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Executives

John P. Wiehoff - Chairman, Chief Executive Officer and President

Angela K. Freeman - Vice President of Investor Relations and Public Affairs

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

Analysts

William J. Greene - Morgan Stanley, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Jack Waldo - Stephens Inc., Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Edward M. Wolfe - Wolfe Trahan & Co.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Robert H. Salmon - Deutsche Bank AG, Research Division

CH Robinson Worldwide (CHRW) Q3 2011 Earnings Call October 25, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Third Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, October 25, 2011. 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 K. Freeman

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

[Operator Instructions] Please note that there are presentation slides that accompany our call. The slides can be accessed through the webcast player in the Investor Relations section of our website, which is located at chrobinson.com. John and Chad will be referring to the slides in their prepared comments.

The slides are a more visual representation of the information that is in our earnings release to facilitate our discussion today.

Finally, I would like to remind you that comments made by John, Chad or others representing C.H. Robinson may contain forward-looking statements, which are subject to 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 P. Wiehoff

Thank you, Angie. So the prepared comments on the presentation deck that I'll be referencing the page numbers of, starting with Page 3, our consolidated financial results for the third quarter. That page highlights some the key metrics that we look at in terms of evaluating our overall results.

Our total net revenues for the third quarter of 2011 grew 10.6%. Our income from operations also grew 10.6%, and our earnings per share were $0.70, a 12.9% increase from the third quarter of last year.

Moving then to Page 4 and looking at our total transportation results for the quarter, these transportation results include all of our modes and services in the transportation category, and they, together, had net revenue growth of 11.3% for the third quarter of 2011. Our net revenue margin for the third quarter of 2011 was 16.4%, which compares to 16.6% from last year.

If you look at the bottom of Page 4 and the graph that we've put together there, on past calls, we've spent a fair amount of time talking about the different aspects of our transportation margin percentages. I know that it's one of the more challenging aspects of our business to try to understand for us and everyone else to predict, because there are a lot of different factors that affect those margin percentages. After this page, we have some prepared comments on the more specific transportation services that we have, but I wanted to spend just a few minutes talking about these overall transportation margin percentages because I think it's very useful to understand the last several years and understand the variances in these margin percentages as a good foundation for the next couple of slides.

In the past, we've discussed the many factors that impact these transportation margin percentages and cause them to vary. And I would encourage everybody who's trying to understand our business to study this history a little bit, if that something that you haven't done previously. In the list of reasons why these margins fluctuate or why they change, some of the more significant ones are the timing and the variances of our price adjustments. Given our third-party business model, we're buying and selling services from tens of thousands of different customers and providers, and while we generally adjust with the market on both sides, there are differences in timing with our contractual pricing and how we purchase various modes and services of transportation. So timings in a supply and demand relationship and timing in the variances of those pricings can make a difference.

Fuel price changes can have a significant impact. Again, across the different services, it varies a little bit. But the price of fuel has a meaningful impact on these margin percentages. The mix of services, especially over time from quarter-to-quarter. That's not always real material, but over a long period of time, the mix with the services that we're offering in the marketplace can have an impact. There is seasonality when you study it. From the fourth quarter to the first quarter, there's generally some pretty meaningful movement. And then there's the longer term secular things around competition and the network effects of our business around scale and the other things that we're doing. When you put those all together, it's really hard to quantify many of the impacts or understand exactly what's going to happen. But I think it's instructive to sort of think about all the reasons and look at the trends as we talk about our third quarter and going forward from here.

One of the things that I have referenced quite a bit over the last couple of years, if you look at that margin percentage history and you go back to the fourth quarter of 2008 when the financial crisis hit and the freight recession really started to take root. If you look at that 19% transportation margin in the fourth quarter of 2008 and the first 3 quarters of 2009, what you see is the highest percentages by quarter on this entire 10-year graph of our transportation margins.

So the fourth quarter of 2008, first 3 quarters of 2009, we had volume declines and/or some of the lower volume growth numbers that we've had throughout this 10-year history. But we also had that correlating higher margin percentage during that period of time.

If you move forward along that chart then to the fourth quarter of '09 into the first 3 quarters of 2010, what you saw was relatively meaningful volume growth across all of our modes and services as we compared to that first 4 quarters of difficult volume growth but margin expansion. We've now cycled kind of through the 3 years since the significant recession, and freight volume activity started to occur. So for the last 4 quarters, we've been comparing against the little bit more difficult volume growth, and you're seeing more static margin comparisons, especially as our year wears on.

During the third quarter of 2011, that 16.4% margin did decline during the quarter. The margin, the transportation margin percentage for the month of September was 16.0%. So while it's difficult and we still don't have great visibility to what the fourth quarter of 2011 will look like, it is possible that when you look at 2010 fourth quarter versus 2011, that 17.6% for last year, at least we're starting out, and we'll get into some of the other modes and services around that, being a little bit of a difficult comparison for us in the fourth quarter of 2011.

Moving on then to the specific modes and services within Transportation on Page 5 of the presentation slides. We talk about our truck results, which includes both our truckload and less-than-truckload net revenues. Combined, they grew 13.1% for the quarter. That is made up of both volume and pricing changes of -- what you see on the truckload piece of 4%. It's probably good to remind you that our business, we believe, is unique compared to the rest of the transportation industry when we look at a pricing number like that. That is our best estimate of cleaning up and condensing down to a comparable price adjustment, exclusive of fuel. Because our business is very spread out and has less density in specific lanes than maybe a lot of the asset-based providers that are out there, this truly becomes kind of a blended average of our whole network of activity. But there can be probably a little bit greater mix comparison from year-to-year, but nonetheless, that's the scrubbed estimate of cost per mile price increase that we were able to get from our customers during the third quarter of 2011.

