Q2 2007 C.H. Robinson Worldwide Inc Earnings...

F I N A L T R A N S C R I P T

CHRW - Q2 2007 C.H. Robinson Worldwide Inc Earnings ConferenceCall

Event Date/Time: Jul. 24. 2007 / 5:00PM ET

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2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without theprior written consent of Thomson Financial.

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C O R P O R A T E P A R T I C I P A N T S

Angie FreemanC.H. Robinson Worldwide Inc - Director of Investor Relations

John WiehoffC.H. Robinson Worldwide Inc - President, CEO

Chad LindbloomC.H. Robinson Worldwide Inc - VP, CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Justin YagermanWachovia Securities - Analyst

Tom WadewitzJPMorgan - Analyst

Ed WolfeBear Stearns - Analyst

Jason SeidelCredit Suisse - Analyst

Scott FlowerBanc of America Securities - Analyst

John LangenfeldRobert W. Baird - Analyst

John BarnesBB&T Capital Markets - Analyst

David CampbellThompson Davis and Company - Analyst

Donald BroughtonA.G. Edwards & Sons, Inc - Analyst

John StifelStifel Nicolaus - Analyst

Ken HoexterMerrill Lynch - Analyst

P R E S E N T A T I O N

Operator

Welcome to the C.H. Robinson second quarter 2007 conference call. At this time all participants are in a listen-only mode.Following today's present takes instructions will be given for the question and answer session. If anyone needs assistance atany time during the conference please press the Starkey fold by the zero. As a reminder this conference is being recorded today,Tuesday, July 24, 2007. I would now like to turn the conference over to Angie Freeman, C.H. Robinson Director of InvestorRelations. Please go ahead, Ms. Freeman.

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Jul. 24. 2007 / 5:00PM, CHRW - Q2 2007 C.H. Robinson Worldwide Inc Earnings Conference Call


Angie Freeman - C.H. Robinson Worldwide Inc - Director of Investor Relations

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

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

With that I will turn the call over to John.

John Wiehoff - C.H. Robinson Worldwide Inc - President, CEO

Thank you, Angie. A little while ago we, we released our second quarter earnings. I want to start by highlighting a few of thekey metrics on there that we focus at. Gross revenues increased 10.5% to $1.8 billion for the quarter.

Net revenues increased 14.9% to $310 million. Our income from operations increased 25% to $130 million. And our diluted EPSof $0.47 was 23% higher than the second quarter of 2006. Our results for the second quarter represent principally organicgrowth.

We achieved our long-term growth target of 15% in most of our key metrics and acquisitions did not contribute materially toany of the revenue growth for any service line. These results were driven by our core strategy of hiring good people, selling,executing and building out our network of relationships.

Moving on to comments by revenue source. Starting with truck transportation which makes up about 75% of our net revenue.Our truck net revenue for the quarter grew at 15.6%.

As a reminder we define truck to include truck and LTL in all forms including drive and refrigerated and flatbed. It also includesEurope, truckload and LTL. In our release we stated that our truck transportation growth was driven by increased volumes andan increase in our gross profit margin. Pricing on average in the quarter was essentially flat with a year ago. During the secondquarter of this year similar to the first quarter our truck net revenue volume growth was about 7 to 8%, generating about halfof our growth with the remainder of truck growth coming from margin improvement.

While we did achieve our long-term target growth of 15% net revenue this quarter, our truck net revenue growth has continuedto slow corresponding to the slowing demand growth in the overall market. We think it's useful to briefly recap our truck netrevenue comments and trends from the past few years to help put this quarter and our current views into context.

Our primary measurement for truck growth is net revenues. Three things drive growth in those net revenues. First, more truckloadtransactions or volume. Second, price increases. Third, gross margin percentage. So more volume is a good thing. The moreyou can charge is a good thing. And the higher percentage of that margin that we are able to keep based on the buy/sell spreadare the three things that will drive our growth.

Our base long-term growth goal of 15% was set from our historical experience since deregulation. That base goal is driven bytargeted volume or transaction increases approximating 15% with modest 1 to 2% price increases. And fluctuating gross marginpercentages.

When volume increases are significant, gross margin percentage tends to go down. When the freight market softens and volumegrowth slows we typically experience expanding gross margins. Prior to 2004 our comments were generally focused ontransaction volume and margin percentage with little change in prices.






During 2004, 2005 and the first half of 2006, the industry experienced significant price increases. During this period we experiencedtruck net revenue growth well in excess of our 15% target, driven by double-digit volume growth, double-digit price increasesand gross margin percentages that were seasonally consistent with historical ranges.

For the third quarter of 2006 last year, we reported consistent with others in the industry that the aggressive growth in volumedemand and pricing had slowed. So for the past four quarters we've experienced high single-digit volume growth and expandinggross margin percentages driving our growth with generally flat pricing.

Which brings us back to 2007 and the key reference points for us analyzing our truck net revenue growth at mid year 2007.First, we are in a soft truck market with weaker growth in demand than the past several years and generally flat pricing. We'vegrown our transaction volume high single digits in the first two quarters of 2007. And we are generally at the high end of ourhistorical ranges of gross margin percentages.

Freight demand, our volumes and pricing and our margin percentages can change quickly especially in the transactional spotmarket where we have significant exposure. While freight volumes, pricing and our gross profit margins will continue to fluctuatewe still believe 15% average net revenue growth is a reasonable long-term goal. Similar to the first quarter we feel very positiveabout second quarter high single-digit volume growth in a flat to down market. Our model continues to take market share. Onthe challenge side, pricing and margin percentage comparisons will be much more difficult in the second half of this year.

