust Robinson Humphrey, Inc.

That's no good, we can't do less?

Chad Lindbloom

We're going back to what we always did.

John Wiehoff

There's a lot of reasons for that. Chad mentioned though when there's less volatility in addition when we're in a month like this, the Easter holiday is different there's a difference in business days. There's just a lot of things that we worry about the additional commentary not necessarily being helpful unless there's a clear trend that has taken it 1 way or the other.

Alexander Brand - SunTrust Robinson Humphrey, Inc.

And just on the bigger picture question, kind of along the lines of John's last question there, when the capacity's tight -- I mean, I think you hear a lot of questions where we're all concerned about whether you get squeezed on gross margin, but do you guys think about it differently from that? And what I mean by that is are you going to the market and saying, "Look, we have scale and can offer capacity that maybe others can't offer." And so this is really more of an opportunity scenario than a risk scenario.

John Wiehoff

I mean, we do, do that. We certainly sell our scale and our capabilities to do things that we feel that most others can't in the marketplace. But as I mentioned earlier, even like account by account, every day, we lose money on transactions, and there's a wide variety of the types of relationships and the types of margins that we have. And there can be situations with customers where we're working our way in and developing the relationship and accepting low margins or even occasionally losing money on shipments to help them get through a difficult time or to prove our wares to somebody on what we're doing. That's why I, in the prepared comments, talk a little bit about it has a lot to do with each relationship and each account manager of ours has to make those individual decisions around what commitment we have to that customer and what the expectations were and how the marketplace is changing. And at times, you take more volume and less margin and then other times, you adjust to the pricing so that you can have more assured capacity and not have a high degree of service failures and as much transactional tension in the marketplace. So when I look at it, I look at our network and I look at our results, and I say what I learned from it is that our customers saw the tightening coming, and they were prepared for it, and they wanted to make sure that they got access, first access to the capacity that's out there. And our pricing moved with the market pricing and we were able to provide meaningful amounts of additional capacity to our current customers. And we and they were both happy. And that could change in future periods depending upon just how tight the marketplace gets or how our customers react. And again, that's a generalization. There are customers out there that we did less volume with in the first quarter of this year than last year because they had different pricing expectations, and we couldn't service their needs at those price expectations. So it's a combination of all those individual account management decisions and adjusting to the market conditions based upon what we've built in that relationship.

Alexander Brand - SunTrust Robinson Humphrey, Inc.

Good color, John, I appreciate your time.

Operator

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

Scott Malat - Goldman Sachs Group Inc.

I just had a quick follow-up question. I know a few people have asked on this, maybe I missed it. I just wanted some help how do I think about employee productivity. You said headcount moves up with the volumes and implies that employee productivity remains pretty flat. Is that a good way to think about it? Or just as you ramp up the hiring, should we get a little of dislocation around there, just as they get up to speed?

John Wiehoff

When you look at it overall, and as we ramp up, I think it's really hard to exactly predict. But in theory, yes. We'll add people and then it will take them a while to become fully productive. But when there's constantly different levels of freight, it's really hard to know because people will go and put extra hours in if there's more freight available to move because they're paid on incentives. But overall, there's going to be some fluctuations in that. But overall, it should move pretty close to the same, and hopefully gain a little leverage on headcount over time as we continue to invest in systems and other things to make people more productive.

Scott Malat - Goldman Sachs Group Inc.

All right. That's helpful. And then aside from the productivity improvements, you kind of indicated that your productivity levels were higher than normal and we could see just some slowing in previous calls. I'm just trying to understand, I guess, you'll get improvement over time. We should expect some productivity improvements? But just in the nearer term, does it come off of high levels also?

John Wiehoff

In the shorter term, what you're going to see, like we talked earlier is that we are hiring, we are adding people to the network so that if our volume growth continues during the year, we do expect to continue to see incremental headcount for each of the next several quarters as we grow through that. We talked earlier about the leverage that we get by margin expansion and how our total personnel costs are up because of the variable accruals around restricted stock and growth pools. But that our actual headcount year-over-year and our transaction growth year-over-year in the first quarter was fairly consistent, kind of mid-single digits. And that while the last couple of years, we've been able to grow volume, but the headcount we don't see that happening in 2011. That as we grow the business, we're at a point where we're going to be putting more people into the network going forward.

Scott Malat - Goldman Sachs Group Inc.

That's helpful. Thanks.

Operator

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

Justin Yagerman - Deutsche Bank AG

I just wanted to dot an I, cross a T here. The charge in the quarter that's onetime in nature, operationally feels like a $0.61 quarter. Is that how you guys are looking at this?

Chad Lindbloom

We just wanted to make sure everybody understood the charge was there. You're right that these legal settlements are pretty infrequent.