When you look at the truckload market conditions, one of the terms that we've used and have heard in the industry that we would support is that throughout 2011, the truckload market has been relatively balanced from a supply and demand standpoint. There's a number of metrics that we can look at around route guide compliance and route guide depth and how freight is sort of moving relative to what was planned at the beginning of the year. And most of those metrics would suggest what a lot of people in the industry are saying, and that we've seen a fairly balanced market in terms of a supply and demand relationship.

When you look at the start of 2011, what we and most people were talking about were concerns and expectations around a very tight truckload market, which was leading to price increases and a lot of bid activity trying to secure capacity for the year with all of the concerns around capacity constraints and the limited ability of the supply-side to adjust in a short period of time, if in fact we had had that tight market.

As 2011 has progressed, and it's been a more balanced market rather than a tight truckload market, what's happened is, from our standpoint, at least, is that while we've had good price increases and good net revenue margins for the year, as the year has worn on, you can see our current quarter, those price increases have tapered down a little bit relative to the year-to-date price increases. And our net revenue margins have begun to compress a little bit, just like I laid out on the previous page with regards to comparisons over the previous year.

So as we go through the different transportation cycles, we've talked a lot in the past how our volume and margin activity tends to correlate inversely. And we do see that happening on the truckload services again during

[Audio Gap]

There is a comment down on the bottom of this page with regards to our truckload results that within the quarter, the truckload volume was consistent. So that 4% volume growth in our truckload services was pretty consistent month-by-month across the third quarter. But our net revenue margin decreased as the quarter declined, I guess, as the quarter progressed. So that was again hopefully set up on the page before with the discussion around looking at our margin comparisons and how they progressed during the quarter.

We have seen a slight increase in our truckload volume activity into the month of October, so we wanted to share that with you. We're always a little bit nervous about these preliminary numbers because they can move around quite a bit as the month progresses. But through yesterday, we were incurring about a 6.5% volume increase in North American truckload growth per day.

So those are the comments that we wanted to share within the truckload piece of it. Within the less-than-truckload services, our comments are fairly consistent with the previous periods, and that the industry continues recover from some of the losses that were incurred, pretty much by everybody for a period of time, and price increases and more discipline have led to improvement across the industry. We continue to focus on our sales and execution, the automation of our process and leveraging our value add to both the providers and the customers, and we've continued to share in some of those price increases, but also had good volume increase just by doing what we believe is bringing value-added services to the equation on how the LTL freight is executed in the marketplace.

So moving on to intermodal then. For our intermodal results for the third quarter, we had net revenue growth of 14.7%. First quarter this year -- for the first time this year, we had both volume and price growth that drove that 14.7% net revenue. We continue to have success in selling intermodal as a service in the marketplace. We like to believe that we specialize in mode conversion and offering intermodal services that combine with truckload services where appropriate. And we continue to focus on improving those processes around how we execute, how we route, how do we utilize equipment, with some investments or commitments on our part to make certain that we have efficient price access to all of the railroads that are out there.

So we're taking delivery of the 500 boxes that we ordered, that we talked about in the past. About 1/2 of those or a little less than 1/2 are in-service today, and the rest are coming. And we continue to feel good about our growth in the marketplace and how we're balancing the third-party model and pooled equipment with some limited amounts of our dedicated equipment to make sure that we have the right kind of access in the marketplace.

Moving on to the ocean and air results. Our international ocean net revenues for the quarter were up 4.8%. Our air net revenues were down 13.2%. Our view into this marketplace is that there's relatively soft industry demand for most of the services. We saw volume declines with our existing customers, or most of them, in both of these modes and services. We continue to sell aggressively on the ocean side and did have some volume increase in our TEUs during the quarter. But for the most part, we continue to stay focused on our systems investment and trying to improve our processes and our network around the world so that we can integrate international air and ocean services in with our customers and take advantage of the growth opportunities when the marketplace gives them to us.

Moving to other logistic services, Page 8 on the presentation slides that we've had out there. This represents our miscellaneous category. It includes a number of different things. It's been relatively flat for the year as it was for the third quarter. Within there, there is a mixture of things. About 1/2 of these net revenues are presented by transportation management fees. There's been a longer-term trend, which is consistent during the current year and the current quarter, that those management fees have continued to grow. And we would expect them to continue to grow longer-term as a trend.

During the current year and the current quarter, there are some declines in some of the other fees, particularly in warehouse services that have resulted in a net flat activity for the year. But we do expect that the management fee portion of this will continue to be an important part of our growth story and continue to grow long term.

We've talked about this in the past, and it's probably worth reiterating that while this is a meaningful source of revenue for us from a transportation management fee standpoint, it's probably even more significant than the absolute amount of fees because most of the customers that we earn those management fees from, we also have a freight relationship where we're combining analytical or fee-based services with significant freight relationships. And when we talk about how our business is evolving to more integrated services, particularly with larger customers, the growth of these management piece[ph] is an important part of that combined relationship.