Moving on to our other modes and services, in our intermodal business we were able to add some new intermodal customersduring the quarter. Our net revenue growth of 6.5% was driven by volume increases. In the global forwarding business ofinternational air, ocean and customs brokerage services, we were also able to add new business and grow our volume andmargin. Volume growth and margin expansion drove net revenue in excess of 25% for global forwarding. During our secondquarter we opened three new offices in our global forwarding network and continue to build out our team and network in thatbusiness.

Our transportation management business continues to add fee based volume and add to our transportation net revenue growth.Our sourcing business continues to grow as well. Weather impacts on certain commodities drove price increases and margincompressions. That's typical for that industry but we continue to expand our presence and scope in the perishable supply chainservices. T-Chek had 5.4% net revenue growth for the quarter. Their growth continues to slow compared to previous years giventhe current market conditions. However, they were able to add some new accounts during the quarter.

Looking at operating expenses we've talked a lot that one of our key goals is to make our business model as much variable costdriven as possible. We spend a lot of time managing the people and the headcount across our network. We added 162 peoplein the quarter, about 9% more than a year ago and about 2.5% more than the first quarter. Total personnel expenses improvedfrom 47.9% of gross profits to 45.4%.

Our variable cost incentive plans are driven by growth calculations. Those calculations are consistent with prior years, however,as our growth rate has slowed so has the growth in the expenses related to those plans.

We continue to push for productivity and network leverage and will try to grow our earnings faster than our net revenues. Lasttopic that I'll touch on is early in the third quarter we completed a small acquisition in Los Angeles called LXSI. We are excitedabout a new location in the network and adding some expertise in domestic air and expedited services. These are both thirdparty services that we plan to continue growing. That concludes my prepared comments. I will turn it over to Chad.






Chad Lindbloom - C.H. Robinson Worldwide Inc - VP, CFO

Thank you, John. I'm going to quickly cover two different subject areas. Both related to cash flow. One is our free cash flow andthe other is share repurchase activity and the authorization that was mentioned in the press release. Our free cash flows for thefirst half of '07 as you saw were slightly lower than in '06 for two primary reasons.

Fluctuations in working capital and increased capital expenditures. Working capital fluctuations are primarily made up ofaccounts receivable and accounts payable going up and down. We are comfortable where our receivables and payables wereas of the end of the quarter.

There is -- we have been over the last two years showing improvements in our use of working capital. It's just that there was agreater improvement in the first half of '06 than there was in the first half of '07. Yet we still did improve it going into '07.

On the capital expenditure side, the disproportionate growth in CapEx is, is driven by our new headquarters building. At thebeginning of the year we gave guidance that we thought we'd have $45 to $50 million of total CapEx with about half of it beingrelated to the building. We are still comfortable with that range. We think that we will probably end up in the lower half of thatrange. So far we've had a total of $23.6 million of CapEx, $12.5 million related to the building. So we expect to have somewherebetween $20 and $24 million more this year in the second half.

On the share repurchases, as we mentioned in the press release, the board authorized us to purchase an additional, up to anadditional 10 million shares above and beyond the 1.7 million shares we had left from a previous authorization. We expect thatthese authorizations will last us several years. The amount that we buy if any during a period will vary based on our cash position,potential uses of cash and market conditions.

During the quarter we did repurchase 864,000 shares and issued about 400,000 shares through option exercises and ouremployee stock purchase program. That concludes our prepared remarks. We will now open it up for questions.

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you, Mr. Lindbloom. (OPERATOR INSTRUCTIONS). Our first question comes from Justin Yagerman with Wachovia Securities.Please go ahead.

Justin Yagerman - Wachovia Securities - Analyst

Hi, good afternoon, gentlemen and Angie, how are you doing? I guess my first question relates to the hours of serviceannouncement that we had this morning. If you could comment a little bit on how that announcement and the changes in theregulations if they do go through would affect your business and how you see that impacting the marketplace?


We did see the announcement. We have not yet had a chance to discuss the impact with many of our, really any of our carrierpartners. So we will need to discuss them before we would know for sure. But in general when there have been any changesaround regulatory type things the first question is, will it drive any sort of underlying economics or cost changes to the assetproviders based upon their productivity or restrictions and then if so, how aggressive and successful will we all be in trying topass those through to the shippers who are generally not very excited about reasons like that to have to pay more. So I thinkwhat will be happening soon is everybody will be crunching their network to see what type of an impact that's going to have.






Obviously working fewer hours would generally stir you toward, maybe it's going to cost more or you will have to have morecapacity in order to meet the similar amount of needs as the past and then we'll, just like a fuel surcharge or anything else wewill be working to try to adjust those costs and pass them through and correct them as best we can.


And in an environment where capacity becomes harder to come by, though, would you speculate that your business wouldbenefit from that or is it the rate side of that equation becomes a hard factor to gauge in terms of figuring that out?


I think we've learned the last three or four years that in general as I suggested in my comments price increases are positive toneutral for us. So if it does escalate cost I think it will either be a neutral or a potential positive for us. As I suggested from amargin percentage standpoint over time that tends to equal out. So I'm sure like many other costs over time it will level out.But anything, in general anything that causes challenge or change or transition gives us an opportunity to try to help both thecustomers and the carriers and is probably a good thing.


On this acquisition that you guys made, the LXSI you mentioned domestic air and expedited as the areas that you are targeting.Can you give a little more color around that? Is there any business from the U.S. to Asia there and how do you see that evolvingwithin the general plan in that business?


Well, those are both service offerings that we offer today but they are both very small. And as ground transportation servicesevolve to more time definite and faster turns we've just been expanding our carrier relationships and our scope of offerings interms of time sensitive delivery both buy air and by ground. This business in Los Angeles has some pure domestic business. Italso has some international connected business where there are components of it that are executed on the ground. So the waywe think of it is that we are getting another location in the network with we believe a highly qualified team of people and someservice provider relationships that will help us grow and expand the offerings in those categories.