Justin Yagerman - Deutsche Bank AG

When I look at the quarter, I guess, trying to get a sense of the way that things are progressing here from a business model standpoint, it sounds like maybe transactional volumes in the quarter weren't as robust as maybe could have been, obviously weather and some of the other issues that we've been talked about were impacting there. As we look out, I mean, I guess, 1 of my questions is around the West Coast and whether or not you're seeing a lack of activity there. We've heard that from a number of different carriers. And whether or not you guys are seeing that pickup or expect to see that pickup in the quarter and if that could be something that drives an increase in the transactional market for you guys looking out at second quarter.

John Wiehoff

We did, during the first quarter, see some more softness in the West Coast and some of the West Coast lanes and there wasn't an east. I think I commented specifically around the Intermodal variations and in some of our offices out there was not quite the same tightness. As far as how that will be going forward, it's very difficult to predict. If the long-haul West Coast stuff, especially in the summertime, in refrigerated freight, it can drive some very transactional type services that can have a lot of different margin attributes and a lot of different service stuff too, but it really can vary year to year depending upon those market conditions.

Justin Yagerman - Deutsche Bank AG

Last year, if I'm right I mean, second quarter you guys did see a big surge in transactional volumes and that was around the time that we saw West Coast volumes really pickup. Obviously, there was a different mood around container availability and worries around about peak season surcharges. But I mean, as we see that ramp, I guess that was kind of what I was thinking about.

John Wiehoff

Yes last year, in both the first 2 quarters, we had very easy comparisons from a volume standpoint coming off the depths of the recession. So while we had very good volume growth last year, some of it was not at very good margins as we go through a tighter market like this, there may be those incremental transactional opportunities. But we're also, like I've described several times, making sure that we've got the business priced right to get the capacity in the marketplace and give it to the customers that are able to plan for it and price it properly.

Justin Yagerman - Deutsche Bank AG

So right now it sounds like the real focus, I mean, just looking at the margin performance in that quarter, yield optimization sounds like the word of the day right now, I mean, in terms of margin optimization?

John Wiehoff

I would say that's always our objective kind of how it works out between price and volume probably has more to do with how the customers and capacity react in the marketplace. And that again why I mentioned it several times that our results tend to be the aggregate combination of how our network and how our customers reacted to the market conditions and what kind of price increases were tolerated, and what we saw first quarter over first quarter is that our customers, carriers and network reacted fairly consistently in terms of moving prices upward.

Justin Yagerman - Deutsche Bank AG

John, in your prepared remarks, you mentioned something that was driving LTL volumes in terms of more automated services, I think. Can you talk a little bit about that, and where you are in the process?

John Wiehoff

Sure. We've had probably for the better part of 10 years now pretty good growth in our LTL and in the beginning of that or so a lot of it was just expanding our relationships and our service capabilities and our internal processes around selling it and bringing it to the marketplace. Over the last couple of years, as we've gotten more into these outsourced solutions and kind of process management through the recession and in this year, there are a fair number of medium sized or larger LTL shippers that in the past, would use multiple providers or not have as good a processes as we believe we can help them with. And when we go out and talk about how you route freight, how you automate with the carriers, how you build loads or consolidate, that a lot of the growth in our LTL stuff has come from significant volumes from customers that are giving us more of a single source or outsourced solution type opportunities. So it's been a longer period of time, 10 years or more, where we've been increasing our competency in growing that mode and taking market share pretty nicely. And now the last couple of years, it's more about an integrated process with a lot more technology and more relationships where we're handling all of their LTL freight.

Justin Yagerman - Deutsche Bank AG

Sounds like that's more of an enterprise sale in terms of like a one-off. What's the pipeline look like in terms of that market really within a switch over to Truckload the way that there's been an adoption of the broker model there?

John Wiehoff

From a longer-term standpoint, we believe that as companies continue to focus on supply chain efficiencies and get more and more acceptance of 3PLs and trust in our business model that there's really good long-term growth support there. And that's why we continue to say we feel like we can sustain our long-term growth goals and that there's good momentum around those opportunities. There's no question that we've increased our operational capabilities and our systems capability over the last 3 or 4 years, where the solutions that we can offer today are a lot different than what they were 5 years ago, and hopefully that added capability on our part is adding to some of the growth.

Justin Yagerman - Deutsche Bank AG

As carriers are yield optimizing in that market, has there been more or less challenging than the Truckload market for you?