Moving to the sourcing results for the quarter on Page 9. So sourcing services was 3.7% for the quarter. For the last couple of quarters, we've been cautioning about the potential for net revenue declines due to the loss of business or committed business from one of our larger customers.

We did lose that business during the quarter, and there really is nothing new around the update of that relationship. What happened in the third quarter is we were successful in growth with services to other customers, as well as some seasonal commodity growth that helped us have a successful third quarter, a little bit better than we were anticipating at the beginning of it.

One of the seasonal successes and categories that we did well in, in the third quarter is the melon business. And near the end of the quarter, one of the companies that we've been working more closely with, we were successful in completing an acquisition of it. The size and revenues of the company are not real material, but the melon category represents something strategic for us. And we have hopes to continue to work with this company and expand our presence in that component of the sourcing services to help with our growth in the future.

So we do expect that, for the next couple of quarters, there remains risk of declining net revenue, knowing that we have some committed business that was lost over the last year or so that will still have to cycle its way through. We'll continue to do what we can to generate new business and sell. But because some of the new business is less committed and/or seasonal, it's not really certain what will -- what our growth forecast looks like for the next couple of quarters until we cycle through that business transition.

The last service category before I turn it over to Chad. Our payment services represents our subsidiary T-Chek. And the comments there, I think, are similar to previous quarters, where there are really 2 things driving the 10% net revenue growth for the quarter, the first one being primarily pricing adjustments around the fuel payment services that we do and the impact that those have on the quarter. And the second is that while we work to expand the menu of services around our payment offerings, one of the more important ones is the MasterCard compatibility of the payment cards of what we do. And we've continue to see pretty significant volume growth in those MasterCard services that is contributing to the net revenue growth in that service category for us.

So those are prepared comments along the service line activity. I'll turn it over to Chad for some more prepared comments, and then we'll move to the Q&A.

Chad M. Lindbloom

Thanks, John. As Page 11 shows and John mentioned earlier, our total net revenues increased 10.6%. Our total operating expenses grew at the same rate, resulting in income from operations increase of 10.6%. One thing that occurred during the quarter is our personnel expenses grew slightly slower than our net revenues, which is different than the first half of the year. Our personnel expenses for the quarter decreased to 42.1% of net revenues compared to the third quarter of 2010, which was 42.3% of net revenues. This decrease was primarily the result of various incentive programs, including restricted stock and certain bonuses that are driven by earnings growth.

In the third quarter of 2011, our earnings grew slower than in the first half of the year, which led to sequential decreases in some of these expenses. Last year, the third quarter earnings growth accelerated compared to the first half of 2010, which led to sequential increases in those expenses. These fluctuations are consistent with how the incentive compensation plans are designed to work.

Our stock-based compensation expense for this quarter was $9.5 million compared to $10.2 million in the third quarter of 2010. As a reminder, the restricted stock expense or the stock-based compensation expense for the fourth quarter of 2010 was $14.5 million, as our earnings growth continued to accelerate throughout 2010.

Total net revenues through the first -- moving on to October highlights, similar to John giving the truckload volume growth, we're going to give total net revenue growth through October 24. The total net revenue growth through that period was approximately 6%. Like John mentioned about the truck volume growth, it is possible that these first few weeks may not be a good indication of how the fourth quarter as a whole turns out.

Moving on to Slide 12. Our balance sheet remains strong with cash and investments of $383 million. We had a very good cash flow quarter driven by our earnings, as well as prudent capital -- or working capital management with cash flow from operations of $215 million.

Our net CapEx for the quarter, including the software that we are developing to make our business grow faster and be more efficient, was $9.3 million. In addition to these types of normal ongoing CapEx, we will have some notable other capital expenditures in the fourth quarter of 2011.

There will be $7.5 million of CapEx for the 500 intermodal containers that we've discussed last quarter as well as this quarter. We are also purchasing a new phone system that will be a consolidated system for all of our U.S. branches. The current total expected CapEx for this project is $6 million, with approximately $4.5 million of that $6 million occurring in the fourth quarter of 2011. The balance will be spread between 2012 and 2013 as we complete the rollout.

In addition, we are purchasing a new corporate aircraft for approximately $11.5 million. $1.25 million of that was paid in the third quarter, and the balance will be paid in the fourth quarter. We have entered into an agreement to trade in our existing plane for $4 million. Therefore, our net CapEx offsetting these trade-in proceeds will be about $7.5 million in the fourth quarter of 2011.

Moving on to the share repurchases. We have discussed in the past our strategy of using share repurchases as a variable way to return excess cash to our shareholders. During the third quarter of 2011, we've purchased 1,408,314 shares at an average price of $68.88.

That concludes our prepared remarks, and we will now turn it over to the operator to facilitate the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Christian Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

When you think about the pricing dynamic, you gave an update on where truck volumes were running for the month of October. How should we think about pricing? And I guess, maybe layering that into the margin side, I know it's difficult to get a sense. But does that imply kind of -- or can we imply a sequential improvement in transport margins as we go forward? Or is it a little bit difficult to tell that?

John P. Wiehoff

I think it's very difficult to tell. If you look at that history and kind of study it a little bit, absent kind of year end, the first quarter or something significant happening, the margins don't generally move sequentially more than 1% or so. And we know that we're starting to quarter kind of towards the lower end of the range in that box there. So it's very difficult to predict even at this point what the fourth quarter might end up like. I would say, from an overall pricing standpoint, the next couple of quarters are probably going to be pretty interesting, because as I mentioned in the prepared comments, most of the transportation businesses or relationships started out the year with price increases relative to the year before. And it'll be interesting to see how this balanced market situation translates into bid activity or lack thereof or what collectively the shippers, how they approach the marketplace over the next quarter or 2 and what type of pricing activity occurs.