Is there ocean exposure there?


I don't believe so.


Just a question, the tax rate was even year over year but down from first quarter, how should we be thinking about that tax rateas we go through the year, Chad?







The tax rate is in the range of what we've guided people to and we expect to be in the 38 to 38.5%. It's going to fluctuate basedon -- it's very difficult to predict where we are going to be in that because it will fluctuate based on how many options areexercised. FAS 123 R made income tax expense much more volatile than it had been.


So 38 to 38.5 for the rest of the year?


That's kind of our normal range that we expect, yes.


Got it. And just lastly before turning it over to anyone else, as you looked at the quarter, how did you kind of see seasonalityplaying out throughout? Did you see a normal progression as you ramped through the quarter or was it generally choppythroughout?


It was -- when you look at growth over last year and if you look at it on a per business day basis it was the strongest in April anddown a little bit in May and then about the growth on a net revenue per business day was relatively consistent in June comparedto May.


Not kind of what you would typically think of for a second quarter?


Well, the May and the June were still growing. And if you looked at it sequentially but it didn't grow as much as it did overprevious years and months.


Got it.


So there's still seasonality.


Okay. And I lied, one last one, what did you buy back shares at average price in the quarter?







Our average price was about -- it was $53.28.


I appreciate it.


No problem.


Thank you.

Operator

Thank you, our next question comes from Tom Wadewitz with JP Morgan. Please go ahead.

Tom Wadewitz - JPMorgan - Analyst

Yes, good afternoon. Let's see. Wanted to see if you could provide some thoughts on gross margin. You mentioned that, I guessin the transportation piece in particular you mentioned the comps are tougher in second half. Is it difficult to see year over yearimprovement given those tougher comps or is that something that's still kind of realistic to think that there's some upside fromwhere you were a year ago?


You know, there's potential for minor improvement but within the range of what we would see as historical we're alreadytowards the high so there wouldn't be a lot of room. The one thing that I think is relevant about that, though, is at least historicallythere's been that relationship between volume growth and margins that when usually historically it has taken acceleratedvolume growth in order to start moving that margin percentage back towards the middle. So in general our expectation wouldbe that profit margins can stay higher in a soft market and, you know, you sell and you wait for the market to turn and volumeto increase and when that happens you are probably going to sacrifice some margin.


Right. Okay. But, so it's realistic to think that you probably maintained some pretty strong margins, maybe a little bit of upsidebut the pace of improvement probably slows a bit. So on the volume growth side given that it is a pretty soft market, the volumegrowth is in transportation is pretty impressive. How should we think of that going forward? Does that get tougher to sustainor can that actually accelerate? I guess it actually accelerated a little bit in second quarter on a year over year basis versus firstquarter. So any thoughts on how we think about that going forward?







It's difficult for us to separate brand new customers from existing customers because there's a lot of churn in the I.D.s, customerI.D.s and acquisitions and whatever but our best estimate historically is that when we've been growing transaction volume atdouble digits something approaching our long-term goal of 15%, say in the 12 to 13% range, that there's been an element ofthat that is taking market share and getting new customers and we know that we added a lot of new customer I.D.s in thequarter just like we believe that we always can. But then at times we get a tailwind from the marketplace where there is growthin the freight and growth in the volumes and particularly given our spot market capabilities we think we get a decent share ofthat growth when the market takes off. So in a flat market, we would hope to continue to target this type of growth as takingmarket share and expanding our network and presence. And if the market got worse and started to decline we could have agreater head wind that it would be tougher to take market share and when things pick back up then we would look to try togrow volume faster.


Do you have a sense of what the market looks like, whether there is some signs of improvement or does it still seem to be apretty weak truckload market from a demand perspective?


It's very difficult to tell. We really don't have any insight into that. And it's hard, like we said before when we analyze our business,there's per day, per month, holidays fall and different things and it's hard for to us gain any insight especially even until a monthor a quarter kind of progresses a little bit further which is why we stay away from speculating or trying to anticipate the nextquarter.


Right. But based on what you saw in second quarter it was still a pretty soft market.


As Chad said, May and June were consistent and then down a little from April.


Okay, what about your view -- maybe I will end with this last one and give others a chance, your view on capacity, have youstarted to see some of the more marginal smaller providers go out of business or really come under a lot of pressure or has yourability to -- the capacity you see in the market, has that remained pretty stable?


There has been some churn in the carrier side of it. What's challenging for us is that we are not really on the leading edge ofthat. We just know those that were working for us who go away. We don't track the bankruptcies or anything like that and evenin good times there's a certain amount of churn in there. So, yes, I have heard anecdotally about different carriers here andthere. We are not able to quantify that in terms of whether it's more than a year ago or how much more. But there definitely isa continued churn of some of the capacity.







Okay. All right. Great. Well, thank you for the time. Appreciate it.


Thanks.

Operator

Thank you. Your next question comes from Ed Wolfe with Bear Stearns. Please go ahead.

Ed Wolfe - Bear Stearns - Analyst

Good afternoon: John, you just talked about the churn of capacity. Is the churn of capacity different than it was six months agoor three months ago?


It's difficult for us to quantify that, Ed, I just know from visiting our offices and talking to our people, hearing some examples ofthat happening. But it's, we are not really able to quantify it.


Do you have any concerns about finding capacity into peak season?


No, no, I think the marketplace, because it's been soft the past several quarters, I think the marketplace should be able to reactpretty well to whatever evolves in the next several months.


Okay.


It could affect pricing though, obviously. If it tightens up, there's less empty miles, people will run further away and it will affectpricing if it tightens up but I'm sure the industry will get through the peak.