John Wiehoff

Probably as much price volatility as there has been any of the modes and services that we deal in. so in the depth of the recession, there was some very aggressive price cutting, and market shares and now that, there's network rationalizations and a much greater focus on efficiency and profit improvement, you see a lot greater change. So I think some of the industry volatility and variances by provider and that price volatility has probably helped us sell the value part of the single source or the process solution, because it's not so simple to go to the marketplace and just do a stagnant bid anymore. Things are moving around on you, and the price difference from the service difference from 1 provider to another might be greater than it's been in the past. And I think that contributes to the value that we can add in some of these relationships.

Justin Yagerman - Deutsche Bank AG

Last question, I'll turn it over to someone else. You've got $360 million of cash. You're up significantly year-over-year. You did buy back shares in the quarter, and I know you guys like to keep a healthy amount of working cap. But thoughts on acquisitions or special dividends or buybacks in excess of what you're doing right now?

John Wiehoff

We continue to look pretty aggressively. Our first preference is always to try to find ways that we can invest organic growth or look at acquisitions to try to grow the business. The dividend practices are pretty set. I don't think our payout ratio will probably stay generally where it's been. And then the share repurchases are the plug as Chad described many times. So the core question in all of that from my point of view is, will we find any opportunities to invest in acquisitions, and kind of use some of that capital to expand our network. And we found overtime that we've had periods of time where we hit a few and get real successful, and then it just feels like we haven't had success for a while here. But we're out there looking, and hopefully, we'll find a good investment for the shareholders.

Justin Yagerman - Deutsche Bank AG

Thanks for the time. Appreciate it.

Operator

Our final question comes from the line of Ken Hoexter with Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch

On the cost of capacity, it was up about 6%. And John, you talked about how net margins got, I guess, squeezed a bit from 16 7 down to 16 5 from the fourth quarter, but you also talked about that the fears and tightening in the market. The cost of capacity was up only 6%, down from 8% last quarter. So what would be the rationale for seeing that slow on the cost side?

Chad Lindbloom

Well, that's comparing year-over-year versus sequential. So a lot of it has to do with what happened between the fourth quarter of '09 and the first quarter of '10.

Ken Hoexter - BofA Merrill Lynch

So can you give a sequential?

John Wiehoff

I don't have every quarter in front of me, but It would -- I guess, the price changes were in the Qs back then, I just don't have it here with me.

John Wiehoff

I don't think the sequential changes from fourth quarter to first quarter are all that helpful because of some of the seasonal variances that we see each year. We tend to focus on the year-over-year stuff to get a better price comparison gauge.

Ken Hoexter - BofA Merrill Lynch

Right. I guess, I'm just surprised that -- so you're seeing the -- or is pace picking up do you think on the cost side? I mean, is that fitting with your thesis that the market is tightening that much that you saw continued pressure on it? Or I guess, this is just the first quarter?

John Wiehoff

Yes. It feels like for the last several quarters, that year-over-year price increases have been pretty meaningful mid- to high-single digits, and that's reflective of a tightening market and the fact that shippers are understanding that they've got to allow some rate increases in order to get their freight moved the way they want to.

Ken Hoexter - BofA Merrill Lynch

And then lastly, just so I understand, the LTL shipment, I think you were just alluding to this, but you saw some significant acceleration there. Was there a driving factor causing that acceleration?

John Wiehoff

It's a combination of things I spoke of earlier where we certainly believe that our execution and our operational capability and our systems and stuff are much better than they were 3 or 5 years ago. And then the outsourced solutions activity that I referenced a couple of times around where we're bringing multimodal, more integrated, automated type things, probably have all helped to our growth in that mode to be able to have more ways that we can add more value to the customers.

Ken Hoexter - BofA Merrill Lynch

It's not something like that just as YRC continues to trickle along that you're seeing more shifting of businesses, it's actually...

John Wiehoff

No. Nothing to any 1 specific carrier for sure. I did mention earlier that price and service volatility across the industry probably has led to a little bit greater acceptance of how a company like us can add value in the LTL world because just single sourcing with 1 provider is a little bit probably more challenging to do today around the service variances and price variances. So working with somebody like us who can help route the freight to the best network a little bit more fluidly and better understand the market condition, probably means more today than it did 2 or 3 years ago.

Ken Hoexter - BofA Merrill Lynch

Makes a lot of sense. I appreciate the time. Thanks.

Angela Freeman

We're sorry, but we're out of time. So that would have to be our last question. We apologize we didn't get to all of you today.

Thank you for participating in our first quarter 2011 conference call. This call will be available for replay in the Investor Relations section of the C.H. Robinson website at chrobinson.com.

It will also be available by dialing (800) 406-7325 and entering the passcode 4432022#. The replay should be available at about 7:00 p.m. Eastern Time today. If you have additional questions, please call me, Angie Freeman, at (952) 937-7847. Thank you.

Operator

Thank you, ma'am. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation. You may now disconnect.

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