Christian Wetherbee - Citigroup Inc, Research Division

So you think there could be some potential fluctuations in advance of what would be the traditional bid season the beginning of next year?

John P. Wiehoff

Yes, yes.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's helpful. And then I guess a follow up on the sourcing side. Is it possible to get a sense of what the net revenue growth looked like kind of x some of the other activity you had going on there? You mentioned losing some from existing customers. I'm trying to get a sense of maybe what the run rate could look like as we move forward.

John P. Wiehoff

It's really hard to do that right now. We've been trying to share as much as we know, but even with the lost business with that same customers, we're earning back some more seasonal programs, and it gets very difficult to predict. The reason why we've been more cautionary about it is because we had some of that dedicated business that we know is not going to reoccur. So we feel like we're starting out in a little bit of a hole from a comparison standpoint, at least for the next couple of quarters. But it's difficult. We still feel like our long term growth rate is mid-single digits in terms of market opportunity. But we've got a couple more quarters to cycle through, the comparisons of the lost business before we'll feel like it's a more normal growth environment.

Christian Wetherbee - Citigroup Inc, Research Division

And that comparison lasts for another 2 quarters or so? I know it's been kind of an evolution over the course of last year or so.

Chad M. Lindbloom

Probably more like 3 quarters, because we did have some of the business last -- we were losing some of the business during last quarter, so we did have some net revenues from the last quarter.

Operator

And ladies and gentlemen, our next question is from the line of Matt Troy with Susquehanna Bank.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

I'll keep to the one question here. Was wondering on your international businesses, specifically intermodal to the extent that it is international. Ocean and Air, can you talk about just customer diversification? I know you've been concentrated in those businesses, at least one of those business in the past. Have we've gotten past the point where one customer product launch can make or break a quarter there? And do you see the opportunity -- I know you're very conservative on acquisitions, but to grow that business more quickly now that you're on a common system organically versus acquiring something out in the market?

John P. Wiehoff

Our business mix in the international air and ocean is quite a bit different than the intermodal. The intermodal activity that we're involved with is much more integrated to our domestic truck, with food and beverage and a lot of the other categories that we've talked about historically there. On our international forwarding business, we still are relatively concentrated there. Our top 20 customers make up a much higher percentage of our business than it would in the rest of it. So our existing freight volumes with those current customers drive our results a lot more than they would in the other modes and services. So we're still a little bit smaller. We don't have the scale, we are a little bit more concentrated from a customer standpoint, but we are working hard to diversify that, to sell and to -- we do have some nice growth in some of the other industry verticals, whether it's garments or some of the other things that we don't have a stronger presence in. But we're growing fastly, and we do feel good about where we're at from a systems investment and strengthening our platform so that we can hopefully both grow more aggressive -- organically, as well as resume looking for acquisitions to integrate into. So we do have long-term growth expectations of accelerating there for those reasons.

Operator

And our next question is from the line of Alex Brand with SunTrust Robinson Humphrey.

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

On the air freight business, I don't think you said anything about this, John, but it seems like capacities loose, demand's weak. So I wasn't sure why your gross margins wouldn't be getting squeezed there.

John P. Wiehoff

The primary reason for that is because a lot of the air freight activity involves consolidation activity. And because we don't have tremendous density in a lot of the lanes, when volumes drop, we can lose some of those consolidation dynamics a little bit quicker than maybe a bigger network would. So it probably is more reflective of the immaturity of our network and some of the consolidation economics around our current size.

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

Okay, that makes sense. And what about -- from a regional perspective, is there any difference in the volume trends by region? Anything of note?

John P. Wiehoff

No. I think we shared throughout the year that while the overall market is balanced throughout 2011, there have been sort of flare-ups here and there where at times in the Southeast, it was a little bit tighter. We felt like, in general, the freight off of the West Coast and the West Coast areas at times has been softer or maybe a little bit more supply than demand, and that's probably tied into some of the weakness in the international stuff. So those are probably the only 2 regional themes that have come out at all throughout it. But in aggregate, it still would kind of come together in what we would say a pretty balanced feel.

Operator

And our next question is from the line of Ken Hoexter with Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

John, maybe you can just talk a little bit about -- you're pretty specific on your forecast, and I haven't heard you talk that specific on looking at the difficult comps and the net revenue margins. So just wondering what drives that tightness in the fourth quarter relative to last year when there was a tighter peak, I guess, earlier? And I guess, a little bit of looser as it got later. Why then -- you saw some strong margins. Is that what's causing the tougher comps? Or just wondering why you were so specific on looking at that fourth quarter? I haven't heard you talk about a forecast like that before.