If it were to tighten up, my guess is what you learned over the three years before this year is that works for you?







You know, when volumes increase that if it drives price increases like it has in the last three years that can be helpful for us.There is this trend that's always been there though that when things tighten and volume picks up, margin percentage can --we sometimes have to pay more to take on that extra volume and that can pull the margin percentage down. So that phenomenathat I tried to describe earlier that's been there from the beginning works against you when volume picks back up. But, yes,volume and price increases are good for us.


When do you think you will have a sense whether capacity is tight enough in the peak that there could be some pricing?


It really can move week to week. I mean it's hard to say and it's seasonal, too. Sometimes it will start to tighten up in the Southeastor the Midwest but not in other places and kind of our offices we just sit back and watch it day by day, week by week and asthe story can change pretty rapidly as it goes through. So you know it's probably not a very fulfilling answer but literally we justlearn a little bit more each day and when it's over we summarize it.


Directionally we haven't heard great things about July so far. Do you have any comments on July's demand?


No.


Okay. When I look at your cost, line items, your personnel, your other G&A, your depreciation as a percentage of net revenuejust seems to get better and better. At 58.3% and I look at the last four or five years, normally third quarter improves over secondquarter. Is there anything in here that should concern me as I apply that last five years, the third year has been a little bit betterthan second year to my expense line items, was there anything here that was exceptionally?


No, there's nothing unusual. We did point out that many of our compensation programs, John mentioned it and it was mentionedin the release are variable based on growth. The fact that even though we have grown earnings significantly it's lower than itwas last year so that's providing some of the leverage.


Is that operating income growth?


Pardon me?







Is that based on EBIT growth?


Some programs are based on branch by branch, specific based on their pretax growth some are based on pretax prebonusgrowth, restricted stock and some other incentive pools are based on the average of earnings per share growth and operatingincome growth. So there's many different formulas.


Chad, the working capital, you made some comments about it but it's now two quarters in a row where it's worked against you.Were your comments -- I kind of interpreted it that --


It worked --


It's timing and it's going o come back, is that what you're trying to say?


If you look at historical quarterly cash flows you will see the first and the second quarter are the weakest and the third and fourthare greater other than last year and then last year we made some significant improvements in the working capital. If you lookat our, something like our accounts receivable minus our accounts payable compared to a year ago, it grew slower than grossrevenues grew, it's just that last year's improvement was so good and unusual.


Okay. So would you expect that that bounces back a bit in the second half of the year?


It -- I don't know of any reason why it would react differently than it has in the past.


Okay. And the acquisition that you made, is that $26 million, that's gross revenue? I'm assuming it's got a similar transportationyield to your transportation yield and that you are going to report that in the airline?







Yes and it would, some of it would be reported in air freight. Currently we do have some domestic air as John mentioned andthat is reported as air. It's primarily international air today but there is also some domestic air. And that acquisition is about 45to -- about half air and half miscellaneous other services including truckload and LTL.


Okay and when did you close that?


July 13th.


And in terms of using your cash flow, your purchase -- your rate of buying back stock is about twice what we've seen this quarter.Should we interpret with the larger buyback reauthorization that going forward it's not -- we should assume a bigger amountthan we've seen in recent years?


Like I said in our comments we expect that authorization to last several years and that our, the amount we buy back in anyparticular quarter, any particular year will depend on various factors including our cash balance, any potential uses for the cashwe see and market conditions.


Okay. In terms of acquisitions can you give us a sense, are you still looking for other tuck-in air, ocean, what are the areas thatyou're looking for?


We are looking for acquisitions to support any of our growth initiatives, nothing has changed on our attitude towards acquisitions.


Okay, last question on the sourcing side you mentioned some pressures on the yields there. Can you talk about when you expectthose to subside a little bit.


Most of them cycle through with growing seasons. There were a number of freezes and floods and it can raise prices comparedto the previous year. But it generally lasts like three to six months. So the, this was typical quarterly fluctuations the way I lookat it from quarter over quarter. And I don't know that those same reasons for margin compression may or may not even existin the second half of the year.







Right. There were some increasing prices on certain commodities. When you look at our dollars or cents per case of profit eventhough our margin percentage was down we actually made more per case than we did a year ago.


I get it. Thank you very much.

Operator

Thank you, the next question comes from Jason Seidl with Credit Suisse.

Jason Seidel - Credit Suisse - Analyst

Good evening, gentlemen, a couple quick questions. You said that pricing is essentially flat for the quarter in your truck division.Can you break out pricing between truckload and LTL?


You know, we don't, and the reason for that is there are some definitions in terms of what is LTL and what is truck when wehave different shipments that we consolidate and put on to a truck.


Like a multi-stop truckload, right?


Pardon.


Like a multi-stop truckload, is that what you refer to?


Yes. We do do some internal metrics around that but we don't disclose anything.


Have you seen some of the LTLs weakening of late? Because I know you probably noticed FedEx came out with the announcementthe other day that they are reducing their fuel surcharge by about 25% which is essentially a rate reduction. Are you seeinganything about weakening LTL rates?







Nothing that sticks out to me. In our business again it's different because we are generally sourcing capacity all in and sosurcharges can be blended into the rate or calculated separately. All we can really do is look at the average price per transactionin one period to the next and it was generally flat. So I'm sure there is variance within there amongst different carriers butnothing we can really pull out in terms of a specific carrier or LTL versus truck.


Okay, if I could just switch to your intermodal gross profit growth. Obviously slowing a bunch from the first quarter but you hadfairly difficult comps over the prior year. What should we expect for intermodal in the back half of '07 here?


We don't give any specific guidance other than our long-term 15% growth. So it will really depend on how well we do atpenetrating the market and continuing to add customers and continuing to add volumes just like with the rest of our business.


