C.H. Robinson Worldwide Q1 2010 Earnings Call Transcript

C.H. Robinson Worldwide Q1 2010 Earnings Call Transcript
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C.H. Robinson Worldwide (CHRW)

Q1 2010 Earnings Call

April 21, 2010 10:00 a.m. ET

Executives

Angie Freeman - VP, IR

John Wiehoff - CEO

Chad Lindbloom - SVP and CFO

Analysts

Jon Langenfeld - Robert W. Baird

Matt Troy - Citigroup

Scott Flowers - Macquarie Securities

Alex Brand - Stephens Inc.

Chris Ceraso - Credit Suisse

Thomas Wadewitz - JPMorgan

John Barnes - RBC Capital Markets

Nate Brochmann - William Blair & Company

Chris Wetherbee - FBR Capital Markets

Justin Yagerman - Deutsche Bank

Ken Hoexter - Merrill Lynch

Scott Malat - Goldman Sachs

Scott Group - Wolfe Trahan

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the C.H. Robinson first quarter 2010 conference call. (Operator Instructions)

I would now like to turn the conference over Angie Freeman, C.H. Robinson Vice President of Investor Relations. Please go ahead, Ms. Freeman.

Angie Freeman

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Thanks. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, Senior Vice

President and CFO. John and Chad will provide some prepared comments on the highlights of our first quarter performance, and we will follow that with a question and answer session.

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

With that, I will turn it over to John.

John Wiehoff

Thank you Angie, and thanks for everybody who is taking the time to listen to our first quarter call. I want to start by apologizing to anyone who we inconvenienced with our schedule change. We had an audit committee meeting yesterday. Our review process was complete.

As most everyone knows, there's a lot of change going on in the marketplace and we have a lot of activities scheduled with customers, conferences for the next week, and we reached the conclusion that for a lot of reasons we'd be better off to share our results earlier and get them out to the marketplace since we were prepared to do that.

So, we moved our call, and again, I apologize if that schedule change inconvenienced anyone.

So, in terms of the first quarter, I'd like to start by highlighting just a few of the key financial results on the release. So, for the first quarter ended March 31st of 2010, our total revenues increased 22.9% to 2.1 billion. Our net revenues decreased 1.8% to 332.6 million. Income from operations decreased 1% to 136 million. Net income decreased 1.6% to 84 million, and fully diluted EPS was flat at $0.50 per share. In addition to these overall financial results, our press release gives more detailed growth percentages by our various service offerings.

In our year end 2009 conference call, we discussed that 2010 was beginning with accelerating volume growth. However, year-over-year price declines and margin compression were resulting in relatively flat net revenue for January. Through the remainder of the first quarter of 2010, we continued to see strong volume growth, and the corresponding tightness of capacity in the transportation marketplace resulting in continued margin compression. As a result, for the first quarter of 2010, while we had a 23% increase in total revenues, our diluted EPS for the quarter was flat at $0.50.

Our transportation revenue increase of over 24% was primarily driven by transaction volume increases in services compared to last year.

A year ago at this time, the transportation industry was adjusting to unprecedented volume declines by the recession. Those volume declines resulted in overcapacity for all modes, a very soft market, and very significant bid activity, driving prices down. One year later, today, we are experiencing volume increases, capacity tightening and assessing what price adjustments might be necessary.

As we discussed every quarter last year and very often in the past, one primary component of our business model that's important to understand in assessing our results is the timing variances in transportation, customer pricing, and capacity procurement that can result in meaningful fluctuations to our gross margins, particularly in the truckload mode which is our dominant source of revenue.

Virtually all of our truckload capacity is sourced daily with prices that adjust daily or at least very quickly when market conditions change. Some of our customer pricing arrangements are also transactional and can adjust quickly, but major portions of our customer pricing are committed or contractual rates that have a longer term or expectation to them, and require a longer process to notify and adjust when market conditions change. The gross margin fluctuations that result from our pricing practices are hard to predict, based on market conditions that can change pretty fast, and our decentralized approach to account management and pricing.

A year ago, while we were coping with volume declines, we were able to benefit from lower truckload cost of capacity for several months, while customer rates were gradually adjusting downward. We're now experiencing an increase in our truckload cost of capacity, and it will take us a longer period of time to adjust customer pricing upward, where appropriate.

This recession has caused volume changes the past year that were pretty extreme, which has also generated margin fluctuations for our business that have been quite significant. Despite the magnitude of the fluctuations, we are very comfortable at Robinson that the market is responding to demand and supply fluctuations very much like it always has, with price and capacity adjustments.

We're very encouraged and positive about our volume growth in transportation and the strength of our relationships and our ability to provide value. We have a lot of different metrics that we measure our success, but shipment volume, market share, and our scope and strength of customer relationships have always been some of those critical metrics that we look at to gauge our long term success. We felt pretty good about those metrics in the first quarter of 2010.

Gross margin fluctuations are a part of our business model that we believe we are very capable of managing, but they're difficult to predict, and they can have a significant impact on our results in the short term.

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