John P. Wiehoff

Yes, well, for starters, we were careful not to make a forecast. We were just trying to update exactly what we've seen through to date and clarify that things can actually change and probably will change fairly quickly over the next couple of months. But what we're really trying to convey is everything that we note to date, which is that historically, these market cycle and our volumes and our margins correlate inversely, but they don't happen perfectly. It's not like exactly at the end of a quarter, you see the light switch change around these. And the trend that we've been seeing throughout the year is that margin comparisons are getting more difficult and that net revenue margin growth is going away. And our volume comparisons have been fairly challenging, but now that's starting to fade, where volume growth in the fourth quarter of last year was less. So hopefully, if the business works the way it has in the past, in future periods, we'd see greater volume growth and more consistent margin comparisons. Now every cycle's a new one, and I don't know exactly what will happen. But we felt it relevant for you to understand that others have talked about market improvement, and we are seeing some modest volume growth coming into the quarter. But we don't know what margin comparisons are going to be like, and so we were just sharing all the perspectives that we had up until today.

Ken Hoexter - BofA Merrill Lynch, Research Division

Great, appreciate the clarity on that. And my follow up would be on the IT. It looks like your extending credit. You talked about the MasterCard business. Is that you moving beyond fuel? Is that maybe becoming more of a financing entity then in terms of extending the credit? Can you just delve into that a little bit?

John P. Wiehoff

Yes. So there are -- it's basically the history of the business, with the fuel cards, is that we were doing almost entirely fuel services. But throughout that, there always were cash advances or other payment mechanisms working principally with drivers that we could facilitate that. Over the past several years, like many in the industry, we've made those fuel cards MasterCard-compatible, or we have MasterCard-processing capabilities for those same people. And we started to sell MasterCard services to other components of shippers and other parts in the business that are just trying to better capture cost and understand their processing fees. So it's a combination of some expansion within the transport relationships that we have, expansion to shippers and some offering of MasterCard services to others, which would be more of a financial services type stand-alone.

Chad M. Lindbloom

They're more of the financial -- more similar to other financial services companies, the services, but we are not -- our MasterCards do not give revolving credit. Our average billing cycle is less than 2 weeks, and the payments are due upon receipt of the bill. So we're not running typical consumer-type MasterCard where you can carry a balance and collect interest and things like that. It's all about commercial MasterCard business where it has to do with efficient ways for people to pay their accounts payable. It's not a financing vehicle at all. We're not using our balance sheet to lend money to other businesses.

Ken Hoexter - BofA Merrill Lynch, Research Division

Okay. Yes, and I guess you can see that with the AR staying relatively in line.

Chad M. Lindbloom

Right.

Operator

And our next question is from the line of Nate Brochmann with William Blair & Company.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to talk -- just my first question is when we think about some of the low inventory or lower inventory levels at a lot of your shippers where customers are holding that certainly, emergency shipping first goes air freight. But could you kind of walk us through the dynamics that you saw, like towards the end of 2009 as a lot of the retailers and even some of the consumer companies kind of had to restock a lot of inventory towards the end of the year, how your dynamics kind of worked out there?

John P. Wiehoff

Well, what I tried to describe before is that fourth quarter of '08 and the early part of '09. We and the industry had some volume declines that we really hadn't seen for a couple of decades. And that was really the period of time where almost every shipper that we were working with was going through some phase of scrambling for liquidity. And as you suggest, really managing inventories down and what was probably lack of sales and recession, but also just the managing for liquidity and really trying to squeeze their supply chain and inventory levels really in unprecedented ways during that period of time. As the end of 2009 and 2010 came along, the very common theme with a lot of our customer relationships is that they wanted to resume growth and look for continued productivity and cost savings in their supply chain, but try to keep their inventories low like they had achieved during that liquidity period. So really, through the end of '09, and I would say up until even including today, there has been as much intensity as ever around trying to manage inventory low and turn it quicker. And simultaneously, match that up with productivity and savings and efficiencies in the supply chain. When I talked about those value-added services and a lot of the things that we're doing to try to work with shippers in more integrated ways, oftentimes, it's really just process improvement and automating and accelerating tendering times and accelerating routing periods and trying to really work with customers to make sure that we can assist as best as possible in turning that inventory as quick as possible and keeping it low. So the end of '09, we saw good volume increases and the resumption of some level of growth. But it's really been for the last 1.5 years now where, in addition to that, what we have felt is a lot of receptiveness to the notion of what we call outsourced solutions or freight relationships where there's a more integrated partnership to try to help drive improvements around broader freight management and inventory turns that can really help a shipper get those goals.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

And is that a lot with your existing larger customers, John? Or is that opportunities where you see new, smaller, medium-sized companies come in and looking to partner up to be able to get those solutions rather than sourcing it directly themselves?

John P. Wiehoff

It's with -- that trend is with companies of all sizes, but generally, more existing customers. We don't typically go from no relationship to an integrated relationship. It's usually at least a few years, or in many cases, much longer than that where we're earning credibility and relationship and learning their business through providing transportation services and through a growing relationship and eventually, automating and integrating more, that we'll convert it into a more dedicated or outsourced our integrated things. So it's existing customers of all sizes, many of them -- many of the larger customers. It'll tend to be a division or a part of the company that we would begin to work with them in a more integrated way.

Operator

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

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

I'll just stay focused on intermodal for a moment. We've heard that Union Pacific's mutual commitment program has been somewhat problematic for the smaller IMCs. And I'm wondering if you have seen that or experienced it? And if you don't want to speak specifically to them, could you just talk more broadly about capacity access?