Okay and not to beat a dead horse on the share repurchase program but given your average price in the quarter last quarter,there is no reason to believe that you wouldn't be almost as active barring any massive increases in your share price during thequarter?


There is no specific changes to the program or specific changes in the environment that we see today. But that's by no meanscommitting that we are going to do what we did last quarter.


Okay. Thanks for the time as always.


Thanks.

Operator

Thank you. Next question comes from Scott Flower with Banc of America Securities. Please go ahead.

Scott Flower - Banc of America Securities - Analyst

Good afternoon all. Just wondering obviously there's seasonality and there's lots of mix effect but and again I know there wasa component for when we are looking at net revenues on a total transportation basis, but the sequential spread fell faster thanit has sequentially 1Q to 2Q and again I'm aware that there could be all sorts of mix effects. But does that get to some of the






transparency in the market moving quicker was it just a mix effect in the different componentry of business within yourtransportation portfolio? I'm just trying to get a better sense of why that moved as it did from 1Q to 2Q?


Just to be clear, Scott, you are talking about the gross profit percentage for total transportation?


Correct, 17.9% in the quarter.


Compared to.


What it was -- in other words, the change in 1Q is close to 20% and when, as I look at 1Q to 2Q changes over time it seasonallytends to get a little tighter but it doesn't typically tend to drop quite as much as we saw 1Q to 2Q this year.


You are talking sequential first quarters to second quarters.


Correct and again that may be just a function of 1Q is spectacularly good because rates came out faster, it could be a functionof mix, typically there seems to be some seasonality and understanding there's lot of complexity in terms of exactly where thenet revenue margin actually is. But typically on an average basis it doesn't tend to drop quite as much 1Q to 2Q as it did thisyear and I'm trying to get my arms around that.


I think the biggest factor is the fact that it was 20.2% in the first quarter. We don't analyze it sequentially in changes like that.


Okay. Then help me a little bit, obviously you've been continuing to grow your transportation management business and I'mjust trying to understand that on a miscellaneous basis how that progresses, how that is being positioned in the marketplace,because obviously that is continuing to grow more rapidly than sort of your overall book of business.


It's, it's a fee based business so basically rather than bidding on transportation at predetermined rates or in a spot market it's alonger term contract, generally at least a couple of years where we are providing route guide management and execution withour generally very technology driven where we are helping a customer manage their process, distribute their route guides,






score their carriers, do everything that a typical transportation management service center would do. There, I don't know theexact number but there is like less than 25 customers in that business today. It's something that we've been focusing on for thelast six or seven years. And it has continued to show a fair amount of demand in the marketplace. There are a lot of customerswho are exploring the possibility of using a service like that. It's a challenging business line from the standpoint that it is a veryautomated process. There is a lot of set up costs. There is a lot of -- there is some standardization but there is a lot of customizationthat goes on. So we, we have been somewhat aggressively but also being very targeted in terms of the customers that we aretaking on and trying to get smarter about how to implement and how to execute that business and understanding profitability,all those different things that we are working through. So, yes, it's a key growth initiative for us. We've been at it for five or sixyears and we are going to continue to learn and get smarter and work with the right customer opportunities to try to grow it.


Right. And then just a couple other last quick ones. You mentioned in the release talking about in some of the air business thatthere was some project based I guess efforts or transactions. How should I think about that? Is that more that those are one-offsor short duration and we should be just watchful of that as we look at that line item in terms of extrapolating or how should Iinterpret that remark in the release?


We have a couple of customers where we do sort of seasonal agricultural shipments and those shipments can start early or runlate and the volumes can vary. And so they are recurring customers that we've referenced in several of the past years butsometimes the volume activity will shift from quarter to quarter or be very high or very low in a given month depending uponcrop yields.


Okay, and then this last quick question, if you could refresh us how much of your business actually is order of magnitude LTLversus truckload? I know there are gray areas but however you might define something as LTL, like versus truckload, obviouslythe predominance being more truckload like.


We know that between 10 and 11% of the truck, our gross profits are generated from LTL. It could be higher than that becauselike John said depending on how you define LTL, we have a lot of multi-stop, multi-pick drops or multi-drop truckloads thatcould be classified as truckload.


Right, order of magnitude is fine. I hear you. Thanks very much.


Operator?

Operator

Thank you, our next question, John Langenfeld with Robert W. Baird. Please go ahead.






John Langenfeld - Robert W. Baird - Analyst

When you look at that acquisition on the expedited side, how much competency do you have there? I'm kind of thinking backto the flatbed acquisition you did, one in Minnesota and one of the comments you had made, we did this to help gain competencymore than scale. How did that relate to this expedited one?


When we've talked about it internally I would say those two acquisition opportunities are pretty analogous that they are bothservice offerings that we offered to customers prior to those acquisitions. But in many cases there would be certain lanes orcertain commodities where we just weren't competitive because we didn't have as broad a scope of carrier relationships orpeople who know the uniquenesses associated with how to palletize a certain commodity or how to strap a certain thing ontoa flatbed. So when we look at an acquisition like this it's really not bringing a new service item to our offering or to our menu,but we hope that it's going to make us much more competitive when we are talking to a customer or quoting a customerbecause we'll have a much greater density of people who understand how to do those things, what types of capacity mightmake a competitive offering and we can share that knowledge across the network. So, yes, I do think those are both goodexamples of where we are using North American acquisitions to enhance our network.


And the main push from the owner of this organization to come into the C.H. Robinson umbrella in this particular instance whatwould it have been in your mind?


You know, I think this one is probably fairly typical to many of the other smaller acquisitions that we've completed where you'vegot a fairly energetic entrepreneurial type ownership but at the same time a lot of their net worth and capital ends up beingtied up in a very demanding, very stressful situation. There's a lot of pressures to take on receivables and maybe some operatingleases from a financial commitment type standpoint that constantly has you doubling down on the types of things that youwant to do to serve your customers. And if you aligned with somebody like our network you have so many more resources toleverage off of you can diversify your personal situation a little bit and yet you can continue to work with those customerrelationships and probably serve them in even a bigger or better way. My sense is that that was the driving motivation in thisdeal just like many of the others.


Okay, makes sense. And then switching over to the bid process this year, the elevated activity in terms of shippers bidding outfreight, anything different you notice in terms of trends, in terms of the type of freight you were getting commitments on orthe duration or anything along those lines?


No, not really. Most of the accelerated bid activity was really towards the beginning of the year and I think, I guess probably themost interesting component of that will be to see what the fall peak season and the second half of the year turns out to be andwhat sort of contractual compliance there is to those new rate structures and kind of how the thing matures during the secondhalf of the year.







Yes, I would agree. And then lastly when you talk about the gross margins being near the high levels on the truck side, couldyou remind me did that, did you basically get to those levels in the third and fourth quarter of last year?


Yes, they moved pretty quickly there in the third quarter of last year.


Okay. Very good. Thank you.

Operator

Your next question comes from John Barnes, BB&T Capital Markets. Please go ahead.

John Barnes - BB&T Capital Markets - Analyst

Hi, good afternoon, fellows. As you, you mentioned your higher CapEx number because of the new corporate headquarters.Have you begun the move in process yet?


No. We will be moving in some time in the middle of October, during October.


All right, so it's going to be a fourth quarter expense. Can you quantify at all as to what kind of expense you are looking atincurring due to that move in?


I would say all of the cost of the building plus the furniture and everything else will be depreciated over time. The move costwill not be significant.


So it's not a big margin impact to relocate to the new facility?


No, it should not be a big impact at all.







Given that you had a little bit higher than normal CapEx this year, should we see kind of a reversion to the main next year or isthere anything else major planned of this magnitude in '08?


Well, we do have some more land that some time in the future we will likely build another two buildings. I'm not, we are notcertain yet whether, when we will start the next building but we will let everybody know. Besides that so far we've been spending$5 to $6 million or so a quarter on normal ongoing CapEx. We expect that to continue and to grow with the business.


Okay. So we should see the reversion of that barring your construction of the next two buildings for headquarters, or threebuildings, that's a good problem to have, right.


Yes.


All right, and then lastly just looking, again, I don't want to beat the capacity situation to death but I just want to make sure Igot your comments right, you've seen some churn in your own carrier base. But you don't believe it's any concern going intopeak. At this point you feel like you're adequately supplied with the available capacity you need?


That's correct. We stated that we think the industry and we'll have access to plenty of capacity to get through the peak seasons.


All right, very good. Along those lines a number of the publicly traded carriers that I follow have mentioned that they have goneout of their way to cut out hauling for brokers and other, other transportation providers, that they felt like just the pricingpressure was too much to bear. I mean, have you seen, are you seeing more of your business with your smaller carriers, hasthere been any kind of mix shift in terms of the size carrier you are dealing with or can you tell from the business you've donethis quarter?


No, there really hasn't been. We -- we do kind of track the business activity by carrier size and there is always minor movements.You can tell by lane sometimes when a carrier makes a different routing or pricing decision or sometimes you'll see minormovements in it. But we've been working really hard to try to differentiate ourselves in the marketplace. We've talked in thepast about carrier management strategies. And I know that a lot of times, at least some asset based carriers really move awayfrom third parties and brokers that they feel are not going to have integrity in the relationship and maybe are going to try toput [assistorials] on or take even more and so we, we have a pretty good mixture of carriers out there and we are working reallyhard to try to preserve our relationship with all of them at all sizes.







All right, very good. Nice quarter. Thanks for your time.

Operator

Thank you, your next question comes from David Campbell with Thompson Davis and Company. Please go ahead.

David Campbell - Thompson Davis and Company - Analyst

Yes, thank you very much and most of my questions have been answered but I did want to know if you could tell me where thethree global forwarding offices were opened in the second quarter and the number of employees involved.


Well, they were all opened organically with two or three employees each. So it wouldn't be a significant headcount. The locationswere Singapore, Amsterdam and Seattle.


Okay. And the one in Seattle is primarily, you mentioned it was global so it's primarily ocean freight or?


Yes, we actually have had a domestic freight office there for quite sometime and we felt there was an opportunity with somepersonnel to try to start coordinating some of the forwarding activity there as well. So we've had a presence in that marketplacebefore, so. Most of these decisions are very personnel driven in terms of where we think we've got the right person to go, to godo that as opposed to some deep geographic analysis.


So they weren't driven as much by customer demand as they were by personnel?


Mostly -- the first consideration is having the right caliber person who is ready to take on the opportunity. Obviously we try totarget them towards markets where we think there is opportunities or existing business but number one criteria is absolutelythe, having the right person.


Right, right. And how do you see the international marketplace in the second quarter? Was it fairly stable for you?







You know, there is a lot of transition. There is currency movements and there is new capacity and a lot of opportunity. We arerelatively small from a market share standpoint in that so we are out trying to build relationships and spread our story and dowhat we do. But there seems to be plenty of opportunity and plenty of transition in the marketplace.


All right. Well, thank you very much. I appreciate your answers.


Thank you.

Operator

Thank you, our next question comes from Donald Broughton with A.G. Edwards. Please go ahead.

Donald Broughton - A.G. Edwards & Sons, Inc - Analyst

Good afternoon, gentlemen. A little surprised by the strength of the top line, not by the margin. And as I look through theentrails here it looks like you have very broad-based growth by the lines of business we can see. Perhaps you can give me alittle bit better understanding. Did you experience more growth in a few large key accounts? Was it growth across your entireaccount base? Was it a higher rate of addition of new accounts?