John P. Wiehoff

Well, there's really only 2 providers in the west, the UP the BNSF. And if you want to offer intermodal services nationally like we do, a lot of our message has been that we're working very hard to have the best relationship we can with both of them because that's the best way to give your customer all of the choices that you have out there. So we've had a lot of transition in both relationships because they've both assessed their equipment management and are changing the pricing programs and probably lots of things in the rail industry that you understand, as well as we do, around how they're trying to optimize and manage their equipment. The BNSF has been more consistent around preferences towards owned equipment to give better line haul pricing, which is something they've had for a while. And our trend towards more dedicated equipment is to align with that and make sure that we have efficient pricing and access to their services. The UP has changed directions. A lot of it was wrapped up in the PACER relationship and all of the changes that have gone with that. And the pricing programs that they have brought to the marketplace have evolved quite a bit over the last 2 or 3 years, and we participate with them and have a good relationship in terms of growing our services there as well.

Operator

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

Robert H. Salmon - Deutsche Bank AG, Research Division

It's Rob on for Justin. I guess, is I'm looking at the productivity, we saw it come off a little bit from very high levels in Q3, down about $450 on a net revenue per average employee basis. Could you talk a little bit about the drivers that we saw in terms of the deceleration or the actual decline in terms of employee productivity? Was that more from the headcount additions that we saw cycling through into the numbers? Or was it deceleration in overall volume growth in your TL segment? And how should we think about employee productivity looking forward?

Chad M. Lindbloom

One thing we've been talking about consistently all year is that we were at peak productivity levels, and we need, if we are going to continue to grow -- or as we continue to grow, we're going to need to add people to balance that. Now obviously, we're never perfect at that, so there's different things driving that impact, which is yes, we did add more people than we did have volume growth. Our net revenue margins have been fluctuating, especially compared to last year downwardly, which means we're making each of those people -- it takes more work to make -- more amount of gross volumes to make the same amount of money. So yes, our net revenue per person's slight decrease is driven by the fact that we have more people. But we think adding those people is the right thing for the long term to continue to grow the business, and there is going to be fluctuations. Some parts are going to look better and some parts are going to look worse. But we always feel good about how we've been adding headcount in the productivity of the business model, continuing to keep costs relatively flexible.

Robert H. Salmon - Deutsche Bank AG, Research Division

That makes a lot of sense. It also relates to your overall business model where we see fluctuating gross profit margins overall in the transportation segment. I guess, shifting gears to the small acquisition that you guys announced, could you give us a little bit of color in terms of Timco's overall gross revenue and net revenue split on an annualized basis to the extent you're willing to comment? And could you also give us a sense of C.H. Robinson, how hard you've been moving much of Timco's logistics through your network currently?

Chad M. Lindbloom

Yes. We were -- I don't know if we're either a exclusive transportation provider, but we were definitely a significant transportation provider to Timco already. So we won't really see a huge pickup in freight volume because of Timco, because we were already handling a lot of it. The one unique thing about Timco's business model is it's in a -- it's what's called an account of sale business, so the gross revenues don't show up. We are -- for the bulk of the business, we're representing growers and collecting a commission. So it's only the net revenue of Timco that shows up. As far as the relative size, I don't have that in front of me, but I think it's a very small number. As John mentioned, it's not significant to us right now from a financial perspective, but it's an important ongoing strategy of us trying to control more product versus just sourcing products that the customers are looking for, to be looked at more like a shipper even though we're still not growing a product and we still don't have the harvest risk. But it makes us look more like a supplier rather than a broker to customers.

Operator

And our next question is from the line of Ed Wolfe with Wolfe Trahan & Co.

Edward M. Wolfe - Wolfe Trahan & Co.

When you look at that 4% pricing, John, what's the direction of spot and contractual rates that make that up? Which one's higher than the other right now, and how has that been trending for you?

John P. Wiehoff

One of the things that we've talked about in the past and throughout the year is that the transactional freight, the true transactional freight, occurs when there's route guide failure or service failures or unpredicted amounts of seasonal or excess freight. And because of the fact that the market's been fairly balanced and fairly stable and was reasonably contracted out at the beginning of the year, one of the reasons why we believe our volume growth has been a little bit more modest this year is because there just hasn't been a lot of unplanned freight in the marketplace. It's been a fairly balanced market. And historically, we've said our best opportunities to help our customers and help our carrier partners and add value to the marketplace is during periods of transition when people need help and things are changing. So it's been a fairly stable, balanced year, and most of that pricing represents longer-term, annual, committed, contractual-type prices compared to a year ago.

Edward M. Wolfe - Wolfe Trahan & Co.

So of the 4%, contract pricing is a higher percent? Or it's just a bigger part of the mix?

John P. Wiehoff

A bigger part of the mix. And as I said earlier, Ed, remember that we're pretty spread out. There's a lot of different lanes and even within existing customer bases, we can switch lanes from year-to-year. And that 4% is truly just an aggregated percentage that comes out of it, and it's mostly pre-priced activity from the beginning of the year.

Edward M. Wolfe - Wolfe Trahan & Co.

So when's the next bite of the Apple to speak 4% move up in a significant way, if it's going to over the next year?

John P. Wiehoff

It kind of depends upon the market conditions. It really -- it depends upon when and if shippers go to bid. We've talked in the past about -- from our point of view, each shipper reserves the privilege of when and how to go to the marketplace and what percentage of their freight they might put out there. And they generally do that logically if they think that it's in their favor to do that. If the market tightens up in the rest of this year or early spring, that can cause transactional opportunities to look at more fluid pricing. So we need some market transition or stress to sort of really put in more meaningful price changes. Otherwise, it will probably just carry on in a more balanced mode.