The best answer to that is growth across the entire account base. We did sign up a lot of new customer I.D.s in the quarter. Weare always adding a lot of new customer I.D.s and trying to grow them into top accounts over time. So we continued ouraggressive marketing and signing up a lot of new customers and that is the primary growth driver. Our top 100, top 300, thelarger, more mature accounts that we look at had less growth than we did as a whole during the quarter.


Because I know we talked about the last several months that certainly the conditions that we saw in '05, '06, really set up manydistribution managers to be, well, in a position to be outsourced or at least a portion of those departments to be outsourcedand that was a trend that could be working in your favor. Is that continued to come to fruition for you, for you guys, or is thata theme that we should not be thinking about as a revenue driver anymore?


I don't recall us specifically making those comments. I know that the way we think about it and have talked about it is that thesesignificant price increases that I referenced earlier caused a lot of strain and a lot of reanalysis for a lot of us in terms of whatwas the most cost-effective way to do things in mode. So there was a lot of transition created that provided opportunities tore-bid things or to try to help customers in new ways. But I don't really know for certain that it's caused any directional outsourcingor don't really recall ever seeing that as a trend.







All right, fair enough. Thanks, gentlemen.


Thanks.

Operator

Thank you, the next question comes from John Larkin with Stifel Nicolaus. Please go ahead.

John Stifel - Stifel Nicolaus - Analyst

Thank you, John and Chad for taking my questions. A couple of years ago you were using your balance sheet strength to dowhat I would call some accounts receivable financing for some of the carriers and that seemed to be a pretty profitable endeavorand also differentiated you from some of the other truck brokers out there. I haven't heard too much about that the last coupleof quarters. Has that been de-emphasized or is that actually one of the reasons why you are having so much success at trackingcapacity?


Our, you are referring to what we call our quick pay program?


Yes.


It's not financing accounts receivable for carriers. What it is doing is paying them in two days rather than 20 days which are ournormal terms. The reason we haven't talked about it a lot lately is it has stabilized. So it's growing with the business. Prettyconsistent, somewhere around 30 to 35% of our payables, truck payables are going out through that quick pay program. Butit hasn't caused major changes like it did a year or so ago when the use of it was increasing.


So you would expect it to stay around a third of your total business being handled in that manner.


Based upon what we've seen it's been relatively stable there for quite sometime.







Okay, and then secondly your ocean, air, and miscellaneous businesses seemed to grow very nicely during the second quarterand I'm wondering if that's a new emphasis on those three businesses that could ultimately lead to perhaps a little better balanceand perhaps a little less dependency on truck? Is that something that is a strategic initiative or is that just happening based onwhat's falling off a tree into your various offices around the country?


I think it's been a growth initiative for the last ten years that we want to build out our forwarding business and when we talkedabout the more recent acquisitions in Europe especially that there was going to be some good mode diversification and wewould be able to sell into that. So absolutely it's a growth initiative of ours and we not only consider it good to diversify but it'salso just kind of an organic growth opportunity that we've been working on for quite sometime. So the only thing I wouldchange in your statement is its really not new but, yes, it's a key initiative for us.


It just seemed to get more traction here in the second quarter than perhaps you've been getting so that's a good thing, I guess.And then with respect to the domestic branches, I guess there weren't too many new domestic branches added. Are you gettingto the point where you've got just about all the geographic markets covered and the domestic growth will therefore come justfrom expanding existing offices or are there still some areas where you feel like you would benefit by adding additional domesticoffices?


We still plan to open domestic offices for the foreseeable future. We've evolved that process where we've been sort of doinggroup interviews and the office openings the last couple of years have come more in clumps rather than spread more evenlythroughout the year. So we are still expecting three to five of them in the second half of the year and that's already pretty muchin progress; we just haven't announced the precise names or locations yet. But we still feel like for the foreseeable future thereis at least another 50 or 60 cities that it makes economic sense for us to have an additional presence in where we think we canhelp pursue those market share goals and carrier relationships more effectively by having a presence in those cities and we willcontinue to develop people for those jobs and identify them and put them into them as we think they are ready.


Are those 50 or 60 just domestic?


Yes.


Okay. That's amazing. Now, you have any opportunities to maybe add multiple offices in the same city, is that a strategy thatmakes sense particularly in places like Chicago where there's a lot of freight and a lot of far reaching geography to cover?







Yes, we already have three offices in Chicago and there are a number of other large cities where when we target the officeopenings there may a southern suburb and a northern suburb that we have an office in. Obviously, we have got three officesin LA and those are big marketplaces. Each of those offices will have slightly different levels of expertise and focus and differentmodes and they will work together on different things and they will be geographically spread so that we can kind of be on theground marketing in efficient ways both in terms of hiring people from local universities and communities as well as just faceto face customer and supplier carrier interaction.


That's very helpful. That's all I had. Thank you very much.


Thanks, John.

Operator

Thank you. Our last question comes from Jessica Carl from Merrill Lynch. Please go ahead.

Ken Hoexter - Merrill Lynch - Analyst

Good afternoon, it's actually Ken Hoexter as well, hey, Chad and John. Just on that miscellaneous expense, or revenue side, isthere something particularly that's just a freight management where you've been growing, just wondering why that's growingso much faster than truck just as a follow on to a previous question.


Mostly because it's a newer service line with a limited number of customers. So when we've added some it's just as adisproportionate percentage increase. So it's really just coming off of a smaller base of growth.


Is that something you are trying to go back to your current base to increase penetration or is that something you are doingwith new sales?


No, I described earlier it's a business line that we think has a lot of potential but we are growing selectively with the right typesof opportunities to make sure that we evolve the service to the right sort of value-add to the customer on the right kind ofpricing.