Edward M. Wolfe - Wolfe Trahan & Co.

Okay. And just as a second question, a topic for Chad. If hypothetically you did 6% net revenue and EPS in the fourth quarter, would there be no stock-based compensation relative to that $10 million last year?

Chad M. Lindbloom

No. There still would be some stock-based compensation at 6% growth.

Edward M. Wolfe - Wolfe Trahan & Co.

Roughly, what would that look like?

Chad M. Lindbloom

No, it's possible for it to be 0 in a quarter, but it's not likely. Not at 6% growth.

Edward M. Wolfe - Wolfe Trahan & Co.

Roughly, what does it look like at 6%?

Chad M. Lindbloom

I haven't calculated it at 6%.

John P. Wiehoff

The challenge is that it's an annual calculation, so you'd have to get to the annual growth rate and then subtract the third quarter estimate and see what the difference would be. I don't have that in front of me.

Chad M. Lindbloom

No, neither do I. The data is available on the annual report if you want to go back and see what stocks available to vest. And the formula is published, so you could run whatever scenarios you wanted to.

Operator

And our next question is from the line of Jack Waldo with Stephens.

Jack Waldo - Stephens Inc., Research Division

Yes, just a follow up on Ed's question real quick, and I missed this before, the fourth quarter stock-based compensation, what did you say it was, Chad?

Chad M. Lindbloom

Last year's fourth quarter was $14.5 million.

Jack Waldo - Stephens Inc., Research Division

$14.5 million. And I think I had about $9 million end of fourth quarter of '09. Does that sound about right?

Chad M. Lindbloom

It sounds about right. I can look really quickly.

Jack Waldo - Stephens Inc., Research Division

I'm sorry, maybe $4.1 million.

Chad M. Lindbloom

Stock-based compensation for the fourth quarter was $4.1 million in 2009.

Jack Waldo - Stephens Inc., Research Division

Okay. So well, I guess I'll just do the math with that and we can compare notes.

Chad M. Lindbloom

I'll be honest, I did run a bunch of different scenarios to what would the restricted stock expense be.

Jack Waldo - Stephens Inc., Research Division

Yes. I guess my question is could it be closer to the $4 million than the $14 million?

Chad M. Lindbloom

It could be.

Jack Waldo - Stephens Inc., Research Division

Okay. And then my last...

Chad M. Lindbloom

No, it definitely will be less than the $14 million.

Jack Waldo - Stephens Inc., Research Division

Okay. And then my last 2 questions are kind of on the semantics line. The tax rate was a little bit lower than what we were expecting. Was there anything in the tax rate that made it lower than, I guess, kind of the 38% to 38.5% where you've been running?

Chad M. Lindbloom

Yes. We've always talked about being between 38% and 38.5% There is nothing significant that -- I realize the rate was a little bit below 38%. There was nothing significant to comment on. It's just normal fluctuations.

Jack Waldo - Stephens Inc., Research Division

Okay. And then where did you end on your share count for the year -- or for the quarter, and what would be a good number to use for the fourth quarter, excluding any share buyback?

Chad M. Lindbloom

Somewhere around -- excluding any additional share buybacks, it probably be somewhere in the neighborhood of $164 million.

Operator

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

William J. Greene - Morgan Stanley, Research Division

Have you noticed any measurable impact on capacity in your system from CSA at this point?

John P. Wiehoff

Nothing that we could specifically attribute to CSA. There were conversations and anecdotes from a year ago, probably at least a full year ago, that in contemplation of it that some of the carriers were holding their drivers to higher standards or flushing a few out. But at the very small end of that where you have single truck carriers or whatever, there's always a decent degree of churn in some of ours. So if any of the smaller carriers left because of that, we wouldn't necessarily know that specifically. So there might be some impact in terms of drivers for larger carriers or smaller capacity going away, but nothing measurable from an overall standpoint attributable to CSA.

William J. Greene - Morgan Stanley, Research Division

Okay. And then as a second question, often exchanges are thrown out there as a threat to the Robinson model. My sense is technology is not there to a point where it could threaten anything close to your scale. But we do have sort of smartphones now where you could kind of put the ability of sort of trucker to sort of identify loads that are nearby. Is that something that you think you would want to look into in terms of moving in that direction, toward greater automation of load matching in the hands of sort of a carrier or a shipper? Or how do you think about that potentially?

John P. Wiehoff

The whole phone evolution is relevant. We already have a smartphone app that's out there being used by drivers. And if you look at our website, that's been there for the last 10-plus years. There's a lot of load finding and matching and search capabilities that have been on the Internet for almost a decade, back -- lingering from the whole dot-com thing, or where the Internet opened up a lot of this. Extending that to smartphones and making it more portable and making check calls and some of those other stuffs, we think is a little bit of an opportunity for us just because in the past, some of that real-time satellite track and trace stuff was very expensive and more challenging to integrate in with. So there's a little bit of an opportunity for us just in terms of those technology costs coming down and allowing us to integrate in more with all shapes and size of carriers with universal technology like a smartphone, rather than a very expensive dedicated GPS-type device. I suppose there's accompanying risk with that, that others can sort of replicate or do things cheaper as well and build kind of comparable networks. But that's where we believe our processes, our relationships, our scale and a lot of the other things that we believe are competitive advantages are far more relevant than just the underlying technology infrastructure.

William J. Greene - Morgan Stanley, Research Division

Yes. That make sense. Is there a leap that could come from this on the productivity side?

John P. Wiehoff

We have a perpetual list of productivity initiatives, and all this is on there in terms of carrier automation particularly. But we've been working a lot on EDI and web interfaces and lots of other things that I would characterize it as one of the more recent items on that long-standing list of driving productivity, but probably not anything that's going to be a leap frog or revolutionary around it.

Operator

And our next question is from the line of Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Most of the tough questions have been asked here, so let me come back to the tax question, Chad, and let me ask if you wanted to see if there was like a ForEx impact as well. You said this was just random variance, 38% to 38.5% the true range. Does that mean fourth quarter you might be a little bit higher than normal to kind of true up the full year?

Chad M. Lindbloom

Well, there's no real true up. It is based on the income and the activity that happens throughout the year on a year-to-date basis, and then we back out whatever we've booked so far. So it's not that this calculation is more or less accurate than it was at end of the second quarter or will be at the end of the fourth quarter. Some of the specific things are where are we making money as far as -- in some quarters, we have losses in foreign countries where we can't take a tax benefit for it because we don't have any carryforwards available. And in some quarters, we're profitable in other -- in those same countries, which drives down the rate actually because -- when you have tax losses with no tax benefits. So there's small little fluctuations in effective state tax rate based on our portionment[ph] of where the income being a portion. So there's a lot of -- there's no big change, and there's a lot of little technical things that vary from quarter-to-quarter that drove the variance.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Okay. And then as you're getting larger and doing a little bit more international markets, I know a number of other companies we follow have talked about a ForEx impact for the quarter. Was there any kind of foreign exchange impact to the current quarter?

Chad M. Lindbloom

There was nothing significant. Less than 1%.

Operator

And our next question is from the line of Peter Nesvold with Jefferies & Company.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

All of my questions have been answered, the only quick thing is it looked like the big benefit from cash flow from 2Q to 3Q is other operating elements. Is there anything you can elaborate to describe what drove that huge strength in cash flow in the quarter?

Chad M. Lindbloom

Yes, the biggest drivers, or the biggest 2 drivers of that line of the cash flow statement are our accounts receivable and our accounts payable. So the main driver of the -- there was still a use of cash, but the main driver of the big improvement is our accounts receivable days outstanding compared to the second quarter of 2011. So when you look at the quarterly impact, fell about 2 days of days of sales outstanding, where the accounts payable stayed relatively consistent. So having a 1- or 2-day shift in our accounts receivable can drive huge fluctuations in cash flow.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Any reason why that reverses out next quarter?

Chad M. Lindbloom

I'm looking at a quarterly history going back to 2009, and it's ranged from, based on the way that we calculated our accounts receivable based on the quarter sales, it's ranged from 41 days to 44.7. So it's really a fluctuation around how well are we doing at that particular moment or at the particular day where the quarter ends at collecting the money. So it does fluctuate around 42 -- 42 days roughly is where we're at -- is a pretty -- was a pretty good ending point. So it's a little bit of -- last year's fourth quarter, we were at 41 days.

Operator

And our next question is from the line of Thom Wadewitz, JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

It looks like I snuck in under the wire here. Let's see. You talked about the volumes in truckload picking up a little bit in October. Do you have a sense of that? Is that share gain, or do you think that's just kind of the broader market activity picking up?

John P. Wiehoff

It's too early to tell that, Tom. When the quarter -- when month is over, quarter is over, we can at some customer activity and try to better understand how many we added and our account penetration with our larger customers. But we don't have any of that right now.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. And earlier in the call, you referred to an environment where there's less transactional business. I think you said the market's in balance and so forth, and that's perhaps work against the pace of volume growth you've seen this year. Looking out the next couple of quarters or perhaps just generally, what do you think would need to take place or what may take place in order to drive a more favorable dynamic where you'd see stronger growth?

John P. Wiehoff

Historically, at least we're -- we will have a certain amount of volume growth just by selling and building our network, probably consistent with what we had this year. But historically, where we've had more significant growth is where a lot of shippers have had route guide disruption, which would mean they've had more freight than they expected, or they've had freight in lanes where they didn't expect it, or that price has moved significantly and they wanted to reassess their freight mid-year. So generally, there's a lot of inertia to a significant amount of the freight out there. And when you have a fairly static year, like we would characterize this year, we can still grow and do some good things. And we feel like we've had a successful year in terms of serving our customers and expanding our business. But the third party model and a lot of the value that we try to add gets accentuated when there is market tension and there's opportunities to participate in a different way too.

Angela K. Freeman

Well, we're out of time, so unfortunately, that'll have to be our last question. We're sorry we couldn't get to everybody today. Thank you for participating in our third quarter 2011 conference call. The slides are posted on our investor website and in addition, this call will be available for replay in the Investor Relations section of the C.H. Robinson site at chrobinson.com. It's also available by dialing 1 (800) 406-7325 and entering the passcode 447-8446#. The replay will be available at about 7p.m. Eastern Time today. If you have additional questions, please feel free to call me, Angie Freeman, at 1 (952) 937-7847. Thank you.

Operator

Ladies and gentlemen, this concludes the C.H. Robinson Third Quarter 2011 Earnings Conference Call. ACT would like to thank you for your participation. You may now disconnect.

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