Fine, and then I just want to wrap up on the share repurchase plan. I think, Chad, did I hear you right that you can do it over acouple of years or there is a certain time frame you want to finish this?







No, there's no, with the new authorization just like with our previous one -- the shares that we are buying right now we arebuying off of a, off of an authorization that was granted in 1999. So the 10 million share new authorization is expected to lastseveral years.


Okay, great. Thanks.


Thank you for participating in our second quarter 2007 conference call. Before we conclude, I want to remind you that this callwill be available for replay in the Investor Relations section of the C.H. Robinson Web site. It will also be available by dialing(800) 405-2236, and entering the pass code 11092490-pound. The replay will be available at approximately 7:00 PM Easterntime today. If you have additional questions about our second quarter results, please call me, Angie Freeman, at (952)937-7847.Thank you.

Operator

Thank you. Ladies and gentlemen, we thank you for your participation, and at this time, you may disconnect.

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Cover PageCorporate ParticipantsAngie Freeman (3 Turns)John Wiehoff (48 Turns)Chad Lindbloom (33 Turns)

Conference Call ParticipantsJustin Yagerman (12 Turns)Tom Wadewitz (6 Turns)Ed Wolfe (18 Turns)Jason Seidel (7 Turns)Scott Flower (8 Turns)John Langenfeld (5 Turns)John Barnes (8 Turns)David Campbell (5 Turns)Donald Broughton (3 Turns)John Stifel (8 Turns)Ken Hoexter (4 Turns)

PRESENTATION1. Operator2. Angie Freeman3. John Wiehoff4. Chad Lindbloom

QUESTIONS AND ANSWERS1. Operator2. Justin Yagerman3. John Wiehoff4. Justin Yagerman5. John Wiehoff6. Justin Yagerman7. John Wiehoff8. Justin Yagerman9. John Wiehoff10. Justin Yagerman11. Chad Lindbloom12. Justin Yagerman13. Chad Lindbloom14. Justin Yagerman15. Chad Lindbloom16. Justin Yagerman17. Chad Lindbloom18. Justin Yagerman19. Chad Lindbloom20. Justin Yagerman21. Chad Lindbloom22. Justin Yagerman23. Chad Lindbloom24. Justin Yagerman25. Operator26. Tom Wadewitz27. John Wiehoff28. Tom Wadewitz29. John Wiehoff30. Tom Wadewitz31. John Wiehoff32. Tom Wadewitz33. John Wiehoff34. Tom Wadewitz35. John Wiehoff36. Tom Wadewitz37. John Wiehoff38. Operator39. Ed Wolfe40. John Wiehoff41. Ed Wolfe42. John Wiehoff43. Ed Wolfe44. John Wiehoff45. Ed Wolfe46. John Wiehoff47. Ed Wolfe48. John Wiehoff49. Ed Wolfe50. John Wiehoff51. Ed Wolfe52. Chad Lindbloom53. Ed Wolfe54. Chad Lindbloom55. Ed Wolfe56. Chad Lindbloom57. Ed Wolfe58. Chad Lindbloom59. Ed Wolfe60. Chad Lindbloom61. Ed Wolfe62. Chad Lindbloom63. Ed Wolfe64. Chad Lindbloom65. Ed Wolfe66. Chad Lindbloom67. Ed Wolfe68. Chad Lindbloom69. Ed Wolfe70. Chad Lindbloom71. Ed Wolfe72. John Wiehoff73. Chad Lindbloom74. Ed Wolfe75. Operator76. Jason Seidel77. John Wiehoff78. Jason Seidel79. John Wiehoff80. Jason Seidel81. John Wiehoff82. Jason Seidel83. John Wiehoff84. Jason Seidel85. Chad Lindbloom86. Jason Seidel87. Chad Lindbloom88. Jason Seidel89. Chad Lindbloom90. Operator91. Scott Flower92. John Wiehoff93. Scott Flower94. John Wiehoff95. Scott Flower96. John Wiehoff97. Scott Flower98. Chad Lindbloom99. Scott Flower100. John Wiehoff101. Scott Flower102. John Wiehoff103. Scott Flower104. Chad Lindbloom105. Scott Flower106. Angie Freeman107. Operator108. John Langenfeld109. John Wiehoff110. John Langenfeld111. John Wiehoff112. John Langenfeld113. John Wiehoff114. John Langenfeld115. John Wiehoff116. John Langenfeld117. Operator118. John Barnes119. Chad Lindbloom120. John Barnes121. Chad Lindbloom122. John Barnes123. Chad Lindbloom124. John Barnes125. Chad Lindbloom126. John Barnes127. Chad Lindbloom128. John Barnes129. John Wiehoff130. John Barnes131. John Wiehoff132. John Barnes133. Operator134. David Campbell135. John Wiehoff136. David Campbell137. John Wiehoff138. David Campbell139. John Wiehoff140. David Campbell141. John Wiehoff142. David Campbell143. John Wiehoff144. Operator145. Donald Broughton146. John Wiehoff147. Donald Broughton148. John Wiehoff149. Donald Broughton150. John Wiehoff151. Operator152. John Stifel153. Chad Lindbloom154. John Stifel155. Chad Lindbloom156. John Stifel157. Chad Lindbloom158. John Stifel159. John Wiehoff160. John Stifel161. John Wiehoff162. John Stifel163. John Wiehoff164. John Stifel165. John Wiehoff166. John Stifel167. John Wiehoff168. Operator169. Ken Hoexter170. John Wiehoff171. Ken Hoexter172. John Wiehoff173. Ken Hoexter174. Chad Lindbloom175. Ken Hoexter176. Angie Freeman177. Operator

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